Bak Funeral Home Case Study Analysis
The funeral industry has changed very much. It has less similarity as in traditional way of funeral in 1975. There have been incredible alterations over the past few decades due to Federal Trade Commission (FTC). FTC has mandated alterations in the funeral service pricing, alterations in consumer preferences, and consolidation of funeral service providers. In 1984, FTC wanted funeral homes to offer customers with a general price list that disintegrates the prices of each component of the funeral.
For instance, instead of charging one price of $9000 for all merchandise and services for funeral purposes, the funeral home must divide the charges into components, for example, $3450 for casket, $540 for embalming, $185 for cosmetology, hairdressing and placement in casket, etc. In addition, the FTC has declared that funeral homes may not require customers to buy a lot of items, in particular caskets or burial vaults from the funeral homes.
Customers may buy either or both the components from a dealer apart from the funeral director and have the casket transported to the funeral home and the vault transported to the cemetery. Nowadays, there are several non funeral home dealers of these components. Customers can go online to buy caskets and vaults from the Funeral Depot or the American Casket Store with next-day delivery assured. A number of religious orders manufacture caskets that they market through “funeral resource centers” positioned in big cities. Moreover, the preferences of the customers have altered dramatically.
About 30 years ago, nearly 93 percent of the families prefer to go for traditional funeral followed by earth burial. Today, the percentage of burials has declined by 71 percent, whilst the percentage of cremation has increased to 29 percent on national level (Ruhl and Wilson, 2008. p. 482, 484). The funeral industry has advanced from a comparatively plain local business that was in large portion unfettered into a contemporary industry controlled by multi mortuary business corporations struggling for economies of scale.
2 a) Sabina need to calculate the depreciation of the rental property in order to buy the Bak Funeral Home. There is a need to check all tax issues methodically with a tax accounting professional, however the Internal Revenue Service (IRS) in general allows devaluing the value of the construction on the property over a period of 27 and half years. This is the rational treatment of the fact that structures do wear out eventually, or become out of date owing to their older qualities no longer in demand. So, Bak Funeral Home has been generating some positive cash flow per year.
However, now some of that income can be offset for taxes. The building is depreciated by cutting out the value of the land and dividing the building value by 25 years for annual depreciation (25 years because the building was constructed in 1980 and the valuation is being done in 2005). The depreciation calculation looks like this: 1. Purchase price – Land Value = Building Value. 2. Building Value / 25 = Annual allowable depreciation deduction (Kimmons, n. d. ). The Bak Funeral Home has a depreciation value.
Thus, it would not be feasible for Sabina to buy back the Funeral Home and ask her mother, Joan to rent her the existing building for $2000 per month. Individuals invest in property not only for the income prospective it presents, but also for the tax benefits that accompany owning and renting out assets. Possessing property and renting it out is a business. One can take in revenue (rent) and incur costs similar to any other business. The greater part of operating expense deductions comes from money that one has expended on the property.
There are deductions permitted for mortgage interest and property taxes, in addition to deductions for insurance, maintenance, and mending on the buildings. One expense that requires no expenditure of money is reduction on the property. This is an accounting deduction that is permitted and is based on the general wear and tear on the building. If Sabina can show a loss on her rental property, where her expenditures exceed her income, she might be able to remove the loss on her tax return. The only way that she can deduct the loss is to be an active member in the supervision of the property.
She can hire a property manager to carry out the day-to-day tasks, but she needs to be aggressively participating in appreciating terms of contracts, interviewing probable tenants, and approving expenses that go toward upholding the building (Tax Tips: All about Rental Property Tax Breaks, n. d. ). Hence, Joan (her mother) would agree to this arrangement. 2 b) Joan requires 11 percent cash flow return on her investment in the building. The market value of the building is $1800, 000. Sabina would not need to pay state and federal income taxes because the company would be operating at a loss.
As the net income is declining year after year, that is why; Sabina should not purchase Bak Funeral Home and operate it at its present location. 2 c) Now we need to check whether it is feasible for Sabina to purchase Bak Funeral Home business and operate it in nearby location. Sabina would be finding an investor who would be willing to purchase and build a new funeral home away from Regional Airport where land values are lower. At least ten residential lots will be required for car parking. Each lot is sold at $30,000.
Building costs would be $900,000 and real estate cost $25000. Here also, the assumptions are made. Sabina would not need to pay state and federal income taxes because the company would be operating at a loss. It would be feasible for Sabina to buy back the Bak Funeral Home and operate it in nearby location as the values of the land seem to be lower. 2 d) Firms whose level of performance is below parity, or that finds it more and more difficult to flourish in the new economic world order, seeks and implements techniques to enhance performance and augment shareholder wealth.
For those managers who are critically considering whether a merger or a consolidation would be feasible option for their firms, understanding the rules and methods governing these events will facilitate them to make their choice. Thus, given the current situation Sabina should approach Modelski Funeral Home and suggest that she merge the Bak Funeral Home Business into Modelski location. If the two businesses are combined, then both the business would be able to prosper and as the stake is 50-50, then it would not be any problem for the companies if they even incur losses.
They will be able to compensate and they would also had a larger portion of market share in the industry. 2 e) In this case, Sabina should buy the Bak Funeral Home Business at the price which her mother, Joan is offering and would definitely merge with Modelski business. As she would be able to purchase the business at an interest free rate over a period of five years, thus it would be viable for her to buy the business. 2 f) Reputation indeed does work in case of Sabina as she has been managing her father’s business for few years. She herself is a brand as people are aware of her name and fame being a funeral director.
However, if she goes by profit making motive, then it would not work in the long run. She should buy her Bak Funeral Home at the interest free rate which her mother is offering. 2 g) The price is based on the firm’s ability to generate a stream of profit or cash flow. The seller projects this stream of cash more than 5 or more years to compute the worth of the business. Often, discounted future earnings are applied which takes into consideration the time value of money – cash obtained in year 5 is discounted based on probable interest rates.
In this process disagreements can crop up regarding estimation of cash flow and predictable sales projections. A lot of cash flow and EBITA (earnings before interest, taxes and amortization) protuberances employ “recast” numbers to reproduce the outcome on profits of perquisites that a business proprietor takes from the business (How to sell a small business, n. d. ). Thus, it would not be feasible for Sabina to get out of the funeral business and let her mother to sell the business at a price which is five times the cash flow of the company.
3) In spite of of the prevention methods employed, probable threats that could arise inside or outside the organization which needs to be evaluated. Even though the exact nature of probable disasters or their resultant effects are hard to determine, it is advantageous to perform a complete risk assessment of all threats that can sensibly occur to the organization. Despite the type of threat, the objectives of business recovery planning are to guarantee the safety of consumers, staff and other personnel during and following a catastrophe (Wold and Shriver, n. d. ).