[M&A Insights] The No.1 Funeral Service Company on Sale...The Reason Behind Its "1 Trillion Won" Valuation

No.1 Funeral Service Provider FreedLife as M&A Asset
Large-scale Advance Payment Management, Key Issue for Funeral Services
Dedicated Team Established, Strengthening Expertise through Collaboration with Operators

One of the difficulties that bereaved families face when they have to hold a funeral suddenly is the complicated funeral procedures. From food to burial clothes, coffins, and hearses, there are many choices to make. To prepare for this, there is a product called 'Sangjo Service' that systematically prepares family funerals by receiving money (advance payment) from customers in advance.

Recently, in the merger and acquisition (M&A) market, the country's number one Sangjo company, Freed Life, has been put up for sale. In 2020, the private equity firm VIG Partners acquired Freed Life for about 300 billion KRW, and they have now begun to actively recover their investment. The asking price from VIG Partners is over 1 trillion KRW. Why is such a high valuation expected for a Sangjo company with sales of 182.9 billion KRW and operating profit of 30.9 billion KRW as of 2022?

The Scale of Advance Payments Determines the Value and Cash-Generating Ability of Sangjo Companies

The answer lies in the scale of 'advance payments.' Advance payments are a key indicator for evaluating prepaid installment transaction companies like Sangjo companies. The size of advance payments determines corporate value and cash-generating ability.

The main goal of a Sangjo company is to effectively manage the large funds prepared from advance payments (however, under the Installment Transactions Act, at least 50% of the balance of advance payments must be kept in financial institutions or secured by a debt payment guarantee contract). It looks similar to insurance companies that manage premiums paid by customers. But there is a difference. Insurance companies pay out the insured amount even if the insured event occurs after paying a small premium, but Sangjo companies require full payment of the balance to receive services. The industry is classified not as finance or insurance but as 'prepaid installment sales.'

As of March last year, the total number of subscribers to prepaid installment transaction companies, including Sangjo companies, was 8.33 million, with total advance payments reaching 8.389 trillion KRW. Freed Life was the first company in the industry to exceed 2 trillion KRW in advance payments last year. As of the first half of last year, it had about 2 million members and 2.1 trillion KRW in advance payments, of which 1.5 trillion KRW is managed as investment assets.

Creating Dedicated Management Teams... Efforts to Strengthen Expertise Comparable to Asset Management Firms

As the number of Sangjo service subscribers increases every year, the total scale of advance payments and managed assets in the industry continues to grow. Sangjo companies must preserve customers' advance payments while increasing investment returns to provide better services. This is because large losses can severely damage customer trust.

In fact, a major domestic Sangjo company invested about half of its net increase in advance payments in 2019 into the 'Lime Fund' and suffered losses of hundreds of billions of KRW due to a redemption suspension incident. The company filed a civil lawsuit against the securities firm that sold the fund. In court, the focus was on how systematic the decision-making structure of the Sangjo company was. In court, the judge asked a financial staff member of the Sangjo company, "It is strange to now demand 'responsibility from the seller' when you didn't even know where the investment was made and losses occurred." The judge inquired whether internal procedures for large-scale investments were in place. The staff replied, "The company had no investment experts, and the decision to purchase the Lime Fund was made after consultation among about three people, including the chairman and myself."

To prevent such risks, the Sangjo industry is continuously strengthening investment expertise internally. Freed Life was the first company in the industry to establish an asset management headquarters in 2020 for efficient asset management. It continues efforts to enhance expertise by signing business agreements with asset management firms.

Freed Life currently invests about 75% of its managed assets in safe assets such as bonds. The remaining 25% is invested in various asset classes including deposits, stocks, and alternative investments. The target return can be adjusted according to portfolio composition and annual asset allocation strategy. The average investment return is about 5%. Through this management, Freed Life earned about 44.16 billion KRW in financial income last year, which is about 24% of its sales. This is about an 18% increase from the 37.44 billion KRW in financial income in 2021. Ultimately, when valuing Sangjo companies in the M&A market, it is necessary to consider not only industry ranking and performance but also the scale of advance payments and asset management.