Seller Financing, Earn-Outs, and Creative Deal Structures for Funeral Home Acquisitions

You have your SBA commitment letter. The bank will cover 80% of the purchase price. The problem is the remaining 20% — and the seller wants a number the bank won’t touch. Here’s how deals actually close when the financing stack has a gap.

You’re in active negotiations. Maybe you’ve been through the diligence, you know the call volume, you’ve seen the preneed book, and you believe in the business. The SBA lender has signed off on your loan. But the seller’s asking price — or the appraised value versus what the bank will fund — leaves a gap you can’t cover with equity alone.

This is not unusual. It is, in fact, the normal state of a funeral home acquisition in the $1.5M–$5M range.

The answer is almost always some version of creative deal structure. That means seller participation in the financing — through a seller note, an earn-out mechanism, a consulting agreement, or a combination of all three. Each of these tools has legitimate uses, firm limits, and traps that catch buyers who don’t understand the mechanics.

This article covers all of them. It is written for buyers who already have their primary financing in place and need to understand what’s legal, what’s common, and what to watch for when negotiating the seller’s piece of the capital stack.

Why the Bank Won’t Cover the Whole Price — And Why That’s Expected

SBA 7(a) loans for funeral home acquisitions typically fund 75–85% of the total project cost. “Total project cost” includes the purchase price, working capital, and closing costs — not just what’s on the purchase agreement.

The equity injection requirement — usually 10–15% — must come from the buyer. That leaves a gap between the equity injection and what the bank funds.

Why the math rarely works out perfectly

Here’s a simple illustration:

• Seller’s asking price: $2,200,000
• SBA-appraised value: $2,000,000
• SBA loan at 80% of appraised value: $1,600,000
• Required buyer equity (10%): $200,000
• Gap between loan + equity and asking price: $400,000

That $400,000 has to come from somewhere. It’s either off the purchase price — meaning the seller takes a lower number — or it comes from a creative structure that bridges the difference.

Most sellers who’ve built a business over 30 years don’t simply drop the price when you show them an appraisal. They want to be made whole. Creative structures are how both parties get to yes.

The private equity pullback has shifted leverage

From roughly 2018 through 2023, private equity consolidators were aggressive bidders in the funeral home market. They competed on price, paid full cash, and often closed fast. That wave has receded significantly.

Many of the mid-market PE consolidators have paused acquisitions, tightened their target profiles, or exited the space entirely as interest rates increased the cost of leveraged buyouts. That means sellers who were counting on a PE buyer now have fewer all-cash options.

Independent buyers with SBA financing — even with the financing complexity that entails — are the realistic buyers for most sub-$5M funeral homes in 2025 and 2026. Sellers know it. That knowledge makes them more willing to participate in creative financing than they were three years ago.

Seller Notes: The Most Common Creative Structure

A seller note — also called a seller carry, owner financing, or a purchase money note — is a loan from the seller to the buyer for a portion of the purchase price. Instead of receiving all cash at closing, the seller takes a promissory note. You pay them over time, with interest.

This is the most common mechanism for bridging the gap between what the bank funds and what the seller wants.

Typical terms for funeral home seller notes

• Principal amount: 10–20% of the purchase price
• Interest rate: 5–7% annually (sometimes tied to prime or WSJ prime plus a spread)
• Term: 5–7 years, typically with monthly or quarterly payments
• Security: Usually subordinated to the SBA lender’s first lien, secured by a second lien on business assets and sometimes real estate
• Subordination: Seller note is junior to the SBA loan in all respects — the seller cannot accelerate or collect ahead of the bank in any default scenario

These terms are not arbitrary. They reflect what the SBA will allow — and the SBA has specific rules about seller note structures that can kill your loan if you get them wrong.

SBA’s 24-month full standby requirement

This is the most misunderstood rule in funeral home deal structuring.

When a seller note is being used as part of the SBA equity injection — meaning you’re counting the seller note toward the 10–15% equity requirement — the SBA requires that the note be on “full standby” for at least 24 months after loan closing.

