Illustrative example: a call-volume earnout when a new competitor opens
By Jason Taken, Business Advisor, HedgeStone Business Advisors · Last reviewed · 7 min read
In this illustrative composite, a 410-call funeral home lost about $450,000 of certain price when a competitor broke ground nearby. The buyer paid $2.9 million at closing plus up to $540,000 over three years, earned between 360 and 400 calls a year. On probability-weighted outcomes, the earnout was worth about $196,000 in today's dollars.
Key takeaways
- The earnout floor matters more than the maximum: setting it 50 calls below the three-year average, not 15, decided whether the seller collected anything in a moderate-loss case.
- A call-count earnout treats a $2,290 direct cremation the same as a $9,350 burial, so it can penalize a seller more than the economic loss when a low-price competitor opens.
- SBA SOP 50 10 8.1 prohibits seller earnouts in SBA-financed changes of ownership, so this structure only works with a buyer using its own capital or conventional bank debt.
- On assumed rates, the seller kept about $1.83 million after debt, costs, and estimated taxes at closing, plus an expected after-tax earnout of roughly $147,000 in present value.
This page is an illustrative composite built from typical figures, not a real client deal. The family, the firm, and the outcome are invented to show the math. The setting: a single-location funeral home in a mid-sized Mid-Atlantic county, owned by a second-generation couple in their late sixties, with a regional family group ready to buy. Two weeks before the letter of intent was due, a new funeral home with an on-site crematory broke ground about five miles away.
What did the funeral home look like before the announcement?
It was a steady, owner-run firm averaging 410 calls a year, with a mixed disposition profile and earnings that held up under scrutiny. Nothing about the business itself had changed when the competitor appeared.
Calls ran 402, 414, and 415 over the last three full years, a flat-to-rising trend on the first measure of The Four-Number Funeral Home Valuation Screen. Revenue below excludes cash advances.
| Disposition | Calls | Average revenue per call | Revenue |
|---|---|---|---|
| Traditional burial | 185 | $9,350 | $1,729,750 |
| Cremation with services | 143 | $5,100 | $729,300 |
| Direct cremation | 82 | $2,290 | $187,780 |
| Total | 410 | $6,456 | $2,646,830 |
The preneed backlog was almost entirely insurance-funded, and the reconciliation found no shortfall worth pricing, so it does not move the numbers here.
How were the earnings normalized?
The buyer priced on adjusted EBITDA, because it would install its own manager rather than rely on the selling owner. Every add-back had a document behind it.
| Line | Amount | Support |
|---|---|---|
| Reported pre-tax income | $388,000 | Tax return |
| Depreciation | +$74,000 | Depreciation schedule |
| Interest | +$21,000 | Loan statements |
| Roof repair expensed in one year | +$38,000 | Contractor invoice |
| Spouse’s salary, no active role | +$42,000 | Payroll records |
| Personal vehicle and insurance | +$14,000 | Policy and title |
| Owner’s $165,000 pay vs. $95,000 market manager | +$70,000 | Regional salary survey |
| Rent raised from $60,000 to $96,000 market | −$36,000 | Broker opinion of rent |
| Adjusted EBITDA | $611,000 | 23% margin |
The rent line cuts the other way. The couple’s real estate company owned the building and charged the funeral home below-market rent, which flattered earnings. Our definition of adjusted EBITDA covers why buyers insist on that correction.
What valuation range did the numbers support?
Before the announcement, an assumed 5.0x to 6.0x adjusted EBITDA put the business between about $3.06 million and $3.67 million, and the buyer was discussing $3.35 million. Those multiples are assumptions for this composite, not market statistics.
For context, the only verified multiple figure we cite is Carriage Services’ own guidance. On its Q4 2025 earnings call, management anticipated 7x to 9x EBITDA for its planned acquisitions. That describes one public consolidator’s targets, not what a regional family buyer pays for a single location.
Then the competitor appeared. The buyer’s view: losing 10% to 15% of calls in the first three years was plausible. Its revised position was $2.9 million, firm, with no way for the sellers to recover the difference if calls held.
How was the earnout structured?
The parties split the risk: $2.9 million at closing plus up to $540,000, paid as up to $180,000 a year for three years. Each year pays nothing at 360 calls or fewer and the full amount at 400 or more, on a straight line between.
The buyer was a regional family group financing with cash and a conventional bank line. That mattered. Under SBA SOP 50 10 8.1, seller earnouts are prohibited in SBA-financed changes of ownership, so a first-time buyer using SBA money could not have offered this bridge at all. That buyer’s tools are a lower price or a seller note on full standby, covered in our guide to SBA loans for funeral homes.
The sellers negotiated three protections that our guide to earnouts tied to call volume treats as essential:
- A floor 50 calls below the average. The buyer opened at 395. At that level, the moderate case below would have paid nothing at all.
- A written call definition. At-need and preneed-matured calls arranged under this firm’s name count, including any the buyer routes to a sister location from the same service area. Trade cremations and ship-outs do not.
- Acceleration. If the buyer closes or rebrands the location, or sells the business, unpaid installments become due at their full amount.
Why would a buyer accept a floor that low? Because its downside was capped either way. In the heavy-loss case it paid almost nothing beyond $2.9 million, a price it had already judged fair for a weakened firm. In the mild case it paid more, but only for calls it was actually serving, with the margin those calls carried. The buyer also kept full control of pricing and staffing. The sellers asked for a seat on a review call each quarter and access to the monthly call log, which cost the buyer nothing and settled most of the disputes before they started.
