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Sale-Leaseback Gives Life to Innovative Investment in Funeral Homes

How Garnett Station Partners and STNL Advisors used a sale-leaseback transaction to fund acquisitions in the niche funeral home industry.

Sale-Leaseback Gives Life to Innovative Investment in Funeral Homes

This article is sponsored by STNL Advisors. It originally appeared in the fall 2021 edition of Middle Market DealMaker

Ben Franklin’s oft-cited saying that there is nothing certain in life except death and taxes holds true for Garnett Station Partners, a private equity firm that saw potential in funeral homes—especially those with real estate assets—as a stable and successful investment.

To transact in this niche industry, the firm turned to STNL Advisors, a real estate consultancy that helped Garnett craft a solution to the challenging issue of how to finance its initial acquisition of 26 funeral homes.

It wasn’t the first time that Garnett had used STNL’s services.

“They really have been strategic partners with us for the last eight years,” says Alex Sloane, managing partner and co-founder of Garnett. “They advise us on every single deal we do. We don’t do a deal without their blessing, support and counsel.”

When helping its clients fashion and find value in their investments, STNL specializes in out-of-the-box thinking and creative approaches. In the case of the funeral home investments, Garnett sought STNL’s help to utilize a technique known as sale-leaseback, which was crucial to funding the purchase.

Sale-leaseback is a financial transaction in which the owner of an asset, in this case real estate, sells it and then leases it back from the new owner. The funeral home deal hinged on Garnett being able to line up the investors who would purchase the real estate and lease it back to the subsidiary, which would operate the funeral homes.

“We had developed a thesis around consolidating funeral home businesses,” Sloane says. “Core to that thesis was the ability to sell the real estate to a REIT and other real estate investors separately from the operating company. And that had never been done before.”

Glen Kunofsky, founder and president of STNL, says his company was intrigued by the deal. He notes that sale-leasebacks are commonly used in industrial, manufacturing, retail, corporate headquarters and restaurants, but applying the strategy to funeral homes was a new frontier.

“The goal was to have the sale-leaseback co-terminus with the acquisition of these businesses, as most private equity wants,” he says. “The real estate was such a significant part of the capital stack so, without the real estate, without buyers coming to the table, and us bringing the capital, there was no acquisition. Garnett’s goal was to have the capital in place simultaneously to buy the businesses.”

A lot of advisors don’t go out and actually see the properties. They will look at a spreadsheet, and look at Google Maps. But one of the first things we do is go and see each property.

Glen Kunofsky
Founder and President, STNL Advisors

Kunofsky says the concept of sale-leaseback is not necessarily well understood or utilized as much as it could be. Other industries where STNL has applied a sale-leaseback approach include lumber yards, chemical plants and manufacturing facilities.

“The word speaks for what it is, but a lot of people don’t understand that you don’t necessarily need to own the real estate at the time of arranging the sale of the real estate,” he says. “In Garnett Station’s case, they were acquiring the business with the real estate so they didn’t own anything yet. It all happened simultaneously.”

And it had to happen fast. Garnett had a timeline of 60 days in which to line up the financing.

Sloane says involving STNL early in the process was crucial. He would advise any other firm considering such a transaction to do the same.

“They analyzed it with us from the very beginning and from every angle,” Sloane says. “STNL came to the conclusion that they’d be able to do it. That really enabled us to execute our thesis. Without the real estate component, we would never have gotten comfortable to do this investment.”

With that green light, STNL hit the road. The firm’s professionals traveled a total of about 1,200 miles to visit every piece of real estate and learned about each funeral home, crematorium and cemetery.

“A lot of advisors don’t go out and actually see the properties,” Kunofsky says. “They will look at a spreadsheet, and look at Google Maps. But one of the first things we do is go and see each property. We want to understand what the pros and cons are in terms of the business, and what a potential buyer is going to be looking at. Then we try to decide what an investor would pay for these properties and what they should rent for.”

Along the way, STNL learned a lot about the industry and the properties themselves. It also made use of the real estate expertise and relationships it has developed over the last quarter century.

“We took all that information and compiled a detailed marketing plan for private and institutional investors and did a confidential book with all the relevant information,” Kunofsky says. “And then, we started speaking to the potential buyers. We made calls to explain the industry and the properties, and explain why it would be a good investment. We also explained how the business was going to be organized and financed.”

Sloane credits STNL for helping to make the deal a reality, which ultimately proved fruitful for the firm. Four years after that 2016 transaction, Garnett Station sold the funeral homes. “We did very well for our investor group,” says Sloane, whose firm went on to invest in 40 more funeral homes.

“What’s so great about STNL is that they are so creative,” he says. “They know the buyer universe, they knew our timing and constraints and were able to meet our timeline. They helped us create value.”