After the 24-month standby period, normal payment terms resume, and the remaining principal is paid off over the balance of the note term.

What to do if you’re not counting the note toward equity

If you have sufficient equity to meet the injection requirement without counting the seller note — meaning you’re putting in your own cash equal to 10–15% of the total project cost — the full standby requirement may not apply.

The seller note in this scenario is simply subordinated debt. The SBA will still require that it be subordinated, that the seller cannot be repaid before the SBA lender, and that the terms don’t create a cash flow burden that impairs loan repayment.

Your SBA lender will have specific requirements. Confirm them in writing before you include a seller note in the term sheet.

Why sellers agree to carry paper

This is where the conversation usually stalls, because sellers often say “I want all my money at closing.” When you understand what’s actually in it for them, you can have a more productive negotiation.

Higher total price. A seller who takes cash will accept a lower headline number than a seller who carries a note. The seller note allows you to pay a higher price — often 10–15% more than your all-cash offer — because you’re not constrained by what the bank will fund on day one.

Installment sale tax treatment. Under IRC Section 453, a seller who receives payments over time — rather than all cash at closing — can spread their capital gain recognition over the life of the note. This can reduce their effective tax rate by keeping them out of higher brackets in any single year.

Confidence signal. Agreeing to carry a note means the seller believes the business will generate enough cash to repay them. This matters in negotiations — it reframes the seller note not as a concession but as a statement of confidence in the business they’re handing you.

Security and subordination: what sellers can ask for

Even though the seller note is subordinated, sellers can and should require reasonable security provisions:

• Second lien on business assets. The seller has a security interest in equipment, vehicles, trade name, and goodwill — junior to the SBA lender.
• Second lien on real estate (if real estate is included in the transaction and the seller note is large enough to warrant it).
• Personal guarantee from the buyer. Common, and generally acceptable to SBA lenders.
• Life insurance assignment. Some sellers require the buyer to maintain a term life insurance policy naming the seller as beneficiary for the outstanding note balance.

The SBA lender must approve any security arrangements on the seller note. Get that approval before you commit to a seller who wants specific security provisions.

Earn-Outs: Bridging the Valuation Gap When You Disagree on Value

An earn-out is an arrangement where the final purchase price isn’t fixed at closing — a portion of it is contingent on future business performance. If the business hits agreed-upon targets, the seller receives additional compensation. If it doesn’t, they don’t.

Earn-outs come up when the buyer and seller disagree on the value of the business. The seller believes call volume will increase. The buyer sees risk. Neither will move enough on price to close the gap. An earn-out lets both parties act on their respective beliefs. This is especially common when buying from family heirs, where sentiment-driven valuations create gaps that data alone won’t close.

The SBA problem with traditional earn-outs

SBA 7(a) requires that the total consideration be established at closing. Contingent future payments that could increase the purchase price post-closing create problems for the SBA because:

1. The total consideration becomes uncertain, making accurate appraisal impossible.
2. Post-closing payments to the seller could constitute a repayment of equity that the SBA factored into the loan approval.
3. The SBA lender cannot confirm that the transaction is arm’s-length and fairly valued if the price is partially undefined.

If a traditional earn-out is structured as a separate contingent payment that could increase the purchase price after closing, most SBA lenders will not approve the deal.

Performance-based seller notes: the compliant alternative

The workaround is a performance-based seller note — a seller note with a fixed principal amount, but where the payment schedule is tied to performance metrics.

Here’s how it works:

• The seller note is established at closing with a fixed principal (say, $200,000).
• The payment schedule is based on the business hitting defined metrics — annual call volume above a threshold, gross revenue above a floor, or similar.
• If targets are hit, payments are made on schedule. If not, payments are deferred or reduced, and the maturity extends.
• The total obligation is capped — the seller cannot receive more than the face value of the note.

