How to compete and acquire wisely as the buy/sell market heats up again

Anyone holding an equity position in a funeral business is likely considering buying, selling or both. You either regret missing out on the last round of acquisition by not taking advantage of the available money to strengthen your business, or regret all of those offers you turned down. Good news: The industry is about to catch acquisition fever again. Some of the industry lenders are returning to the game, offering very low rates and easy terms. There are a lot of firms for sale, and their expectations of how much their business is worth have come down to realistic levels; which allows the acquirers to use cash instead of stock.

Sellers will be much smarter this time, with a better understanding of what it means to come to work as a manager instead of an owner having heard all the whining from the last generation of sellers. The question is whether the buyers will be any smarter. What have we learned about operating acquired funeral homes that we didn't know the first time around?

5 factors that shape competition in the funeral business today...

Harvard professor Michael E. Porter, author of On Competition. defines five elements of competition. Reviewing them below, consider how none of these factors were significant prior to the creation of the large acquisition companies, but how all of them are in existence today.

1. A high threat of new competition. A client recently informed me that the hospice in his community has received a license and zoning to install a crematory and chapel. Compared to hospice, CostCo, on-line casket stores, discount funeral homes and minimal service cremation providers, most funeral homes had no real competition prior to 1990.
2. The consumer is empowered to negotiate prices and special deals. How many days go by without a price shopper, or a competitor dropping his prices in order to take a call from a competitor?
3. Substitute products hold down prices. Profit margins at full-service funeral homes are evaporating as they attempt to compete with discounters and minimal cremation providers on price.
4. Competitors are actively seeking advantages & investing resources to improve their positions. Funeral homes are building new facilities, adding crematories, installing plasma screens for video tributes, and discounting pre-needs to hold market share.
5. Vendors hold a superior negotiating position over retailers derived from holding large shares of their respective markets. This is the only area where traditional funeral homes continue to hold an advantage. Although business is very tough for traditional funeral homes, it's even tougher for the vendors. Pre-need insurance companies, casket & vault manufacturers and other industry suppliers are under more pressure than their client funeral homes. This is another way the current industry differs from the pre-1990 funeral business; there was a time when the providers sponsored large convention parties and flew funeral home owners around the world to get their business.

Because of all of the above, traditional funeral homes have learned to compete. One reason acquisition has failed as a strategy for many funeral home operators, both large and small, is that the acquisitions were made with the assumption that competition within the industry would continue to be soft and compliant. But such has not been the case, and certainly is not the case now. We have all witnessed the carnage when an absentee owner competes with local owners.

Many of the most successful funeral businesses sold in the 1990s simply because the multiples being offered were so great; it seemed the intelligent decision and for many it worked out well. Because the multiples paid for funeral homes this time around will not be great enough to tempt a well-managed funeral-business owner to sell (well-managed in terms of profit and having a succession plan in place), the quality firms will be acquirers this time around instead of sellers. Sellers this time around will fall into two types: those without a succession plan and marginal firms that can no longer compete.

...and 5 things to consider when sizing up potential acquisitions

Realizing it's going to be tough competition, what are the factors the intelligent acquirer should consider before he or she commits to a new mortgage for the right to compete in a new market?

First, acquire in markets with limited competition. When an outsider acquires in a market with multiple family-owned funeral homes, business tends to shift to the other locally owned businesses. Remember this: Success in the funeral business isn't about doing everything right - it's about relationships. Very bad locally owned businesses will do well against very well-run businesses owned by an out-of-town company simply "because the families that used to go to their best friend for funerals, will now go to their 2nd best friend." (Quote attributed to Paul Henney, Henney Family Services).

So, we want to buy in small towns where there is little competition, preferably in communities where at least one of the competitors is owned by national or regional consolidator. Or, we want to acquire in small towns where there are few or no other funeral homes, and I mean really small towns – some as small as 2,000 people, serving counties of 10,000, where there is only one funeral home. Cremation is minimal and services are traditional, even when cremation is selected.

Second, realize up-front that success depends upon a good manager. If we learned anything from the acquisition of the 1990's, former owners make lousy managers. If they wanted to run a business, they wouldn't have sold. Most of the sellers were tired and wanted to retire, not work harder for a regional manager.

What does it mean to be a good manager? They need to focus on the community, not the funeral home. A good manager realizes his competitive disadvantage from the beginning and mobilizes his efforts to create relationships. This is accomplished by hiring well-known part-timers and initiating programs that get the staff involved with the public.

Third, acquire businesses that are clearly superior in some discernable way, such as combinations, discounters, superior facilities in terms of parking or special features such as reception rooms, children's rooms, or location.

Fourth, don't operate an acquired firm on a budget; operate it as if it is the only business you own. Budgets are a formula for failure. Well-run family businesses do what ever is necessary to make their business successful, even if it means suffering a cut in salary for a few months to improve their competitive position. But these same people will make an acquisition in another community, never visit the town after the deal is made, and fail to make the necessary investments to make their acquisition successful, such as advertising and staff training.

Fifth, when scrutinizing acquisition candidates, select the firms that are clearly superior or make the necessary investment to make it clearly superior. Stewart Enterprises fared better in the 1990s than other acquisition companies because they had a value-added philosophy; they acquired cemeteries and made them into combinations, then acquired free-standing funeral homes in the same markets to operate as branches. They improved their competitive position by investing in the properties.

Being clearly superior is not exclusive to facilities. Acquirers can be clearly superior by investing in marketing concepts and training. It is safe to assume most funeral directors in the country could be made better with training. Changes in society have made arranging a funeral much more difficult. Constructive arrangement skills are not taught in mortuary school, and even if they were, most of the licensed funeral directors in the country have been practicing so many years, they did not benefit from new curriculum.

Arrangers need sales tools to be effective; the consumer is not aware of all of the options available to them in personalization and memorials. Good arrangers have tools at their disposal that help to make them more effective communicators – tools that allow the consumer to see why they should invest in a limo versus driving their own cars, what a piper musical program is and how dove releases, butterfly releases, and balloon releases can make a graveside service more memorable.

Consolidation in deathcare is inevitable, including casket companies, vault companies, pre-need insurance companies, and operators. Bankruptcy is not. The corporate turmoil of the past eight years was not so much a factor of consolidation as it was buyers making buying decisions instead of operational decisions. Many independent operators would have benefited from challenging themselves as to how they were going to compete in a market before they decided to make an acquisition.

Glenn Gould is CEO of MKJ Marketing and author of the new book, "Deathcare Marketing: 25 FAQ's." He draws on twenty years experience as an executive and consultant with several Fortune 500 companies, including Batesville Casket Company. Visit MKJ's website at www.mkjmarketing.com You can reach Glenn at 727-524-8100 or ggould@mkjmarketing.com