As private equity gains, death is by no means a dying business

Private equity firms are investing in healthcare from cradle to grave, and literally in the latter category. Thanks to high profit margins, predictable revenue and the eventual death of tens of millions of baby boomers, private equity-backed companies are eating into a small but growing percentage of the funeral home industry.

The funeral home industry is in many ways a prime target for private equity, which looks for highly fragmented markets that could benefit from consolidation. By cobbling together chains of funeral homes, these companies can take advantage of economies of scale in procurement, improving marketing strategies and sharing management functions.

Of the roughly 19,000 funeral homes in the $23 billion industry in the U.S., at least 80 percent are still privately owned and operated — mostly mom-and-pop stores, but also some regional chains, according to industry officials. The remaining 20%, or about 3,800 homes, are owned by funeral home chains, with private equity-backed companies owning about 1,000 of them.

Consumer advocates worry that private equity firms will follow the example of public companies that have built large chains of funeral homes and raised prices for consumers. “It’s not the grieving family paying the bills that gets the service, it’s the shareholders,” said Joshua Slocum, executive director of the Funeral Consumers Coalition, a nonprofit that educates consumers about funeral costs and services. organize.

While funeral price data isn’t readily available to the public, an investigation by the coalition’s local arm found that when publicly traded or private equity-backed chains acquire individual funeral homes, prices tend to follow.

In Tucson, Arizona, for example, when the local owner sold the Angel Valley Funeral Home to the private equity-backed Foundation Partners Group in 2019, the price of a cremation rose from $425 to $760, and the price of a funeral without viewing or visitation increased from $425 to $760. $1,840 to $2,485, and a full, economical funeral from $3,405 to $4,480.

In Mesa, Arizona, the sale of Lakeshore Mortuary to publicly traded funeral home chain Service Corporation International resulted in cremation prices rising from $1,565 in 2018 to $1,770 in 2021, funeral prices from $2,795 to $3,680, and economic funerals from $1,565 in 2018 to $1,770 in 2021. $4,385 to $5,090.

“We believe our pricing is competitive and reasonable in the markets in which we operate,” a Service Corporation International official said in an email.

Details of these price increases were provided by Martha Lundgren, board member of the Arizona Funeral Consumers Coalition. The funeral home acquisition resulted in the cancellation of a pricing agreement negotiated by consumers representing coalition members, she said. In 2020, a cremation at the Adair Dodge Chapel in Tucson will cost $395, nearly two-thirds less than the standard price of $1,100. But after Foundation Partners Group bought the funeral home, the membership pricing agreement was scrapped and the price for direct cremation rose to $1,370.

The price hike partly reflects higher prices for supplies such as coffins, as well as higher labor costs, Foundation Partners Group officials said. But they said most of the price increases represented a move towards a more transparent pricing system that included administrative and transportation fees that other funeral homes later added.

“When people don’t think clearly, we don’t take advantage of them,” said Kent Robertson, the company’s president and CEO. “That’s not us.”

The U.S. funeral home industry saw massive consolidation in the late 1980s and early 1990s, and again around 2010, said Chris Kruger, an industry consultant in Phoenix. Acquisitions have reached a frenetic pace over the past two or three years. As the 73 million baby boomers, the oldest of whom will be in their 70s, continue to age, many investors are banking on a surge in demand for death care services in the coming years.

“Pure demographics are obviously good for everyone here,” Kruger said. Funeral home profits are already attractive, and combining them into chains to share overhead costs could boost profits even further.

At the same time, many funeral home owners and operators are reaching retirement age, and no one in the family wants to take over. A 2021 survey by the American Funeral Directors Association found that 27% of homeowners plan to sell their business or retire within five years.

The desire to sell, coupled with the influx of investment money into the space, has pushed funeral home prices to new heights. Before private equity turned its attention to funeral homes, they sold for three to five times their annual revenue. “Right now I hear seven to nine,” said Barbara Kemis, executive director of the North American Cremation Association, the cremation industry trade group.

The value of a funeral home goes beyond its physical assets. Funeral directors are often an integral part of the community and develop goodwill with their neighbors. So when chains acquire these homes, they rarely change names and often keep the previous owners for a smooth transition.

