Structuring the Deal: Asset Purchase, Stock Purchase, and How to Write an LOI That Gets Accepted

You’ve found a funeral home you want to buy. You’ve done your initial evaluation. The numbers look right, the market makes sense, and the seller is willing to talk.

Now what?

This is the moment where most first-time buyers stall. They know the business is worth roughly $X — but they don’t know how to turn that into a formal offer, what structure protects them best, or what terms the seller expects to see. The mechanics of deal structuring aren’t covered in most acquisition guides because the authors assume you already have an M&A attorney running the process.

You might. But you still need to understand what your attorney is doing and why — because the structural decisions made at the LOI stage have tax, liability, and operational consequences that compound for years.

This guide covers three things:

1. How to choose between an asset purchase and a stock purchase
2. How to write a Letter of Intent that gets taken seriously
3. How to navigate from LOI to purchase agreement without losing the deal

Asset Purchase vs. Stock Purchase: The Decision That Shapes Everything

Every acquisition comes down to a fundamental structural choice: are you buying the business’s assets, or are you buying the ownership interest (stock or membership units) in the entity that holds them?

This isn’t a technicality. It determines your tax basis, your liability exposure, and often whether the deal closes at all.

Asset Purchase: What You’re Actually Buying

In an asset purchase, you form a new entity — typically an LLC — and that entity purchases specific assets from the seller’s business:

• Tangible assets: Equipment, vehicles, furniture, inventory (caskets, urns, merchandise)
• Real estate: The building and land (often structured as a separate transaction)
• Intangible assets: Trade name, customer lists, phone numbers, website, non-compete agreement
• Preneed book: The right to fulfill existing preneed contracts and access the associated trust funds
• Goodwill: The residual value above the fair market value of identifiable assets — essentially the premium for the business’s reputation, relationships, and earning power

You are not buying the seller’s entity. Their LLC or corporation continues to exist (and retains any liabilities you didn’t assume). You’re starting with a clean slate, populated with purchased assets.

Roughly 90% of small funeral home deals are asset purchases. There’s a reason for that.

Why Buyers Prefer Asset Purchases

Stepped-up tax basis. When you buy assets, your cost basis equals what you paid. That means you can depreciate tangible assets and amortize intangibles (including goodwill under Section 197) based on your purchase price — not the seller’s old book value. For a $2 million acquisition, this can generate $100,000+ in tax shields over 15 years.

Liability protection. You generally don’t inherit the seller’s unknown liabilities — pending lawsuits, undisclosed debts, regulatory violations, or contractual obligations you didn’t agree to assume. The seller’s entity retains those.

Cherry-picking. You choose which assets to buy and which liabilities to assume. Don’t want the aging hearse? Don’t buy it. Want to assume the preneed book but not the outstanding AR? Structure it that way.

IRS asset allocation. Under Section 1060, you and the seller must agree on a purchase price allocation across seven asset classes, reported on Form 8594. This allocation determines how much of your purchase price goes to depreciable assets vs. goodwill — a negotiation that directly affects your after-tax returns.

Why Sellers Often Resist Asset Purchases

Double taxation. If the seller’s business is a C-corporation, an asset sale triggers corporate-level tax on the gain, then personal tax when the after-tax proceeds are distributed to the shareholder. This can create an effective tax rate of 40–50%.

Less favorable capital gains treatment. In a stock sale, the seller typically pays long-term capital gains rates on the entire gain. In an asset sale, the gain is allocated across asset classes — some taxed as ordinary income (e.g., depreciation recapture on equipment), some as capital gains.

Complexity. Individual asset transfers require more documentation — separate bills of sale, title transfers, license re-applications, contract assignments.

Stock Purchase: When It Makes Sense

In a stock purchase, you buy the seller’s ownership interest in their entity. The entity continues to exist with all its assets, liabilities, contracts, licenses, and history. Only the ownership changes.

Stock purchases make sense when:

• The funeral home holds licenses, permits, or contracts that are difficult or impossible to transfer to a new entity (some state establishment licenses fall into this category)
• The seller’s entity has significant tax attributes (NOLs, tax credits) the buyer can use
• The seller insists on stock treatment and you can negotiate sufficient indemnification protections
• The entity holds real estate and a transfer would trigger reassessment or transfer tax

Stock purchases require extra protection: Since you’re inheriting everything — including unknown liabilities — your purchase agreement must include robust representations and warranties, indemnification provisions, and an escrow holdback to fund potential claims.