Because the principal is fixed at closing, this structure doesn’t create the purchase price uncertainty that kills SBA loans. The note is a debt obligation, not a contingent purchase price adjustment.

You will need to confirm this structure with your SBA lender and, ideally, with an attorney who has experience with SBA 7(a) transactions.

Metrics that make sense for earn-out structures

If you’re structuring a performance-based seller note, use metrics that are verifiable, not easily manipulated, and directly tied to the business’s underlying value:

• Annual call volume. The most direct measure of a funeral home’s activity. Difficult to manipulate. Reported on state filings in many jurisdictions.
• Gross revenue. More inclusive than call volume (captures cremation mix shift), but easier to game through pricing changes.
• Net operating income. Appropriate for larger deals with sophisticated sellers; harder to verify without transparent accounting.
• Preneed contract conversion rate. Useful if the seller claims a strong preneed pipeline that you’re skeptical of.

Avoid metrics the buyer controls directly — “revenue from marketing initiatives I introduce” or “net income after my management fees” give the buyer too much ability to affect outcomes. Sellers will (rightly) reject these.

Earn-out horizons and dispute risks

Performance structures for funeral home acquisitions work best over 2–3 year windows. Longer than that, and too many variables outside either party’s control affect outcomes. Shorter than that, and seasonal variance distorts the picture.

The dispute risk is real. Even well-drafted earn-out provisions generate disagreements. Common flash points:

• Accounting method changes that affect measured profitability.
• Buyer operational decisions (pricing changes, cost reductions) that reduce call volume or revenue below threshold.
• Macroeconomic or demographic shifts in the market area.
• Disagreements over what counts as a “qualifying” call or contract.

Before agreeing to an earn-out structure, hire a transactional attorney to draft dispute resolution mechanics — ideally binding arbitration with a named arbitrator or formula for selecting one.

Consulting Agreements: The Hidden Deal Structure

A consulting agreement pays the selling owner to remain involved in the business after closing — typically for 12 to 24 months. They may handle family relationships, mentor staff, and support the transition. In exchange, they receive ongoing compensation.

On the surface, this is about transition. Underneath, it often functions as deferred compensation — a way for the seller to receive additional value from the transaction over time, outside the formal purchase price.

Why consulting agreements exist

A funeral home’s value is disproportionately tied to family relationships. Families who have called that funeral home for generations have a relationship with the owner, not just the business. If the owner leaves on closing day and a stranger takes calls, some families may leave.

A consulting agreement gives families time to transfer their loyalty to the new owner. It preserves the human continuity that keeps call volume intact during the transition — which protects the buyer’s investment.

Typical consulting agreement economics

• Term: 12–24 months is most common. Beyond 24 months raises questions from lenders and creates operational complications.
• Compensation: $50,000–$150,000 total, paid monthly or quarterly.
• Services: Clearly defined and specific. “Assist with family relationships,” “attend services at buyer’s request,” “introduce buyer to community contacts.”
• Availability: Typically 5–15 hours per week. Not a full-time commitment.

Tax treatment: ordinary income vs. capital gains

This is where consulting agreements require careful structuring and competent tax advice.

From the seller’s perspective: Payments under a consulting agreement are ordinary income, taxed at the seller’s marginal rate. Capital gain — from the sale of business assets — is taxed at the long-term rate (typically 20% for high earners, plus 3.8% net investment income tax). Sellers generally want as little of their total consideration characterized as ordinary income as possible.

From the buyer’s perspective: Consulting payments are a deductible business expense in the year paid, which is more favorable than capitalizing the amount as goodwill (amortized over 15 years). A dollar paid under a consulting agreement generates a current-year deduction; a dollar paid in purchase price generates a 15-year amortization deduction.

These opposing tax interests create a negotiation. Buyers prefer more consulting income (bigger deduction now); sellers prefer less (avoids ordinary income tax). Where you land affects the final deal economics for both parties.

IRS scrutiny of consulting agreements

The IRS looks at consulting agreements in business acquisitions closely. The concern: that the consulting agreement is not really for services, but is simply a disguised purchase price payment.

