Illustrative example: renegotiating price after diligence finds deferred maintenance
By Jason Taken, Business Advisor, HedgeStone Business Advisors · Last reviewed · 7 min read
In this illustrative composite, a buyer's diligence on a $2.29 million funeral home purchase found $473,275 of problems on paper. After removing double counts and routine replacements, the parties agreed to $190,175 off the price and an $85,000 escrow for a suspected oil tank. The lesson: credit each defect once, in the place it belongs.
Key takeaways
- The roof and HVAC appeared in the buyer's first request twice: once as a repair credit and once inside a lower as-is appraisal. Counting them once removed $119,500 from the ask.
- Low repair spending inflated seller's discretionary earnings; charging $11,500 a year of missing maintenance took $48,875 off the business price at the assumed 4.25x.
- Items that end their normal life on schedule, like an aging lead coach or a parking lot, are usually already reflected in the multiple and rarely justify a credit.
- An unknown environmental cost belongs in an escrow with a release trigger, not in a guessed price cut that one side will regret.
This walk-through takes the buyer’s chair. It is an illustrative composite, not a real client deal: the buyer, seller, building, and every figure are invented to show how a renegotiation after diligence should be built. The buyer is a family firm with two funeral homes in the Great Lakes region, buying a 275-call firm about 15 miles away from a retiring owner, with a conventional bank loan.
What did the letter of intent assume?
It priced the business at $1,475,000 and the building at $815,000, for $2,290,000 in total. Both numbers rested on facts diligence would test.
The business price came from $347,000 of seller’s discretionary earnings (SDE) at an assumed 4.25x, an illustration rather than a market statistic. The building price came from the seller’s broker opinion. The LOI also did two quiet but important things. It made the price non-binding and subject to a 60-day diligence period, and it listed the inspections the buyer would order: a property condition assessment, a Phase I, and air monitoring in the preparation room. Because the seller had agreed to those tests in writing, their results were fair grounds for revisiting the price rather than a surprise tactic.
Our profile of the neighboring family funeral home buyer explains why this kind of buyer often pays for real estate rather than leasing it.
What did diligence find?
Seven items, from the roof to a pipe sticking out of the lawn. The buyer’s engineer, a Phase I environmental assessment, and prep room air monitoring each added to the list.
| Finding | Buyer’s estimate | Seller’s quote |
|---|---|---|
| Roof membrane at end of life, leak over garage | $68,300 | $55,800 |
| Two 22-year-old chapel HVAC units | $51,200 | $44,700 |
| Prep room ventilation (formaldehyde above action level) | $33,400 | none |
| Accessible restroom and entrance ramp | $27,900 | none |
| Parking lot resurfacing | $38,600 | none |
| Lead coach, 13 years old | $108,000 | none |
| Possible buried heating oil tank | unknown | none |
Two findings were compliance problems, not wear. Air monitoring showed formaldehyde at 0.6 ppm over an eight-hour shift. Under 29 CFR 1910.1048, that is above the 0.5 ppm action level, though below the 0.75 ppm limit, so the owner must repeat monitoring at least every six months, until two consecutive results at least seven days apart fall below it, and run a medical surveillance program for exposed employees. And because 28 CFR 36.104 lists a “funeral parlor” as a public accommodation, ADA Title III guidance expects barriers to be removed where that is readily achievable.
The tank came from the Phase I. The bank required one, as SBA SOP 50 10 8.1 also does, regardless of loan size, for funeral homes that embalm or cremate on site. EPA’s All Appropriate Inquiries page notes that a Phase I under ASTM E1527-21 can support a buyer’s defense against cleanup liability. It found a fill pipe and no closure records. Our guide to Phase I environmental reviews for funeral homes covers what typically follows.
What did the buyer ask for first?
$473,275 off the price, or about 21%. Every line had a document behind it, which is why the seller’s attorney took several days to find the flaws.
Worked example: the buyer's first request
- Maintenance normalization: seller spent $9,000 a year on repairs against an engineer’s $24,500 run rate. $15,500 × 4.25 = $65,875
- Repair credits at buyer estimates: $68,300 + $51,200 + $33,400 + $27,900 + $38,600 = $219,400
- Coach replacement: $108,000
- Real estate: lender’s as-is appraisal of $735,000 versus $815,000 in the LOI: $80,000
Total: $65,875 + $219,400 + $108,000 + $80,000 = $473,275. Proposed price: $2,290,000 − $473,275 = $1,816,725.
Which parts of the request did not hold up?
Three, worth $283,100 together. None of them was a false finding; each was counted in the wrong place or twice.
- The roof and HVAC, $119,500. The appraiser valued the building at $735,000 as-is and $820,000 with the roof and HVAC repaired, deducting $85,000 for them already. Paying the as-is value and also taking a repair credit would charge the seller twice.
- The coach and parking lot, $146,600. Both were reaching the end of a normal life on schedule. A multiple of SDE already assumes the owner will keep replacing vehicles and pavement; crediting them is like asking a used-car seller to pay for your next set of tires.
- Part of the maintenance normalization, $17,000. The seller’s records showed some repairs booked as capital improvements. The parties agreed on an $11,500 shortfall rather than $15,500: $4,000 × 4.25 = $17,000.
Check: $473,275 − $119,500 − $146,600 − $17,000 = $190,175.
How did the seller respond?
