Doing an Acquisition – How accurate is your preneed contract data?

In today’s environment, cemeteries can experience several changes in ownership over a relatively short amount of time. Acquiring any type of business is challenging and it can be difficult to obtain accurate financial data.  The chance of data being lost or incomplete increases with each ownership change.  If you have acquired a cemetery in the past, how did you become comfortable with the accuracy of the financial data before you purchased it?  If you are the original owner of a cemetery do you periodically complete any type of detailed analysis to gain a level of comfort that the financial reporting of the preneed sales are accurate?

In our experience, it’s typical for a preneed contract to remain unfulfilled for fifteen or even twenty-five years from the time the customer plans their arrangements.  All of these factors lead to lots of files to maintain in both paper and electronic formats. Cemeteries are one of a few businesses that can have contracts remain open for several years or even decades.  Individuals typically do not begin thinking about preplanning for funeral and cemetery services until they are in their fifties or sixties. Industry statistics indicate that approximately twenty-five to thirty percent of individuals’ ages fifty or older has prepaid at least a portion of their funeral or cemetery expenses.  That age group is one of the largest populations in the United States, which results in a significant number of pre-planning contracts that have been written within the cemetery industry as a whole.

Most business owners looking to acquire a cemetery typically perform some type of due diligence to get comfortable with what they are purchasing.  Even if you are the original owner of the cemetery you should occasionally complete some type of due diligence procedures as a process of good internal controls.  But what does due diligence really mean?  There can be a wide range of due diligence activities based on the knowledge, awareness, and personality of the potential acquirer.  In more common terms, it simply means a voluntary investigation process during which a potential acquirer evaluates a target company or assets for acquisition.  This same type of investigation can be applied to a cemetery that has been under the same ownership for years.  Many aspects of a business can be reviewed during the due diligence process including legal, labor, tax, intellectual property, insurance-liability coverage, employee benefits, real and personal property.

One of the most important areas to consider is relevant financial information.  Most owners/operators of cemeteries understand the business model and what is needed to operate a cemetery successfully.  However, often there are differences in the way financial information is recorded.  Right or wrong, not all cemeteries record preneed contracts in their accounting software in the same manner. Identifying and understanding these differences can have a significant impact on the decision to purchase a cemetery.

Completing effective due diligence on the accounting of the preneed contracts is a must!  Due diligence includes reviewing financial reports; which typically includes a balance sheet and an income statement.  But getting into the details to better understand how the data flows into these financial reports is vital to evaluating the financial health of a cemetery.

Important questions to consider prior to acquiring a cemetery:

1. What trusting system is being used to account for contracts?

2. How is revenue being recognized for merchandise, services, and spaces that are sold preneed?

3. How are undelivered preneed items tracked?

4. How are payments applied to contracts?

5. Are reconciliations of revenue and deferred revenue completed between the trusting system and the accounting general ledger?

6. How frequently are items discovered that are not accounted for correctly in the trust and/or accounting system?

Completing effective due diligence procedures on the preneed contracts and related financial reporting is very important when considering the acquisition of a cemetery.  It can provide insight that will help you assess whether or not to go through with the acquisition or even decide to look for other opportunities in the market.

Performing an assessment of your current preneed contracts in relation to how preened transactions are accounted for in your accounting records is a good way to maintain your comfort level with the data in your system.  This type of due diligence review could indicate that there is revenue available to be recognized for financial reporting; which would also allow you to withdraw funds from the trust if you are utilizing trust funds for your preneed contracts.  If you are interested in further information about performing an assessment of your preneed contracts or have questions about your preneed merchandise and service trust accounts you can contact Jamie Iseminger @ MKS&H.

Article Contributed by Jamie Iseminger, CPA, MBA
Senior Audit Manager

About MKS&H: McLean, Koehler, Sparks & Hammond (MKS&H) is a professional service firm with offices in Hunt Valley and Frederick. MKS&H helps owners and organizational leaders become more successful by putting complex financial data into truly meaningful context. But deeper than dollars and data, our focus is on developing an understanding of you, your culture and your business goals. This approach enables our clients to achieve their greatest potential.

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