Illustrative example: selling the operations and leasing back the real estate
By Jason Taken, Business Advisor, HedgeStone Business Advisors · Last reviewed · 7 min read
Here a family sells its 285-call funeral business for $1,850,000 and keeps the building, leasing it to the buyer at $112,000 a year. Raising the old $60,000 family rent to market cut the business price by about $265,000, but the extra rent was worth roughly $419,000 in today's dollars. This is an illustrative composite, not a client deal.
Key takeaways
- Rent and price are one negotiation: each extra $1 of annual rent lowered the business price by about $5.10 at the assumed multiple.
- At a 9% discount rate, 15 years of the $52,000 rent increase was worth about $419,000, against a $265,200 price reduction.
- The operations sale netted an estimated $1,216,600 after a credit line, costs, and taxes; the building added about $40,900 of after-tax cash in year one.
- The family's protection came from the lease terms: a parent-company guaranty, triple-net terms, limits on assignment, and a priced purchase option.
This is an illustrative composite, not a real client deal. We built it from patterns in sales where a family keeps its funeral home building, then rounded the inputs so every step can be checked. The setting is a small city in the Mid-Atlantic, but no real firm, family, or town is described.
Two siblings, both in their sixties, own a 285-call funeral home through an S corporation. A separate family LLC owns the building and land, and for years charged the business a token rent. Their buyer, a private-equity-backed regional platform, wanted the operations but preferred not to own real estate. That preference set up the question this page answers: what is the whole deal worth when the building stays in the family?
What did the operating business look like?
A steady, mixed-disposition firm: 279, 291, and 285 calls over three years, with cremation at 59% of calls. Revenue, excluding cash advances, was $1,676,600.
| Disposition | Calls | Revenue per call | Revenue |
|---|---|---|---|
| Traditional burial | 118 | $9,450 | $1,115,100 |
| Cremation with services | 71 | $4,600 | $326,600 |
| Direct cremation | 96 | $2,150 | $206,400 |
| Preneed commissions and trust income | $28,500 | ||
| Total | 285 | $1,676,600 |
Reported pre-tax income was $278,975 after $1,397,625 of expenses. Those included $150,000 of salary for the sibling who served as funeral director in charge, $42,000 paid to a spouse who did no regular work, and $60,000 of rent to the family LLC. The operating company already paid the building’s taxes, insurance, and repairs, so the rent was effectively triple net.
How did market rent change the earnings?
It took $52,000 off them. An appraiser set market rent at $112,000 a year, triple net, so the buyer charged that figure against earnings before applying any multiple.
| Line | Amount |
|---|---|
| Reported pre-tax income | $278,975 |
| Add back depreciation and interest | $47,000 |
| Add back owner-director’s salary | $150,000 |
| Add back non-working spouse’s pay | $42,000 |
| Deduct a hired location manager | −$105,000 |
| Deduct rent increase to market ($112,000 − $60,000) | −$52,000 |
| Adjusted EBITDA | $360,975 |
Margin: $360,975 ÷ $1,676,600 = 21.5%. The rent line is the one sellers resist, but a buyer will make it with or without agreement. Our page on adjusted EBITDA explains why every buyer normalizes occupancy cost.
What were the business and the building each worth?
The business priced at $1,850,000 on assumed multiples, and the building appraised at $1,400,000. The two values were set separately, which is the only clean way to do it.
No neutral published survey of funeral home multiples exists that we can cite. The single verified data point is Carriage Services’ statement on its Q4 2025 earnings call that it expected its yet-to-be-announced acquisitions to price at 7x to 9x EBITDA. For a single location sold to a private platform, we assumed a band of 4.6x to 5.6x adjusted EBITDA, or $1,660,485 to $2,021,460. The parties settled at $1,850,000, about 5.1x.
The building’s value came from the income approach: $112,000 of market rent ÷ an assumed 8.0% capitalization rate = $1,400,000. Our guide to valuing funeral home real estate covers how appraisers choose that rate for single-purpose buildings.
How much did the rent decision move the price?
A lot. At the assumed 5.1x, each dollar of annual rent removed about $5.10 of business value, and the family captured the dollar back as rent every year of the lease.
| Annual rent | Adjusted EBITDA | Business value at 5.1x | Rent to family LLC |
|---|---|---|---|
| $60,000 (old family rent) | $412,975 | $2,106,173 | $60,000 |
| $112,000 (appraised market) | $360,975 | $1,840,973 | $112,000 |
| $140,000 (above market) | $332,975 | $1,698,173 | $140,000 |
Worked example: is market rent worth the lower business price?
Keeping the old $60,000 rent would have raised the business price by $2,106,173 − $1,840,973 = $265,200, paid once at closing.
Charging market rent instead adds $52,000 a year. Over a 15-year lease at an assumed 9% discount rate, the present-value factor is (1 − 1.09^−15) ÷ 0.09 = 8.0607:
- $52,000 × 8.0607 = $419,156 in today’s dollars
- Advantage of market rent: $419,156 − $265,200 = about $154,000, before taxes and assuming the tenant pays
The above-market row looks even better on paper, but the buyer refused it. Its lender sizes debt on earnings after rent, and the appraiser would not support $140,000.
The 9% rate is itself an assumption that prices tenant risk. Our sell vs. lease comparison tests that choice at several rates and with a tenant default.
Which lease terms protected the family?
The ones that make a single tenant behave like a creditworthy one. The platform’s parent company guaranteed the lease, which mattered more than the rent figure itself.
Lease terms the family negotiated in the letter of intent
- Term: 15 years, plus two 5-year renewals at the tenant’s option.
