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Funeral Home Industry 
At a Glance

The funeral home industry is of interest to Business Finance given both the level of borrowing and the asset performance of the industry

head and gears

INDUSTRY DYNAMICS  

The funeral industry is characterized by family-owned businesses, which typically have been owned for a few generations. The industry is primarily comprised of small businesses, which operate in localized markets. However, there is a consolidation trend-taking place in the industry, as discussed earlier, which has resulted in a few nationally recognized companies. The industry is fragmented and as such may be subdivided according to religion, cultural or ethnic background.  

According to a September 15, 1997 article in Inc. magazine, the failure rate for funeral homes is just 1%, the lowest for any industry. A review of the historical portfolio performance with Business Finance indicates favorable performance of transactions with Funeral Homes.  

Competition is not as intense as in other industries. Due to the sensitive nature of death in many cultures, advertising is usually precluded. This industry generally competes on non-price consideration. No-price factors include quality of services, extent of personal service provided, location, plush surroundings, reputation and consumer prior experience or knowledge of services.  

The funeral industry operates in a market which is characterized by static total demand; demand being defined as the death rate. Demand for services cannot be generated, it is affected by changes in population density; revenues are influenced by prices charged for services. Price increases can, however, offset declining demand or boost revenues.  

According to Marketing News, January 19, 1998, the aging of the U.S. population is one of the most significant demographic shifts for the 21st century, and right behind it is an increase in deaths and the market for services and goods for life’s last, big event. According to “US Market for Funeral and Cremation Services,” a report from Packaged Facts, a New York based research firm, the number of U.S. deaths is expected to rise by about 1% annually between 1996 and 2004 as the Baby Boomer generation ages.  

The death rate is also rising. According to the National Funeral Directors Association, 2.3 million people died in the US in 1996, a death rate of 8.8 per 1,000. The association estimates that statistic will increase to 8.82 per 1,000 by the 2000 and to 9.32 per 1,000 by 2010.

THE REVENUE PERSPECTIVE  

A funeral home generates its revenue from three basic sources:  

Basic funeral home charges (preparation, services, transportation, etc); 67% of revenue.

Disposition charges (cemetery, crematory, mausoleum); 24% of revenue.

Third party charges (flowers, church, death certificates, etc.); 9% of revenue.

Over the last twelve years funeral costs have risen at a rate far outstripping inflation. This rate of increase has prompted consumer groups to call for action from the Federal Trade Commission.  

The average cost of a funeral has increased over 74% since 1985, with increases of 6 to 7 percent per year. For minimum services such as an immediate burial or cremation, the cost increased 10 to 17 percent per year for the same period. A cremation can cost up to $1,800 depending upon options chosen. Minimally, the professional service charge covers the Funeral Director’s time in securing the death and burial permit. The cremation cost to the funeral home averages $185 plus the cost of the container, approximately $35. If a full viewing is requested prior to the cremation, other charges, including embalming and other preparation will be incurred, as outlined above. The professional service charge termed the “non-declinable” fee is allowed by the Federal Trade Commission.

CONSOLIDATION  

The funeral business is a very traditional, highly fragmented industry, operated by individuals, often as family businesses with sons, and more recently daughters, of funeral directors following their parents into the business. Up until the 1970’s, nearly 100% of funeral homes were independently owned, but like many other industries, funeral homes have experienced a trend toward consolidation. Today, five corporations, the largest three being Service Corporation International, Loewen Group, Inc. and Stewart Enterprises own nearly 20% of the funeral homes in the United States and acquisitions are growing. According to Susan Little of Raymond James & Associates, typically consolidation see a 25% operating profit margin, while independents barely squeeze out 10%. This consolidation has created increasing controversy within the industry. It is publicized that the major death-care providers do not share the economics of scale resulting from their consolidation, but instead further raise prices, increasing
their own revenue.

According to a survey by the Memorial Society of North Texas , homes owned by Loewen, SCI and Stewart were consistently more expensive than independent competitors. Additionally, it is believed with consolidation has come a level of depersonalization that family-owned funeral homes have managed to resist. Some independents have even taken on a discount strategy to combat the competition.

SUCCESS FACTORS

Research of this industry indicates that a lender should look for certain signs of a successful practice, including:

  Experienced management

  Good reputation and local community involvement

  Management succession plan. State license

  Adequate hazard, malpractice, and key man life insurance

  Historical cash flow coverage of 1.2x pro forma debt service

  Satisfactory personal credit report. Stable or upward trend in revenue

  Moderately leveraged  

TRADITION  

According to Stacey Woodruff, President of Woodruff Funeral Home of Hazel Crest , IL , tradition in funeral home business practices based on integrity and professionalism may make the difference between surviving on public expectation or what you the funeral director recognize and deliver as good value in service to the public.  

Considering that most funeral homes offer similar if not the same service options to the public…  

Traditional Service – This option includes a visitation for the family and friends prior to a religious funeral ceremony officiated by Clergy.  