With a counter built the same way: documents, line by line. The seller did not dispute a single finding, only where each one belonged.
The seller’s attorney sent back the appraisal’s as-repaired figure, the coach’s purchase date, and repair invoices booked as capital improvements. The seller also offered to complete the ventilation and accessibility work before closing. The buyer declined. It wanted its own contractor on the prep room, because a second failed air test would land on the new owner, and it preferred to control the restroom design. The seller accepted credits for both instead.
Two things kept the deal alive. Both sides showed their math, and the buyer moved first on the double counts once they were pointed out. A buyer who refuses to give back an obvious double count signals that every other number is padded too.
What would have changed with SBA financing?
The structure would look similar, but the lender’s numbers would have carried more weight. Under the same SOP, the lender orders its own business valuation and appraises real estate separately, and total debt supporting a change of ownership is capped at the business valuation; any price above it must be covered by equity. A low as-is appraisal would have moved the buyer’s cash requirement directly.
How was the renegotiated deal structured?
The price fell to $2,099,825, and $85,000 of it went into escrow for the tank. Our guide to negotiating a funeral home price lays out the same principle: each change ties to a document.
| Component | LOI | Final | How it was handled |
|---|---|---|---|
| Business | $1,475,000 | $1,364,825 | −$48,875 maintenance, −$33,400 ventilation, −$27,900 accessibility |
| Real estate | $815,000 | $735,000 | Lender’s as-is appraisal; no separate roof or HVAC credit |
| Total price | $2,290,000 | $2,099,825 | 8.3% lower |
| Tank escrow | none | $85,000 for 12 months | Released on a clean Phase II or state closure letter; costs paid from it first |
The bank lent 75%, about $1,574,869, leaving roughly $524,956 of buyer cash at closing. The buyer also budgeted $161,800 for first-year work using the seller’s contractor quotes for the roof and HVAC: $55,800 + $44,700 + $33,400 + $27,900. Build that reserve into any purchase that includes real estate.
What did the seller net, and what did the cut cost?
About $1.30 million after debt, fees, and estimated taxes, including the escrow. The $190,175 reduction cost the seller about $143,600 after tax, not the full amount.
| Item | Amount |
|---|---|
| Final price | $2,099,825 |
| Mortgage payoff | −$260,000 |
| Broker, legal, and accounting fees | −$120,000 |
| Recapture: equipment at $180,000, basis $40,000; $140,000 × 37% | −$51,800 |
| Goodwill: $1,154,825 less $120,000 fees = $1,034,825 × 20% | −$206,965 |
| Building gain $405,000: $150,000 unrecaptured §1250 × 25%, $255,000 × 20% | −$88,500 |
| Assumed 4.5% state tax on $1,579,825 of gain | −$71,092 |
| Estimated net proceeds | $1,301,468 |
Inventory of $30,000 sold at cost. At an assumed 24.5% combined rate on the marginal dollars, the cut’s after-tax cost is $190,175 × 75.5%, or about $143,582. Rates are assumptions; the seller’s CPA sets the real ones.
What is the lesson for buyers?
Find everything, then count each finding once. A request built from documents, with double counts removed, closed in this composite; the first request nearly ended it.
Before sending a renegotiation request
- Tie every requested dollar to a report, quote, or appraisal page
- Check whether the appraisal or the multiple already reflects the item
- Separate known costs (credit) from unknown costs (escrow with a release trigger)
- Use the seller’s credible quotes where they exist, not only your own padded ones
- Show the after-tax effect on the seller; it makes a fair request easier to accept
Sort findings into three groups before you write to the seller: compliance and safety items that earn a credit, unknown costs that belong in escrow, and normal wear the price already assumes. Our buyer due diligence request list and guide to funeral home due diligence cover how to surface them early, and the buyer’s hub covers the rest of the purchase.
Frequently asked questions
Can a buyer lower the price after signing a letter of intent?
Usually yes, if the LOI is non-binding on price and diligence finds facts the seller did not disclose. The credible way is to show which assumption changed, by how much, and why it was not already reflected in the agreed price. A buyer who stacks every finding without that reasoning tends to lose the deal or the seller's trust.
When should a repair be an escrow instead of a price cut?
When the problem is real but its cost cannot be known before closing, such as a possible buried tank, a pending inspection, or a contractor quote that depends on opening a wall. An escrow pays the actual cost and returns the rest. A price cut works when both sides accept a written estimate.
Should the seller fix problems before closing instead?
Sometimes. A seller with a solid contractor quote can often fix an item for less than the buyer's padded credit. But a seller-managed repair invites arguments about quality and timing. Many buyers prefer the credit so their own contractor does the work to their standard after they own the building.
Does deferred maintenance affect the bank appraisal?
Often. An as-is appraisal deducts for visible condition problems, so a lender may value the building below the seller's expectations. That deduction already lowers what the buyer pays for the real estate, which is why the same roof should not also come off the business price as a separate credit.
Sources cited
- 29 CFR 1910.1048, Formaldehyde — Electronic Code of Federal Regulations
- 28 CFR 36.104, Definitions (ADA Title III) — Electronic Code of Federal Regulations
- ADA Title III: businesses open to the public — U.S. Department of Justice
- Brownfields All Appropriate Inquiries — U.S. Environmental Protection Agency
- SBA SOP 50 10 8.1, Lender and Development Company Loan Programs — U.S. Small Business Administration