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Funeral-C's of Credit

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by

Micah Davis

on 9 April 2018

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Transcript of Funeral-C's of Credit

The C's of CREDIT
Character
Capital
Conditions
Collateral
Cash Flow
Long Term Relationship
Eye of the Tiger
Credit Report
10+ yrs
Example: Personal Financial Statement
7 + yrs
Secondary source of repayment
A weighted average between the percentage of loan proceeds used for practice purchase and percentage of proceeds used for real estate purchase.
Loan Terms
Keys to Finance Ability
Type of Financing Tools
Conventional
Loan Product
SBA 504 Loan
SBA 7(a) Loan
Real Estate Loans
Generally
20 to 25 year
re-payment term
Practice Loans
Generally
20 to 25 year
re-payment term
Construction Loans
Blended Loans
Generally
10 to 15
year re-payment term
Net Income: $ -23,000
NOI: $ 227,000
Annual Basis:
Getting Financing
3 years personal tax returns

Personal Financial Statement

Resume

Three years business tax returns

Business Interim P/L & Balance sheet
Example
Review Historical Income

Evaluate personal assets/liabilities

Understand experience/leadership

Historical repayment ability

Current operations of practice

Revenue: $ 850,000
Net Income: $ -23,000
Annual Basis:
Cash Flow: $364,000
Purchase Price: $2.2 Million
NOI
Info from Tax Return
Cash Flow Analysis
Add-backs
• Compensation of Officer
• One-time expenses
• Interest
• Depreciation
• Amortization
• Rent (if owner is same)
Reminder!!!
NOI
NOI
Revenues
NOM =
Example:
$ 227,000
$ 850,000
= 26%
Net Operating Margin
What are the personal debt obligations of the individual?
Net Income: $ -23,000
+ Add-backs: $250,000
NOI: $ 227,000
New Debt Service: $ 123,000
Excess Cash Flow: $ 54,000
Annual Basis:
NOM
39%
Summary:
1. {
2. {
Are the margins of the funeral home in line with industry averages?
Revenue: $1,100,000
Expenses - Add-backs: $800,000
Cash Flow: $300,000
Total Debt Service: $128,000
Owner Salary: $ 75,000
Student Debt: $ 13,440
Excess Earnings: $83,560
Annual Basis :
10 % Topline Growth
Revenue: $1,100,000
Cash Flow: $429,000
Total Debt Service: $166,000
Owner Salary: $ 75,000
Excess Earnings: $188,000
Annual Basis:
x NOM: 39%
Student
Loan
$170,000
Adjusted w/ fees: $171,717
@ 6.8% over 30 years
Monthly Payment
Annual Debt
$1,120 x 12 months =
$13,440
= $ 1,120
indicates ability to pay down debt
DSCR =
Total Debt Service
greater than 1 indicates there is enough cash flow to cover debt obligations

SBA requires > 1.15
LOB requires > 1.25

LOB Portfolio Avg. = 1.65
NOI - Owner Compensation
56% growth
Now let's add the personal side...
Personal Financial Statement
Female DVM 2.5 years out of school
$ 1,500,000
Out of school & Funeral Director for 8 yrs
Been working at this location for 1 yr
$ 158,000
$ 8,000

$ 600,000 for Business Assets of the Practice

$ 1,600,000 for Land & Buildings
FOR SALE
Is there enough annual Cash Flow to support the annual debt of the financed purchase price?
Does the length of the loan term allow for the purchase price to be successfully financed?
Is there enough Cash Flow to cover the business debt obligations & personal debt obligations?
with Topline Growth
Net Operating Margin
NOM
$NOI
LOB Funeral Home portfolio
Average= 29%
% used to measure operating efficiency

% of how much a company makes (before interest and taxes) on each dollar of sales.
EBITDA
E
arnings

