Pre-Need Funding Arrangements, Knowledge-Based Services May Hold Key to Funeral Home Profitability

Citrin Cooperman Survey: Funeral Homes Experiencing Flat to Modest Growth

NEW YORK, Dec. 10, 2008 – Funeral home owners, who continue to experience flat or modest growth, may be jeopardizing future profitability by the way they handle pre-need funding. They are also missing a golden opportunity through their reticence to develop a method of formalizing, delivering, and charging clients for valuable knowledge-based services, according to a survey by accounting and business consulting firm Citrin Cooperman & Company, LLP.

Citrin Cooperman annually surveys funeral home owners and directors primarily in the Northeast, and this year polled more than 180 respondents primarily from New York, New Jersey, Pennsylvania and Connecticut. Similarly to last year's results, funeral directors and owners report that their three most important issues are changing attitudes about funeral customs; profitability and cashflow; and a continued increase in cremations.

While the survey reports a positive trend in increased pre-need planning, a majority of funeral homes (51 percent, up from 45 percent) now guarantee or lock in pricing as a standard practice – no matter that the prospective decedent many be alive for many more years. Additionally, the percentage of annual revenue found in pre-need trust accounts has grown significantly. On average, it now represents 75 percent of annual revenue, up from 57 percent just two years ago. According to the survey, funeral directors said relatively few families make changes in pre-need arrangements when the need comes around—and that, of those who do, more families on average will spend more than the plan calls for, rather than less.

"Many funeral home directors are now recognizing the larger trends within the industry, but as a whole, the profession reacts cautiously to change," said Edward Horton, partner-in-charge of the Funeral Industry Services practice at Citrin Cooperman. "With pre-need trusts, it's understandable that funeral home owners want to capture the client now, but costs are bound to increase between the initial transaction and the time of the burial, potentially creating a money-losing situation for the funeral home."

The survey reports that the number of funeral homes requiring a percentage advance payment on pre-need arrangements has increased to 38 percent from 35 percent. Amazingly, more than 20 percent of homes require no advance payment of any kind.

The concept of offering and charging for knowledge-based funeral services has gained greater acceptance over the last several years as 61 percent of survey participants recognize the benefits to the industry vs. 55 percent a year ago. Still the vast majority (83 percent) say they don't charge for these services or don't offer them, although this number is down from 89 percent two years ago. Opinion is split, though, on whether such services should be included in the General Price List, according to the survey. Few funeral directors have determined how to charge for these valuable services. Many give them away, while others charge for them indirectly or don't offer such services at all.

"Knowledge-based services typically include counseling about Social Security or Veteran Administration benefits, but could be expanded much more," says Horton. "Most funeral home owners would like to offer more, such as end-of-life planning, advice on long-term care for the aged, and even some direction concerning life insurance and estate planning – but they haven't yet moved on these. This all needs to be done in a formalized process. Funeral directors are in a unique position because they possess specialized knowledge that is of great value to the families they serve. They are also in a position to identify services that may be provided by other professionals."

Of particular interest this year is the opinions of funeral directors concerning the use of insurance-based products as a vehicle to fund funeral costs. Despite a recent pre-need funding scandal involving an insolvent insurance company that adversely affected funeral homes, cemeteries, and consumers in the Midwest, funeral directors remain sharply divided on how best to handle pre-need funds received from families. The use of insurance products to fund pre-arrangements was clearly split along state lines. The overwhelming majority of funeral directors who said they purchased insurance products were from Pennsylvania. By contrast, virtually the universal response of New Jersey respondents was that they used the state pre-need trust for pre-arrangement funds, with few choosing insurance products. In New York and Connecticut, the majority of funeral directors said they used the state trust, a specially designated bank account, or other private trust to deposit such funds.

According to the survey, the good news is that there is an increased willingness to look at issues involving knowledge-based services, and that there are means of increasing business and profitability. While funerals homes haven't made significant strides with knowledge-based services, many continue to generate business from their web sites, which are being used by 73 percent of the funeral homes surveyed. Among these funeral homes, another 60 percent reported that they have generated calls from families who have viewed their site. Online obituaries and links to send condolence messages remain the most popular web site features.

Among the survey's other key findings:

• Among respondents, 66 percent would consider having formalized knowledge-based services offered by a professional partner, such as an accounting or other professional services firm.
• While 66 percent of survey respondents say they know the present value of their business (up from less than 50 percent last year), less then half have an exit strategy or a formal plan to transfer ownership.
• Familiarity with "green" cemeteries has increased significantly over the last year as 86 percent of funeral directors have some level of familiarity, an increase from 63 percent last year. Only three percent have never heard of the term, down from 19 percent last year.
• Four percent still don't have a computer within their facility, and another 27 percent have just one computer for the entire business.
• Discount or "Costco" caskets remain a minimal issue. The average funeral home reported that less then two families per year provided casket they had purchased elsewhere.
• Increased sales of personalized caskets, memorial DVDs and other personalized items continue to offer new revenue streams.

"There's no doubt that funeral home owners and directors are sensitive to the needs of families during difficult times, but that shouldn't hinder them from charging for value-added services they are offering," said Horton. "In a business as steeped in tradition as the funeral home industry, change often comes slowly. We are seeing these businesses begin to make the changes necessary in many cases to ensure their future profitability and survival."

For a full copy of the 68-page survey report or to interview Ed Horton or one of the funeral directors who participated in the survey, please contact Anca Munteanu at 212-697-1000, or amunteanu@citrincooperman.com.

About Citrin Cooperman

Citrin Cooperman (www.citrincooperman.com), a Top 35 full-service accounting firm provides tax, accounting and consulting advice to a variety of clients in New York, New Jersey and Pennsylvania, with a special emphasis on professional services firms, restaurants, real estate, entertainment, staffing and executive search, litigation support and Sarbanes-Oxley. The firm, founded in 1979, has offices in midtown Manhattan, White Plains, N.Y., Springfield, N.J., and Philadelphia.