To withstand scrutiny, consulting agreements should:

1. Specify real services. The consultant should actually show up, actually introduce families, actually help with the transition. Keep records.
2. Reflect market-rate compensation. If the consulting agreement pays $200,000 for 12 months of occasional availability, the IRS will question it.
3. Include a termination clause. Real consulting agreements end if the consultant stops providing services.
4. Include Form 1099 reporting. The buyer issues a 1099-NEC to the seller for consulting payments. Paper trails matter.

When sellers overstay their welcome

Sellers sometimes struggle to transition from owner to advisor. They insert themselves into family arrangements. They second-guess the new owner’s decisions in front of staff. They undermine changes you’re trying to make.

Structure the agreement with clear scope limitations. The seller’s role is introduction and relationship, not operations. If you’re going to make significant operational changes — pricing, staffing, facilities — wait until the consulting term expires or negotiate a shorter term.

The exit from the consulting agreement should be as clearly defined as the entry.

Non-Compete Agreements as Value Protection

Every funeral home acquisition should include a non-compete agreement with the selling owner. This isn’t optional. It’s how you protect the goodwill you’re paying for.

What a non-compete covers

A funeral home non-compete typically restricts:

• The seller from operating, owning, or having an interest in another funeral home
• Within a defined geographic radius (typically 25–50 miles, sometimes measured by county)
• For a defined period (typically 5–10 years)

Without a non-compete, you pay for the seller’s community relationships and then watch them open a competing funeral home across town two years after closing. The goodwill you paid for — which may represent 40–60% of the purchase price — walks out the door with them.

Term and geography considerations

Term: Five years is the floor. Most funeral home transactions use 7–10 years because goodwill in this industry is long-cycle — families may go years between services and need to be captured at the time of need, not just in the first year after acquisition.

Geography: The right radius depends on the market. In rural areas, 50 miles may be appropriate because the seller could set up in the next county. In dense urban markets, 10 miles may be more than enough given how localized funeral home loyalty tends to be.

Price allocation and tax implications

The IRS requires that the purchase price be allocated across asset classes using Form 8594. Non-compete agreements are a Class VI asset. The amount allocated to the non-compete is amortizable over 15 years (Section 197) for the buyer and is taxable ordinary income to the seller in the year received.

This creates the same buyer-seller tension as the consulting agreement. Buyers want more allocated to non-compete (deductible); sellers want less (avoids ordinary income). The allocation has to be the same on both parties’ returns — the IRS requires consistent positions.

Putting It Together: A Sample Capital Stack

Abstract financing concepts are easier to understand when they’re grounded in a specific example. Here’s how a complete capital stack might look on a real acquisition.

The deal

Acquisition target: Independent funeral home in a mid-size Midwestern market. Single location. 150 calls per year. Real estate included. Seller has operated for 28 years and has deep community relationships.

• Seller’s asking price: $2,200,000
• SBA appraisal of fair market value: $2,000,000
• Structure: Asset purchase, goodwill-heavy allocation

The capital stack

Gap resolution: The seller’s $2,200,000 asking price versus the $2,000,000 funded is addressed through a consulting agreement — $100,000 over 18 months ($5,555/month) — plus a performance-based seller note with an additional $100,000 face value, payable if call volume exceeds 160 calls in years 2 and 3 combined.

Total seller consideration at performance targets: $2,400,000 (more than asking price, which is what made the seller accept below asking at close).

