Funeral home sales typically reflect more than just the value of the real estate. Clearly when a funeral home sells, there are some business value and personal property. The amount of business value, however, might be more than you think.
Many people pre-pay for their funeral services so that their family does not get burdened with the bill. To protect consumers, trust funds have been established so that a funeral home operator cannot touch this money until the services are rendered. These are called pre-need trust funds.
We recently appraised two south suburban funeral home properties whose operators had pre-need trust funds that totaled over $250,000 in one case and $1,200,000 in the other. The buyer of the funeral home operation is also purchasing these “pre-sales” which go with the operation. Depending upon the margins of the operator, this could have a substantial impact on the sale price. An article discussing the gross margins across the funeral home industry (Biz Fluent, September 2017 by Gideon Sarantinos) reported that gross margins were as high as 62.5% as of 2010. The article went on to report that some independent contractors may only achieve a 10-30% margin. We have recently spoken with some funeral home operators who report margins of over 40%.
It is worth asking on any recently transacted funeral home properties the amount in the pre-need trust fund. Huge differences between real estate values and overall transaction prices can raise a skeptical eye in the Assessor’s office. The existence of large pre-need trusts could go a long way to explain the differences between real estate values and a going concern value for a funeral home operation.