The Hybrid Approach

Some deals combine elements of both:

• Asset purchase with real estate under separate agreement. The business assets are purchased by your new LLC, while the real estate is purchased (or leased back) through a separate transaction. This is common when the building value is substantial.
• 338(h)(10) election. If the seller is an S-corp, the buyer and seller can jointly elect under Section 338(h)(10) to treat a stock purchase as an asset purchase for tax purposes. The buyer gets the stepped-up basis; the seller avoids the mechanical complexity of individual asset transfers. Both parties must agree.

Decision Matrix

Bottom line: Default to an asset purchase unless your attorney identifies a specific reason — licensing, contracts, or tax — to consider stock.

Purchase Price Allocation: Where the Tax Money Lives

In an asset purchase, you and the seller must allocate the total purchase price across seven IRS asset classes under Section 1060. This allocation is binding on both parties and reported on Form 8594 with each party’s tax return.

The Seven Classes (Funeral Home Context)

Why Allocation Matters

For the buyer: You want to allocate as much as possible to assets with shorter depreciation schedules. Equipment (Class V) can be depreciated over 5–7 years or expensed under Section 179. The building depreciates over 39 years. Section 197 intangibles (Class VI and VII) amortize over 15 years.

For the seller: The seller often wants to maximize the allocation to goodwill (Class VII), which receives capital gains treatment, and minimize allocation to assets subject to depreciation recapture (taxed as ordinary income).

The negotiation: These interests inherently conflict. The allocation is typically negotiated as part of the purchase agreement, supported by independent appraisals. Once you agree in writing, Section 1060 makes it binding on both parties unless the IRS determines it’s not appropriate.

Get your CPA involved early. The difference between an optimized and unoptimized allocation on a $2 million deal can be $50,000–$100,000 in present-value tax savings over 15 years.

Writing the Letter of Intent

The LOI is the document that turns a handshake into a process. It’s not the purchase agreement — it’s the framework that both parties agree to before spending money on attorneys, accountants, and due diligence.

A good LOI accomplishes three things:

1. Demonstrates you’re a serious, prepared buyer
2. Establishes the key economic and structural terms
3. Creates a defined path to closing

What to Include

1. Purchase Price and Basis

State the proposed purchase price and how you arrived at it. Sellers respect transparency here — “we’ve valued the business at X based on Y multiple of SDE” is better than just a number.

If the price is subject to adjustment based on due diligence findings, say so explicitly.

2. Deal Structure

Specify asset purchase or stock purchase. If asset purchase, identify the major asset categories you intend to acquire. If real estate is included, note whether it’s part of the same transaction or structured separately.

3. Payment Terms

• Cash at closing
• Seller financing amount, interest rate, and term
• Any earn-out or contingent payment provisions
• Escrow holdback (if applicable)

4. Financing Contingency

If you’re using SBA or other third-party financing, include a financing contingency with a clear deadline. This protects you from being obligated to close if your loan doesn’t come through. Typical language: “Buyer’s obligations are contingent upon obtaining financing on commercially reasonable terms within 60 days.”

5. Due Diligence Period

Specify the length (typically 60–90 days) and the buyer’s right to terminate without penalty during this period. The due diligence period should begin upon LOI execution, not upon closing of financing.

6. Seller Transition

Funeral home acquisitions almost always require a seller transition period. Specify:

• Duration (30–90 days is typical; longer for complex transitions)
• Compensation (flat fee or hourly rate)
• Scope (introductions to referral sources, community visibility, training)

7. Non-Compete Agreement

Essential in funeral service. A seller who opens a new funeral home across town post-sale can devastate your call volume. Standard terms: 5–10 year duration, 15–30 mile radius. Some states limit enforceability — your attorney should draft this based on your jurisdiction.

8. Exclusivity Period

During due diligence, the seller agrees not to negotiate with or solicit offers from other buyers. Typically runs concurrent with the due diligence period.

9. Confidentiality

Both parties agree to keep deal terms and business information confidential. This protects the seller’s staff (who may not know the business is for sale) and the buyer’s competitive position.

10. Binding vs. Non-Binding Provisions

Most LOI terms are non-binding — they represent an agreement to negotiate in good faith, not a contractual obligation to close. However, certain provisions should be binding:

• Confidentiality
• Exclusivity
• Expense allocation (each party bears its own costs)
• Governing law

Clearly label which sections are binding and which are not. Ambiguity here creates legal risk for both parties.

LOI Mistakes That Lose Deals

Too aggressive on price. A lowball offer signals you’re not serious or don’t understand the business. Base your price on a credible valuation methodology, and show your work.

No financing evidence. Include a pre-qualification letter from your SBA lender or evidence of available capital. Sellers who’ve been through this process before won’t entertain offers with no financial backing.

