Earnout (call-volume based)

Offer letters for funeral homes often contain the words “up to.” Up to $1.7 million, say, with $1.45 million at closing and the rest depending on how many families the firm serves afterward. That second piece is a call-volume earnout. It can close a gap between what a seller believes and what a buyer will risk, but it moves part of the price into the future and puts it under the buyer’s control. This definition is part of our valuation hub.

How does a call-volume earnout work?

The buyer pays a fixed price at closing, then additional amounts after each measurement period if the firm’s call count clears agreed thresholds. Four numbers define it: a floor, a target, a cap, and the number of periods.

Most earnouts in funeral home deals measure retail calls per year against a baseline drawn from the seller’s history. Below the floor, the period pays nothing. At or above the target, it pays the full amount for that period. In between, a linear earnout pays proportionally:

Payout for a period = maximum for the period × (actual calls − floor) ÷ (target − floor), limited to between zero and the maximum.

Payment usually follows the buyer’s year-end count by 60 to 120 days in our experience, which is another reason to agree in advance on who counts and how.

What payout structures are common?

Linear, cliff, and tiered designs are the usual choices, measured either year by year or cumulatively. The structure matters as much as the dollar amount.

The earnout calculator on this page, also available as a standalone call-volume earnout calculator, models the linear version.

How should a call be defined for an earnout?

As tightly as the purchase agreement can manage. The definition of a call decides more earnout disputes than the targets do.

Use the same definition the parties used to set the price, ideally retail calls as explained in our call volume definition. Then settle the edge cases in writing: whether trade cremations count, whether a family served at a sister location the buyer owns counts, how preneed maturities are counted, and whether calls from a new location the buyer opens nearby are included.

Next, protect the measurement from the buyer’s own decisions. After closing, the buyer controls prices, staffing, marketing, and whether work moves to another of its locations. Sellers commonly ask for a covenant to run the firm in the ordinary course, monthly call reports, the right to audit the count, and acceleration of the full earnout on a resale.

Finally, accept that some risk is pure chance. CDC’s FastStats page reports 3,072,666 U.S. deaths in 2024, and the provisional 2025 mortality report counts 3,094,593 for 2025. Yet SCI’s fiscal 2025 Form 10-K shows 347,696 comparable funeral services performed in 2025, down from 350,607. National deaths rose; a large operator’s same-store volume fell. A small firm’s year can swing more.

Where do the floor and target come from?

From the seller’s verified history, adjusted for the trend. A floor set near the recent average with a target modestly above it is a common starting point, but every number is negotiable.

Start with retail calls for the last three full years, counted the same way each year. Suppose they were 198, 206, and 201. The average is (198 + 206 + 201) ÷ 3 ≈ 202. A buyer worried about the owner’s departure might propose a floor near 95% of that average, about 192, and a target near 105%, about 212. A seller with a rising trend will argue the floor should start lower and the target should reflect the trend, not exceed it.

The span between floor and target matters as much as either number. A narrow span acts almost like a cliff, because a handful of families swings the payout from nothing to everything. At 200 calls a year, five families are 2.5% of volume, well within ordinary year-to-year noise for a small firm.

How is an earnout different from a seller note?

A seller note is owed no matter how the business performs; an earnout is owed only if the targets are met. Both are deferred money and both depend on the buyer paying.

That difference changes the negotiation. With a note, the seller’s risk is credit risk: will the buyer be able to pay? With an earnout, the seller carries credit risk and performance risk, under a buyer who controls the performance. A seller trading price for structure should usually prefer a note at a lower headline over an earnout at a higher one, unless the earnout is large enough to pay for the extra risk.

What does an earnout pay when calls come in uneven?

Less than the headline, usually. Running each year separately shows how quickly a “maximum” shrinks.

The calculator assumes the same call count in every year, so run uneven years one at a time. Our illustrative case on an earnout after a new competitor opens shows how a single local event can move every year below the floor.

How do sellers, buyers, and lenders treat an earnout?

Sellers should discount it, buyers use it to share risk, and lenders either forbid it or push it behind their own debt.

Sellers should value an earnout at expected collections, not the maximum. Our guide to earnouts tied to call volume covers negotiating protections, and the comparison of an earnout and a fixed price shows when taking less certain money makes sense.

Buyers use an earnout when the seller’s personal relationships drive volume, when calls have recently jumped, or when a competitor has just opened. It is a way to pay for volume that is proven rather than promised.

Lenders depend on the program. The SBA’s SOP 50 10 8.1, in its Appendix 15 rules for changes of ownership, prohibits seller earnouts outright, so a first-time buyer using SBA 7(a) money cannot offer one. Our guide to SBA loans for funeral homes covers the alternatives. In our experience, conventional lenders financing a buyer want any earnout subordinated to their loan.

Taxes follow their own rules. IRS Publication 537 describes a contingent payment sale as one where the total selling price cannot be determined by the end of the tax year of sale, such as a business sale priced partly on future results. Special installment rules then apply. See taxes on selling a funeral home and talk to your CPA before you sign.

What mistakes make earnouts go wrong?

Most failures come from vague definitions and missing protections, not from bad luck.

• Setting the floor at the seller’s best recent year rather than a three-year average.
• Leaving “call” undefined, so trade work or sister-location families become arguments.
• Agreeing to a cumulative test without a catch-up, so one weak year erases two good ones.
• Omitting audit rights and monthly reporting.
• Forgetting acceleration on resale or change of control.
• Treating the maximum as part of the price when comparing offers.