The consulting agreement details

• Term: 18 months
• Compensation: $5,555/month ($100,000 total)
• Scope: Seller attends minimum 2 family arrangement meetings per month at buyer’s request; introduces buyer to 10 community and clergy contacts in first 90 days; available for phone consultation up to 8 hours/month
• Non-compete: 50-mile radius, 10 years from closing date
• Tax treatment: Payments reported as ordinary income; buyer deducts as operating expense

The seller note details

• Fixed note: $200,000 principal; 6% interest; 7-year term; full standby through month 24; regular P&I payments months 25–84
• Performance note: $100,000 principal; triggered by call volume milestone in years 2–3; if triggered, converts to same payment terms as fixed note with 3-year remaining term
• Security: Second lien on all business assets; personal guarantee from buyer; $200,000 term life insurance policy on buyer, naming seller as beneficiary

Cash flow implications for the buyer

At current call volume (150 calls, $8,000 average revenue per call), gross revenue is approximately $1,200,000. EBITDA margins for well-run independent funeral homes typically run 20–30%. At 25%, that’s $300,000 EBITDA.

Annual debt service:

• SBA loan (25-year term at approximately 7.5%): ~$140,000/year
• Seller note (post-standby, years 3–7): ~$35,000/year
• Consulting agreement: ~$67,000/year (during 18-month term)

Debt service coverage ratio (DSCR) at $300,000 EBITDA: 1.43x in the heaviest year. Adequate for most SBA underwriting standards (typically 1.25x minimum).

This is a viable structure. It’s not comfortable — there’s no excess capital for error — but it works if the business performs as modeled.

FAQ: Creative Deal Structures for Funeral Home Buyers

Can I use a seller note as my equity injection?

Yes, under specific conditions. If the seller note is on full standby for at least 24 months after closing and is otherwise acceptable to the SBA lender, it can satisfy part or all of the equity injection requirement. The typical limit is 5–10% of total project cost, with the buyer contributing the remainder in cash. Confirm exact requirements with your SBA lender.

What happens if I default on the seller note?

The seller note is subordinated. In a default scenario, the SBA lender gets paid first from any liquidation proceeds. The seller, as a subordinated creditor, collects whatever remains — which may be significantly less than the outstanding note balance.

Can the seller note be forgiven?

Yes, but forgiveness has tax consequences. Forgiven debt is generally taxable income to the borrower. If the seller agrees to forgive a portion of the note as part of a workout, the buyer will receive a 1099-C and may owe taxes on the forgiven amount. Consult a tax advisor before agreeing to debt forgiveness.

Is there a limit on the size of the seller note?

The SBA does not set a hard cap on seller note size as a percentage of the transaction. The practical limit is set by the economics: if the seller note is too large, it creates a cash flow burden that impairs debt service on the SBA loan, which the underwriter will flag. The 10–20% range is standard precisely because it’s large enough to matter without creating cash flow strain.

What if the seller refuses to carry any paper?

Then you either pay their price in cash — which means more equity, a larger loan, or both — or you walk away. Some sellers genuinely need all cash at closing (estate settlement, retirement rollover, divorce settlement). Understanding the seller’s motivation for wanting all cash is part of deal diligence.

Can I use an earn-out with a conventional (non-SBA) loan?

Yes. The SBA restrictions on earn-outs are specific to SBA-guaranteed loans. A conventional commercial loan or a direct seller-financed deal has no such restriction. If you’re financing through a community bank on conventional terms, traditional earn-out structures may be fully available to you.

How do I find a lawyer who knows these structures?

Ask your SBA lender for a referral to a transactional attorney who regularly handles SBA-financed acquisitions. These deals are specialized enough that a general business attorney who has never seen an SBA closing will get things wrong in ways that cost you the loan.

The PE buyers who were your competition three years ago have largely stepped back. Sellers who built their business expecting a clean cash exit are now in a world where independent buyers with SBA financing are the market. That’s changed what sellers will accept.

Use that leverage thoughtfully. The best deals are the ones where the seller walks away feeling fairly treated — because they’ll still be around during the consulting period, their name is still on the sign, and the families they’ve served for decades are watching how the transition goes.

Structure the deal to close. Structure the relationship to last.

This article is educational and does not constitute financial, legal, tax, or investment advice. SBA lending rules, tax treatment, and non-compete enforceability vary by state and change over time. Consult qualified professionals for advice specific to your transaction.