Tony Kumming, president of the NewBridge Group in Tampa, Florida, helps broker funeral home sales. Many of his clients remain skeptical of big companies, and often sell for less to people they think won’t tarnish their hard-earned reputations. Most of the former owners plan to live in the community and don’t want their friends and neighbors to be mistreated. “I’m not saying that someone is going to take half of what another company is offering,” Cumming said. “But there are two big things to sell right now: money and fit.”

Five years ago, when Robert Olthof decided to sell his family’s funeral home in Elmira, New York, he contacted some of the large publicly traded funeral home chains. But when representatives from various companies visited him to make offers, Olthof realized that none of the major chains had fielded people who were well-versed in business services. “They sent out accountants and they sent out lawyers,” he recalls. “It’s all about numbers, numbers, numbers. And I don’t like that.”

Instead, Althoff sold to Greg Rollins, a former funeral director who had amassed a chain of 90 private funeral homes throughout the Northeast. Rollins offered less money than the big chains, but he knew what it was like to wake up at 2:30 a.m. and put on a suit to help a grieving family. He knew what it was like to bury a child.

In this undated photo, Robert Orhoff stands next to a portrait of his father. Olthof sold his family’s funeral home in Elmira, New York, to a private owner after discovering an interest in acquiring his large chain that was more focused on the financials than the service side of the business. (Robert Orhoff)

“I can’t say for sure how much it’s worth selling it to someone who is a undertaker himself,” Olthof said. “Because go ahead and your name will still be in front of that building.”

Victoria Hahnemann, a professor at Creighton University School of Law who studies the funeral home industry, worries that new corporate ownership could be devastating for grieving families. “They don’t behave like normal, rational consumers,” she said. “They’re not bargaining because death is seen as an inappropriate time to bargain.”

For most families, a funeral will be one of their biggest expenses ever. But they often enter the shopping process cognitively impaired by grief and unsure of what is habitual or appropriate.

According to a 2022 survey commissioned by the Consumer Federation of America, only one in five consumers will visit multiple funeral homes to obtain price lists. Online comparisons are nearly impossible—a study by the Federation and Funeral Consumers Union found that only 18 percent of the funeral homes they sampled listed prices on their websites. As a result, families often rely heavily on the expertise of a single funeral director who has an incentive to sell them the most expensive option. As a result, consumers may be forced to purchase open-coffin funeral packages that include embalming and other services that add cost and may be unnecessary.

“Will that kind of pickled, shelled, beautified, well-preserved corpse be in the future? I don’t know the answer,” Hahnemann said. “And I think some investors think that’s not the case.”

Foundation Partners Group is a prime example. Backed by private equity firm Access Holdings, the funeral home chain turned five years ago to buy funeral homes with high cremation rates. Cremation rates across the country have been climbing steadily over the past two decades, with nearly 58 percent of households now opting for cremation rather than coffin burial. Foundation Partners expects this to reach 70% by 2030.

The company has acquired more than 75 businesses in high cremation states including Arizona, California, Colorado and Florida. Most funeral homes average over 150 funerals per year.

Foundation Partners CEO Robertson said individual funeral homes “can’t get the marketing budget, they can’t get the safety and health programs and benefits and these different things.” “And because of our ability to drive marketing and do other things, we’ve also grown this 150-call company to 200 calls.”

The funeral home industry is different from other industries that private equity firms might consider investing in, Robertson said, describing it as a mission comparable to hospice work. He said Foundation Partners is fortunate that their backers understand the service part of the industry as well as the financials. “Private equity firms are not necessarily known for deep empathy for people. They are known for financial returns,” he said. “It’s really important to have both.”

Foundation Partners owns Tulip Cremation, an online service that allows people to order cremations with just a few clicks without stepping into a funeral home. Tulip currently operates in nine states where Foundation Partners has funeral homes. The company expects the service to eventually operate nationwide.

Haneman said innovative approaches like Tulip are desperately needed in the funeral home industry, which has barely changed in 100 years. “To me, the average cost of a funeral is between $7,000 and $10,000, which is ridiculous to me,” she said. “People need cheaper options, and innovation will get us there.” Tulip’s cremation costs less than $1,000; ashes are sent back to family.

Other online cremation services include Solace Cremation, Smart Cremation and Lumen Cremation.

“Private equity investment has the potential to go in one of two directions: Either it consolidates the status quo and drives prices higher, or it invests in disruption,” Hahnemann said. “And disruptive promises have the potential to bring more affordable processes to market.”

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