Overly complex structure. First-time buyers sometimes propose elaborate earn-out structures, multi-phase closings, or conditional pricing mechanisms. Simplicity wins. Sellers want certainty.

Missing the seller transition. Funeral home sellers aren’t just selling a business — they’re ending a career, often a family legacy. An LOI that ignores the transition reads as tone-deaf.

Submitted without attorney review. Your LOI should be drafted or reviewed by an M&A attorney before submission. An attorney will catch ambiguities, missing protections, and structural issues that a template won’t.

From LOI to Purchase Agreement

Once both parties sign the LOI, three workstreams begin running concurrently:

1. Due Diligence (60–90 Days)

This is the forensic deep dive into the business. Our due diligence checklist covers this comprehensively — financial records, preneed audit, licensing review, environmental compliance, staffing assessment, and physical plant inspection.

Key point: Due diligence findings almost always lead to purchase price adjustments. Budget for 5–15% in negotiated concessions on a typical deal. If you find nothing, you probably didn’t look hard enough.

2. Financing (45–90 Days, Concurrent)

Your lender needs:

• A completed business plan with funeral-home-specific projections
• The signed LOI
• Seller’s financial records (3–5 years)
• Your personal financial statement and tax returns
• Property appraisal (if real estate is included)
• Business appraisal or valuation report

Start this process immediately upon LOI execution. SBA approvals routinely take 45–60 days, and delays here are the most common reason closings push back.

3. Purchase Agreement Drafting

Your attorney drafts the asset purchase agreement (APA) or stock purchase agreement, incorporating:

• All LOI terms with additional specificity
• Representations and warranties from both parties
• Indemnification provisions — what happens if a representation turns out to be false
• Closing conditions (licensing approval, financing funding, no material adverse change)
• Purchase price allocation (Section 1060 schedule)
• Post-closing adjustments (working capital true-up, prorated expenses)
• Seller transition consulting agreement (as a separate exhibit)
• Non-compete agreement (as a separate exhibit)
• Bill of sale and assignment documents

The APA negotiation typically takes 2–4 weeks once both attorneys begin drafting. Expect multiple rounds of redlines. The most contentious provisions are usually:

• Scope of seller’s representations and warranties
• Indemnification caps and survival periods
• Working capital target and adjustment mechanism
• Purchase price allocation across asset classes

Special Considerations for Funeral Home Deals

Preneed Book Transfer

The preneed book is often the most complex asset to transfer. Depending on whether contracts are trust-funded or insurance-funded:

• Trust-funded: The preneed trust custodian must be notified and approve the transfer. Regulatory filings may be required. Some states require a waiting period.
• Insurance-funded: The insurance company must consent to the change of funeral home provider. Assignment provisions vary by carrier.

Build extra time into the closing timeline for preneed transfers. Delays here are common and can push closing by weeks.

Real Estate: Buy, Lease, or Separate

If the seller owns the building, you have three options:

1. Buy everything together. Simplest, but the real estate component may require a separate SBA 504 loan or conventional mortgage.
2. Separate real estate transaction. Buy the business assets through your operating LLC and the real estate through a separate holding entity. Provides liability isolation and financing flexibility.
3. Lease from the seller. The seller retains the building and leases it to you. Common in deals where the seller wants ongoing income or the buyer can’t finance the real estate component. Negotiate a purchase option to avoid being landlocked.

Licensing Timeline

State funeral board approval for establishment license transfer varies enormously:

• Some states approve within 2–4 weeks
• Others (NY, CA, FL) can take 2–4 months
• States requiring the owner to hold a funeral director license add additional time if you need to sit for the exam

Factor licensing into your closing timeline. A deal can be fully negotiated, financed, and documented — and still can’t close because the license hasn’t transferred.

Sample LOI Term Sheet

For reference, here’s a simplified term sheet structure. Your attorney will adapt this to your specific deal:

The Timeline: LOI to Close

These phases overlap. Run them concurrently, not sequentially.

Final Thought

The deal structure is the foundation of your acquisition. Get it wrong and you’ll pay more tax than you should, inherit liabilities you didn’t know about, or lose the deal to a buyer who presented better.

Get it right and you’ve done the hardest intellectual work of the entire process. Everything that follows — due diligence, financing, closing — is execution against a framework you’ve already built.

Take the time. Work with experienced advisors. And put the structure in writing before you spend a dollar on due diligence.

This guide covers deal structuring principles for funeral home acquisitions. It is not legal or tax advice. Work with an M&A attorney and CPA experienced in death care transactions for your specific situation.