B
efore
I
nterest
T
axes
D
epreciation
A
moritization
Net Operating Income
NOI
Net Income +
= NOI
Add-Backs
Compensation of Officers
Interest
Depreciation
Amortization
One-time Expenses
Rent (if same owner for real estate)
Simplistic measure of cash flow available for Owner's compensation & Debt Service
Tax Return
Cash Flow Analysis
*From Schedule M-1
Cash Flow
+ Add-backs: $ 250,000
For Sale
New Owner's Salary: $ 50,000
Debt Service Coverage Ratio
$ 227,000 - $ 50,000
$ 123,000
DSCR = 1.44
Example
Revenues
$Revenues
x 100
=
Funeral Home Loan Officer
meghan.cowan@liveoakbank.com
910.550.2293

Who are we?
FINANCING

The other F word

Takeaways:
Acquisitions
Succession Financing
Transition of ownership
New proposed debt run on last 3 years historicals
Transition Risks
Expansions
Cash Flow analysis based on same owner's historical performance
New Construction
Re-Finance
Analysis based on same owner's historical performance
Consolidating existing debt to improve cash flow
What will the loan be used for?
Is there enough cash flow to support new owner reasonable salary & the financed purchase price?
Are the historical revenues repeatable with new owner?
Renovations
Acquiring an additional location
What outside factors influence this purpose?
Cash is KING
Protect your credit score!!!
-
Hope is not a strategy
-
Learn as much as you can about the funeral business.
Key Metrics
Managing People

Documents needed to get Started
3 years personal tax returns
Three years business tax returns
Personal Financial Statement
Business Interim Income Statement & Balance sheet
Resume
Scores based on...
FICO score
Range from 350 - 850
- Above 750: Exceptionally strong
- 700-749: Strong
- 650-699: Moderate
- 600-649: Weak
- Below 600: Problematic
Credit Report
Reported monthly to the 3 main credit bureaus
How you manage your personal credit is how you will run your business credit !!!
Shows Balances & Payment timeliness
Credit Score:
algorithmic calculation to indicate a person’s credit strength & the likelihood that they will default on their obligations.
1) Payment history.
Delinquencies quickly lower a score.

2) Revolving credit availability.
The more credit cards with minimal balances, the better.
Concerned when using more than 80% of available credit
Almost maxed out on credit cards? usually indicates a “lifestyle” of living above your means.

3) Age of accounts (when account was opened).
More history to fall back on and the score is more meaningful

5) Personal bankruptcies
Reported for 7 years, then drop off

6) Liens & Judgments.
4) Collections
Creditor turns them over to third party collectors
Always a huge negative on score

© 2018 Live Oak Banking Company. All rights reserved. Member FDIC

Meghan Cowan
Call Volume: 130
Avg. Service Revenue: $6,500
Cremation Rate: 30%
Real Estate $1,100,000
Business Assets: $ 400,000
Buying 3 Rural Rooftops
Other Key Metrics for Funeral Homes:
x 100 = 26%
$ COGS
x 100 = COGS %
$ Wages
$ Revenue
Cost of Goods Sold (COGS)
Inventory
Caskets, Urns, Vaults, Markers, Flowers, etc.
National Average = 22%
$223,000
$850,000
$183,000
$850,000
Increasing Cremation Market
Charge for Director & Staff time
Cosmetology, Casketing, & Dressing
Cooling/Refrigeration
Transfer of Body
Regardless of Funeral type...
Part
Whole
x 100 = %
Calculating Business Metrics 101
$ Revenue
$ Metric
$ Revenue
$ Metric
x 100 = %
x 100 = COGS %
Wages
People
National Average = 16%
x 100 =22%
$ Revenue
Important for you to contribute to this investment at least 10%
Loan Structure for $ 1.5 Million Acquisition
Interest Rate:
Loan Term:
Working Capital:
Soft Costs & Fees:
Cash Needed (>10%):
Monthly Payment: $10,200
Annual Debt: $123,000
x 12 months
Variable, WSJ Prime + 2 %
up to 25 years
$ 60,000
$ 90,000
$ 165,000
Total Costs: $ 1,650,000
Loan Amount: $1,485,000
-
Purchase: $ 1,500,000
Type of Loan:
SBA 7(a)
+
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