Definition
Earnout floor: The call count at or below which an earnout year pays nothing; the distance between the floor and the full-payout target sets how quickly the payment shrinks as calls fall.
What was the earnout worth on signing day?
About $196,000 in present value, against a $540,000 maximum. That figure comes from three scenarios, assigned probabilities, and a 10% annual discount rate, all assumptions.
Worked example: three competitive-loss scenarios
Payment each year = (calls − 360) ÷ 40 × $180,000, between $0 and $180,000.
- Mild loss (30% chance): 398, 392, 396 calls. Payments $171,000, $144,000, $162,000. Total $477,000.
- Moderate loss (45% chance): 384, 371, 368 calls. Payments $108,000, $49,500, $36,000. Total $193,500.
- Heavy loss (25% chance): 362, 349, 344 calls. Payments $9,000, $0, $0. Total $9,000.
Expected nominal payout: (0.30 × $477,000) + (0.45 × $193,500) + (0.25 × $9,000) = $143,100 + $87,075 + $2,250 = $232,425.
Discounting each year’s payment at 10% gives present values of $396,176, $166,138, and $8,182 for the three scenarios. Weighted: about $195,660.
Expected deal value: $2,900,000 + $195,660 = $3,095,660, versus $3,350,000 before the announcement.
The call-volume earnout calculator below assumes the same count every year, so enter each scenario’s average calls to approximate it. Our comparison of an earnout against a fixed price explains how to set the discount rate.
The flaw the sellers caught too late
The competitor planned to lead with low-price cremation. If it took 40 direct cremations, the firm would lose about $91,600 of revenue (40 × $2,290), but the earnout would treat those 40 calls exactly like 40 burials worth $374,000. The sellers spotted it too late to reopen the terms. The fix for the next seller: count each direct cremation as a fraction of a call, and restate the floor and target in the same weighted units.
What did the sellers keep after debt and taxes?
About $1.83 million in cash at closing, on assumed federal and state rates, plus an expected after-tax earnout of roughly $147,000 in present value.
| Item | Amount |
|---|---|
| Cash at closing | $2,900,000 |
| Equipment loan and credit line payoff | −$210,000 |
| Broker, legal, and accounting fees | −$165,000 |
| Recapture: $310,000 vehicles and equipment, basis $70,000; $240,000 × 37% | −$88,800 |
| Goodwill: ($2,545,000 − $165,000 fees) × 20% | −$476,000 |
| Assumed 5% state tax on $2,620,000 of total gain | −$131,000 |
| Estimated net cash | $1,829,200 |
Inventory of $45,000 sold at cost and produced no gain. The real estate stayed with the couple’s company under a new 10-year lease at the $96,000 market rent, which becomes their retirement income. Earnout payments are extra purchase price; IRS Publication 537 calls this a contingent payment sale, because the total price cannot be known by the end of the year of sale. The Form 8594 instructions require supplemental filings when consideration rises later. At an assumed 25% combined rate, $195,660 of expected present value nets about $146,700. Your CPA should model the real allocation.
What is the lesson from this example?
Competitor risk is a pricing problem, and an earnout is one way to price it, but only on terms that let the seller win when calls hold. The headline maximum is the least important number in the agreement.
This couple gave up about $254,000 of expected value against the pre-announcement price, in exchange for selling now rather than waiting out the competitor. Our page on a competitor opening nearby covers the wait-or-sell choice itself. Before you accept an earnout, model at least three scenarios, push the floor down, weight calls by type, and insist on acceleration. The rest of our valuation, finance, and tax hub shows how each of those numbers is built.
Call-volume earnout payout model
Models a linear earnout that pays between a floor and a target call count. Real earnouts vary; read every definition in the purchase agreement.
Educational estimate only. Not an appraisal, valuation opinion, or loan approval.
Frequently asked questions
Should a seller accept an earnout because a competitor is coming?
Sometimes. If buyers are discounting the firm for a threat that may not materialize, an earnout lets the seller get paid if calls hold. It only works if the floor is realistic, calls are defined in writing, and the buyer cannot lower the count through its own routing or rebranding decisions.
How do you value an earnout before you sign?
Build several realistic call scenarios, assign each a probability, compute what each year would pay, and discount each payment back to today at a rate that reflects the buyer's credit. The result is usually far below the maximum. Compare offers on that figure plus the closing cash.
Can an SBA buyer offer an earnout instead of a lower price?
No. The SBA's current lending rules bar seller earnouts in changes of ownership it finances. An SBA buyer facing the same competitor risk would have to lower the price, ask for a seller note on full standby, or walk away. Earnouts belong to buyers using their own money or conventional loans.
How is earnout money taxed when it arrives?
Usually as additional purchase price, allocated mostly to goodwill and taxed as capital gain for most sellers. Because the final price is unknown at closing, the IRS treats it as a contingent payment sale. Both parties file supplemental Forms 8594 when the price changes. Have your CPA confirm the treatment for your entity.
Sources cited
- SBA SOP 50 10 8.1, Lender and Development Company Loan Programs (effective Oct. 1, 2026) — U.S. Small Business Administration
- Carriage Services (CSV) Q4 2025 earnings call transcript — The Motley Fool
- Publication 537, Installment Sales (2025) — Internal Revenue Service
- Instructions for Form 8594, Asset Acquisition Statement — Internal Revenue Service