- Escalation: 2% a year, fixed, so the rent keeps pace without annual arguments.
- Triple-net terms: the tenant pays taxes, insurance, and routine repairs; the lease names who replaces the roof, HVAC, and preparation room ventilation.
- Guaranty: from the platform’s parent, surviving any assignment.
- Assignment: landlord consent required, with a net-worth test for any new tenant.
- Purchase option: after year 7, at appraised value, plus a right of first refusal.
- Environmental covenant: the tenant is responsible for conditions it causes, with an inspection at lease end.
Had the buyer used an SBA loan, its lender would also have cared about lease length. Under SBA SOP 50 10 8.1, the lease term, counting renewals the borrower alone can exercise, should equal or exceed the loan term. This platform used its own credit facility, so the lease length was a business choice, not a lender rule.
What did the family net at closing and in year one?
About $1,216,600 from the operations sale, plus roughly $40,900 of after-tax cash from the building in the first year. Tax rates here are assumptions; your CPA needs to run your own facts.
The price was allocated across the asset classes in the IRS instructions for Form 8594. The IRS capital gains topic puts the top federal rate on long-term gain at 20%, and equipment recapture is ordinary income under the rules in IRS Publication 544. We assumed 37% on ordinary income, a flat 6% state rate, and no net investment income tax.
| Item | Price | Gain | Rate | Tax |
|---|---|---|---|---|
| Vehicles, equipment, furnishings | $210,000 | $146,000 (basis $64,000) | 37% | $54,020 |
| Casket and urn inventory | $31,000 | $0 | n/a | $0 |
| Non-compete | $50,000 | $50,000 | 37% | $18,500 |
| Goodwill, net of $97,000 of costs | $1,559,000 | $1,462,000 | 20% | $292,400 |
| State tax on all gain | $1,658,000 | 6% | $99,480 | |
| Total | $1,850,000 | $464,400 |
Net from the operations: $1,850,000 − $97,000 of legal, accounting, and advisory costs − $72,000 credit line payoff − $464,400 of tax = $1,216,600, or 65.8% of the price.
The building carries a $280,000 mortgage with $38,000 of annual payments. Year one: $112,000 of rent − $38,000 = $74,000 of pre-tax cash. Taxable rent after about $17,000 of interest and $18,000 of depreciation is $77,000, taxed at an assumed 43% combined ($33,110), leaving $40,890. Selling the building instead would have produced roughly $826,000: $1,400,000 − $42,000 of selling costs − the $280,000 mortgage − about $252,000 of estimated tax, including the 25% rate on $395,000 of past depreciation. Try your own split in the seller net proceeds calculator.
What extra paperwork did the leaseback add?
Three documents a straight sale would not need, each tied to the fact that the family stays involved with the property for years.
First, a baseline environmental report and building condition survey, signed by both sides, so later disputes about the preparation room or the roof start from an agreed record. Second, a tenant estoppel and a subordination, non-disturbance, and attornment agreement with the LLC’s mortgage lender, which protects the tenant if the family ever defaults on its loan. Third, a short maintenance schedule attached to the lease, listing which capital items the family will replace and roughly when. Together they added about $9,000 of legal cost, already counted in the $97,000 figure above, and roughly three weeks to the closing timeline.
What is the lesson for owners who want to keep the building?
Set the rent before you set the price. A family that argues for its old rent is quietly offering a discount it will pay for over the life of the lease.
The second lesson is that the lease, not the rent, carries the risk. A strong guaranty, limits on assignment, and a priced purchase option did more to protect this family than any extra dollar of rent. For the decision itself, see keeping the real estate and selling the operations, and for how buyer types differ on leasing, the real estate column in The Buyer-Fit Matrix. The wider method sits on our valuation hub, and the tax side in our guide to taxes on selling a funeral home.
Seller net proceeds estimator
Walks from headline price to cash in hand. Tax inputs are a rough blended placeholder; your CPA should model the real allocation.
Educational estimate only. Not an appraisal, valuation opinion, or loan approval.
Frequently asked questions
Who sets the rent when a seller leases the funeral home building to the buyer?
Ideally an independent appraiser or commercial broker, working from comparable rents and the building's income value. Both sides then negotiate around that figure. A rent pulled from the family's old arrangement, or picked to inflate the building's value, tends to unravel once the buyer's lender and accountant review it.
Why would a buyer prefer to lease the building instead of buying it?
Leasing cuts the cash and debt a buyer needs at closing, so it can spend capital on more locations or on improvements. Many larger platforms prefer to own operations and rent buildings. Some smaller buyers lease because they cannot finance the full price, and the seller's willingness to lease is what makes the deal possible.
What happens to my lease if the buyer later sells the funeral home?
It depends on the assignment clause you negotiate now. A good clause requires your consent, keeps the original guaranty unless the new tenant is at least as strong, and sets financial tests for approval. Without that language, a later resale could leave you renting to an operator you would never have chosen.
Do I pay capital gains tax on the building if I lease it instead of selling it?
Not at closing, because the building is not sold. You pay ordinary income tax on the net rent each year. The deferred gain, including tax on past depreciation, comes due when you eventually sell, unless your estate plan or an exchange changes that. Your CPA should model both paths before you sign.
Sources cited
- Carriage Services Q4 2025 earnings call transcript — The Motley Fool
- Topic no. 409, Capital gains and losses — Internal Revenue Service
- Instructions for Form 8594 — Internal Revenue Service
- Publication 544, Sales and Other Dispositions of Assets — Internal Revenue Service
- SOP 50 10 8.1: Lender and Development Company Loan Programs — U.S. Small Business Administration