Non-Traditional Service – This option may include a visitation prior to a secular service conducted by a Celebrant or other ceremony leaders selected by the family.  

Cremation and Memorial Service – Families can select cremations as an alternative to burial, and still have a traditional or non-traditional service. Others may elect to cremate and then have a Memorial Service

Pre-Need Arrangements – More families are choosing to make funeral arrangements in advance of need. This gives peace of mind knowing critical decisions and financial considerations have been finalized prior to need.  

Grief Counseling – On a referral basis, professional support can be provided to assist families through the grief process.  

Affordable Caskets and Urns – Most funeral Homes offer quality caskets and urns for those families using their services.  

Shipping and Receiving – Through a network of industry professionals, shipping and receiving deceased loved ones can be achieved nationally and internationally.  

And, even if your business lacks the advantages of hired help as in many instances with start up’s, to rise to the occasion of growth you must practice strong management and have a proprietary advantage over competitors.  

Strong Management
The success and failure of a company is determined by the management team it has. A strong and capable management team is needed to manage sales growth, focused on operational discipline and plan for the future in order to maintain its competitiveness.

Special, Proprietary Advantage Over Competitors
To get the upper hand on the competition, the company needs to have a special proprietary advantage. This edge permits the company to have a pricing premium, an operational cost advantage or both. In the hyper competitive business world, it’s not enough just being another commodity type operator

A NEW DAY

More Americans plan for happier endings, pulling the plug on traditional FUNERAL SERVICES.

LEAVE IT to baby boomers to flout convention, even when they're on the way out. Almost half of them want their families to throw a big party when they die, according to a survey by industry leader Batesville Casket Co. As a result, funeral homes are offering theme services.

Out: somber organ music. In: a jazz service with the casket resting on stereo speakers blaring the deceased's top ten. Out: a softly lit chapel. In: a sports haven where guests sit in squishy leather recliners and watch Super Bowl clips.

Wade Funeral Home in St. Louis has a viewing room outfitted like a homey living room, down to the antique furniture. Family members bring pictures to hang on the walls, along with other personal items to honor their loved ones. Most providers don't charge extra for creative services, but you will pay more for special casket features, such as Batesville's add-ons that lend a hunting-lodge motif.

Making a grand exit can be as simple as releasing butterflies, doves or balloons in a final tribute. For a truly celestial send-off, at www.celestis.com you can arrange to launch a loved one's cremated remains into Earth's orbit (at a cost of $5,300) or to the moon ($12,500) and then track the voyage online.

Sources of Data  

“AARP/FTC Sweep Nets Five New Jersey Homes for FROP”, Death Care Business Advisor, Vol. 10, No. 16, July 24, 1997.  

Ankeny , Robert, “Investing in ‘Death Care’: Detroit Gets Black-Owned Funeral Home Chain,” Crain’s Detroit Business, March 25, 1996, p. 3.  

“Carriage Services Announces Third Quarter Earnings,” PR Newswire, October 28, 1997.  

“Companies that Provide Funeral Goods and Services Agree to Pay Civil Penalties to Settle Federal Rule Violations,” FDCH Federal Department and Agency Documents, November 4, 1996.  

“Consolidation Continue In ‘Death Care’ Industry,” Investment Dealer’s Digest, Inc., Bank Loan Report, Vol. 0, No. 32, Investment Dealers’ Digest, Inc. August 5, 1996.  

Constantineau, Bruce, “Hostile Bid for Loewen is Sensible, Analysts Say,” 17ze Vancouver Sun, September 19, 1996, p. D1 / Front  

Constantineau, Bruce, “Loewen Hits S 1 Billion US in Bank Backing: Future Growth in Cards but None of Line of Credit Has Been Used Yet, Exec Says.” 17ze Vancouver Sun, October 3, 1997, p. E1 / Front  

DeMarrais, Kevin G., “Funeral Homes Targeted: Sting finds Most Obey Pricing Rules,” 17ze Bergen Report, July 18, 1997, p. B1  

“FAMSA Files Complaint with FTC Against SCI,” Death Care Business Advisor, Vol. 1, No. 5, September 4, 1997  

“FAMSA Petitions FTC for 1998 ~ Reopening of the Funeral Rule,” Death Care Business Advisor, Vol. 2, No. 8, October 23, 1997  

“Five New Jersey Funeral Homes Cited for Violating Consumer Law,” Asbury Park Press, July 18, 1997, p. B7  

“FTC Announces Results of Inspection of Sixty-seven Philadelphia Funeral Homes for Compliance with Consumer Protection Law,” FDCH Federal Department and Agency Documents, December 9, 1997  

“FTC Announces Results of Largest Statewide Inspection of Funeral Homes in Iowa ,” M2 Presswire, January 28, 1998  

“FTC Funeral Rule Sweep in Philadelphia Finds 20 Funeral Homes in Violation,” Death Care Business Advisor, Vol. 2, No. 12, January 8, 1998  

Batesville Casket Co. survey on” Spending”  

“Stacey Woodruff, President of Woodruff Funeral Home

 

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