Illustrative example: a $1.8M preneed backlog that is 15% underfunded
By Jason Taken, Business Advisor, HedgeStone Business Advisors · Last reviewed · 7 min read
In this illustrative composite, an owner's own records showed his preneed backlog $88,500 overfunded. Reconciled contract by contract, the guaranteed contracts would cost $1.8 million to deliver at today's prices against $1.53 million of verified funding, a $270,000 shortfall. He cured four unfunded contracts, took a $232,000 price reduction, and accepted a $75,000 escrow.
Key takeaways
- The owner's internal ledger compared overstated balances with original contract prices, which hid a $358,500 swing from apparent surplus to real shortfall.
- Rungs one through three of the Preneed Reconciliation Ladder (register, matching, verified balances) moved the answer more than the re-pricing arithmetic did.
- Four contracts with no trust deposit were a compliance issue, cured before closing on counsel's advice, not a negotiating point.
- The insurance-funded contracts were 92% funded and the trust-funded ones about 80%, so the funding type shaped the negotiation.
This is an illustrative composite, not a real client deal. The firm, its contracts, and every dollar figure were built for teaching, using patterns we see when preneed files are reconciled before a sale. Nothing here describes a specific family or town.
The firm is a 315-call funeral home in a small city in the Great Lakes region. The owner, 69, had sold preneed for 30 years, mostly guaranteed contracts. When a buyer asked about the backlog, he answered with confidence: his records showed more money set aside than the contracts were sold for. That answer was wrong, and the way it was wrong is the lesson.
Why did the owner believe the backlog was overfunded?
He compared his internal funding ledger with the original contract prices. Both numbers were the wrong ones to use.
His ledger showed $861,000 in trust and $702,000 in insurance, $1,563,000 in total. The guaranteed contracts on his register had been sold for $1,474,500. On that view, he was $88,500 ahead.
A guaranteed contract, though, is a promise to deliver the selected funeral at whatever it costs on the day of death. Our page on guaranteed-price contracts covers why the comparison has to be with today’s prices, not the price on the contract. Prices move: NFDA’s 2023 price study, as reported by Funeral Director Daily, put the median funeral with viewing and burial at $8,300, up 5.8% from 2021. Contracts sold two or three decades ago have absorbed many such increases.
What was the business worth before preneed came up?
The buyer’s letter of intent priced the operating business at $1,950,000, before any preneed adjustment. The building is leased from an unrelated landlord, so no real estate is in the price.
| Item | Figure |
|---|---|
| Calls, latest year | 315 |
| Revenue, no cash advances | $2,050,000 |
| Adjusted EBITDA, after a hired manager | $392,000 |
| Assumed multiple range (illustration only) | 4.5x to 5.5x |
| Implied range | $1,764,000 to $2,156,000 |
| Letter-of-intent price, business only | $1,950,000 |
The multiple range is an assumption for this example. No reliable published survey of funeral home multiples exists, and we do not present one.
How did the Preneed Reconciliation Ladder change the number?
It replaced an $88,500 surplus with a $270,000 shortfall. Each rung of the Preneed Reconciliation Ladder removed a different error.
Rung 1: Register completeness
The register listed 236 contracts. A sweep of paper arrangement files found 11 signed contracts that had never been entered. The complete register held 247: 142 trust-funded guaranteed, 92 insurance-funded guaranteed, and 13 non-guaranteed.
Rung 2: Match to funding
Every insurance contract tied to a confirmed policy. Of the 142 trust contracts, 138 tied to sub-accounts and 4 had no deposit at all. Three of those four were among the 11 found in paper files.
Rung 3: Verify funding values
The trustee’s statements showed $812,000, not $861,000. The $49,000 difference was $31,000 of trustee fees never posted to the ledger and $18,000 of earnings withdrawn years earlier. The insurers confirmed $718,000 of current policy values, higher than the $702,000 in the ledger because the policies had grown. Verified funding: $1,530,000.
Rung 4: Re-price obligations
Each guaranteed contract was re-priced at the current General Price List, item by item. The 13 non-guaranteed contracts were set aside, because families pay any difference on those at the time of need. Discontinued caskets were replaced with the nearest current model at its current price. Where a contract also guaranteed cash-advance items, such as an obituary notice or a clergy honorarium, those were re-priced at current local cost, because the firm carries that promise too.
Rung 5: Compute the gap
| Group | Contracts | Original prices | Re-priced at today’s GPL | Verified funding | Gap | Funding ratio |
|---|---|---|---|---|---|---|
| Trust, matched | 138 | $790,000 | $982,000 | $812,000 | $170,000 | 82.7% |
| Trust, no deposit found | 4 | $29,500 | $38,000 | $0 | $38,000 | 0% |
| Insurance-funded | 92 | $655,000 | $780,000 | $718,000 | $62,000 | 92.1% |
| Total guaranteed | 234 | $1,474,500 | $1,800,000 | $1,530,000 | $270,000 | 85.0% |
The math: $1,800,000 − $1,530,000 = $270,000, and $1,530,000 ÷ $1,800,000 = 85%. The trust side alone, $1,020,000 of obligation against $812,000, was 79.6% funded.
| Measure | Owner’s ledger | Reconciled | Difference |
|---|---|---|---|
| Funding | $1,563,000 | $1,530,000 | −$33,000 |
| Obligation | $1,474,500 (original prices) | $1,800,000 (today’s GPL) | +$325,500 |
| Surplus or (shortfall) | $88,500 | ($270,000) | $358,500 swing |
You can test a backlog like this one in the preneed shortfall calculator shown below the article, then compare its quick estimate with the contract-by-contract result.
