Letter of intent (LOI) for a funeral home purchase: what to put in it and what it binds

Before a letter of intent, a buyer is just interested. After one, there is a price on paper, a structure, a list of conditions, and usually a period in which the seller has agreed not to talk to anyone else. For a funeral home that period can be the most valuable thing the seller gives away, because it pauses every other buyer while diligence runs.

This page defines the LOI and its funeral-specific content. For the full list of terms to settle, use our funeral home LOI term checklist; for where the LOI sits in the whole process, see how to buy a funeral home.

What does a funeral home LOI usually include?

Price and structure, the treatment of preneed and working capital, real estate, financing, diligence, exclusivity, and the seller’s role. A good one answers the questions most likely to cause a fight later.

On allocation, the IRS instructions for Form 8594 require both buyer and seller to report the same split across seven asset classes when goodwill attaches. Agreeing on the approach in the LOI saves a late tax argument.

Which parts of a funeral home LOI are binding?

Typically only the procedural paragraphs: exclusivity, confidentiality, who pays which expenses, and governing law. The price and business terms are usually expressly non-binding until the asset purchase agreement is signed.

Non-binding does not mean weightless. The LOI becomes the reference point for every later draft. A buyer that asks for a concession not foreshadowed in the letter is re-trading, and a seller that discovers a new demand after exclusivity began has lost leverage. Our guide to negotiating a funeral home purchase price shows how diligence findings legitimately change terms after the LOI.

How does SBA financing shape a funeral home LOI?

It sets hard limits on structure, so an SBA buyer’s letter should be written to the rules from the first draft. Changing structure after signing invites delay and doubt.

Key constraints from SBA SOP 50 10 8.1, effective Oct. 1, 2026:

• No seller earnouts in an SBA-financed change of ownership.
• Equity of at least 10% of total project cost for an initial acquisition, which cannot be reduced.
• Seller notes count as equity only on full standby for the life of the loan, and for no more than half the required injection.
• Total debt supporting the deal, including seller debt not on full standby, is limited to the lender’s business valuation.
• Quality of earnings is required when the Business Purchase Price is $3 million or more, measured after removing appraised owner-occupied real estate.
• Seller role limited to a consultant for no more than 24 months.

SBA’s 7(a) loan program page describes the general program; our guide to SBA loans for funeral homes covers sizing and coverage.

What should the preneed paragraph of an LOI say?

It should name the method for measuring the backlog, who does the work, and what happens to the result. “Price subject to preneed review” leaves all three open.

A workable paragraph commits both sides to The Preneed Reconciliation Ladder: confirm the register is complete, match each contract to its trust account or insurance policy, verify funding values against current trust statements and insurer confirmations, re-price every guaranteed contract at the current GPL, and compute the gap. The letter then says what the gap does. Common choices are a dollar-for-dollar price reduction, an escrow sized to the shortfall, or the seller funding the trust before closing.

Two more points belong in the same paragraph. First, say how contracts missing from the register will be handled, usually through a specific indemnity that survives until each one is served. Second, say whether a surplus, if one appears, changes the price at all. Buyers often resist paying for a surplus, and sellers should know that before signing rather than after the numbers arrive.

Insurance-funded contracts need their own line, because the policy, not a trust, carries the funding, and the insurer’s records are the evidence.

How long should exclusivity run?

Long enough to finish the critical path and no longer. Build it from the actual tasks, then add defined extensions.

1. List third-party reports the deal needs: business valuation, real estate appraisal, Phase I environmental, and a QoE if the threshold is met.
2. List regulatory steps: the buyer’s establishment license, the funeral director in charge designation, and any preneed permit or approval.
3. Check state preneed timing. Under Texas Finance Code Chapter 154, a buyer taking 51% or more that does not hold a permit must apply for one, the department decides a complete application within 16 days, and prepaid contracts cannot transfer until it issues.
4. Set milestones such as financing commitment by a date, and make each extension depend on the buyer meeting the previous one.
5. State what ends exclusivity early, such as the buyer’s written withdrawal or a missed milestone.

How do buyers, sellers, and lenders each use the LOI?

Buyers use it to lock up the deal and frame diligence, sellers use it to fix the terms that matter before leverage shifts, and lenders use it to start underwriting.

Buyers want flexibility on price after diligence and firm exclusivity. A buyer who has already planned the diligence work can promise a tighter timeline, which makes the offer stronger.

Sellers should settle the preneed method, working capital, their own role, the non-compete scope, and the top legacy terms in the letter, scoring the legacy items with The Legacy Terms Ledger.

Lenders read the LOI to see whether the structure fits their program before ordering reports. An LOI that mixes the building into one number, or includes an earnout for an SBA loan, sends them back to the parties.

What mistakes do buyers make in funeral home LOIs?

Most come from leaving hard questions for later. These cause the most trouble:

• “Price subject to diligence” with no method. Say how preneed and working capital will be measured.
• One bundled number. Separate the business, the real estate, and any consulting pay.
• An open-ended exclusivity period. Sellers resist it, and good ones refuse.
• Ignoring the licensing path. If no qualified director in charge is lined up, closing waits.
• Structures the lender cannot use. Fix SBA conflicts before signing, not after the appraisal.

For the full buy-side sequence, start with our buyer’s guide to buying a funeral home.