What does each underfunded contract cost the buyer later?
About $1,154 per contract, paid out of the buyer’s own pocket each time one is delivered. That is the cash reality behind the price credit.
Across the 234 guaranteed contracts, the average re-priced obligation is $1,800,000 ÷ 234 = $7,692, and the average verified funding is $1,530,000 ÷ 234 = $6,538. The buyer performs a $7,692 funeral and collects $6,538. If about 24 contracts mature a year, roughly a tenth of the backlog, that is 24 × $1,154 = $27,700 a year of service delivered without matching cash, before further price increases.
A buyer underwriting the deal subtracts that drag from future earnings or takes it as a one-time credit. Taking it as a credit is cleaner for both sides, because the seller’s number stops moving at closing and the buyer’s lender sees earnings that are not quietly reduced by old promises.
How was the $270,000 turned into deal terms?
It was split three ways: a compliance cure, a price credit, and an escrow. Each piece answered a different question about risk.
- Cure the four unfunded contracts. Missing deposits are a compliance matter, not a bargaining chip. On counsel’s advice the owner deposited $38,000 before closing, enough to fund those contracts at today’s prices. The FTC’s guide to planning a funeral notes that the laws of individual states govern prepayment, so the cure followed his state’s rules; our state-by-state funeral home guides are the starting point for yours.
- Credit the measured gap on funded contracts. $170,000 + $62,000 = $232,000 off the price. The buyer first asked for more, arguing prices would keep rising before the contracts mature. The owner’s side showed the oldest, most underfunded contracts would mature first. They settled at the measured figure.
- Escrow for contracts not yet found. Eleven missing contracts in one sweep made the buyer worry about more. The owner agreed to a $75,000 escrow for 24 months and an indemnity capped at $125,000 for any guaranteed contract that surfaces later.
Rules about what counts as delivered or funded vary. To take one state’s view, not necessarily this firm’s, New York’s Department of State says in its guidance on preneed merchandise sales that it does not recognize “constructive delivery” of merchandise not actually delivered before death. Practices that pass in one state can create gaps in another.
Large operators carry the same risk at scale. SCI’s FY2025 Form 10-K reported a $17.0 billion preneed backlog that “includes both insurance and trust-funded” products. Buyers who live with that risk daily will not skip this work on a small firm.
What did the owner net after debt and estimated taxes?
About $1,000,000 from a $1,718,000 adjusted price, with $75,000 of it held in escrow for two years. The trust balances and policies moved to the buyer with the contracts; they were never the seller’s cash.
| Line | Amount |
|---|---|
| Letter-of-intent price | $1,950,000 |
| Preneed credit | −$232,000 |
| Adjusted price (includes $75,000 escrow) | $1,718,000 |
| Deposit to cure four unfunded contracts | −$38,000 |
| Line of credit payoff | −$140,000 |
| Advisor fee (assumed 5% of adjusted price) | −$85,900 |
| Legal, accounting, reconciliation work (assumed) | −$46,000 |
| Federal tax: equipment recapture, $146,000 × 35% | −$51,100 |
| Federal tax: goodwill, $1,463,000 × 20% | −$292,600 |
| State tax, 4% × $1,609,000 (assumed) | −$64,360 |
| Net proceeds | $1,000,040 |
The allocation assumed $210,000 for equipment and vehicles with a $64,000 basis, $45,000 for inventory at cost, and the rest to goodwill. We did not assume any tax deduction for the cure deposit; that is a question for the owner’s CPA, as are the rates.
What is the lesson from this backlog?
The arithmetic was the easy part. Missing contracts, unposted fees, and old withdrawals turned a confident surplus into a real gap long before anyone re-priced a casket.
Had the owner climbed the Ladder a year before marketing, he would have found the four unfunded contracts on his own schedule and negotiated the credit from a finished schedule. Our guide to how preneed shortfalls change the purchase price covers that negotiation, our preneed trust shortfall definition explains why gaps form, and the valuation hub places the credit inside the full price.
Preneed shortfall estimator
Re-prices guaranteed-price contracts at today’s cost and compares them to the money actually set aside. Rung 4–5 of the Preneed Reconciliation Ladder.
From current trust statements and insurer confirmations.
Leave at 100 to compare to full retail; some buyers measure against cost to deliver.
Educational estimate only. Not an appraisal, valuation opinion, or loan approval.
Frequently asked questions
Can a funeral home with an underfunded preneed backlog still sell?
Yes. Most buyers expect some gap on older guaranteed contracts and simply want it measured. A shortfall becomes a price credit, an escrow, or an indemnity. What stalls deals is an unmeasured gap, or deposits that were never made, because those raise doubts about every other record in the file.
Do the preneed trust funds go to the seller at closing?
No. In a typical sale the trust accounts and insurance assignments move with the contracts to the buyer, who must deliver the funerals. The seller receives the purchase price. That is why a shortfall reduces the price: the buyer inherits obligations that cost more than the money transferring with them.
Why did the insurance-funded contracts have a smaller gap?
Many preneed policies grow over time, and the insurer reports a current value instead of relying on the funeral home's own ledger. Growth rarely keeps pace with every price increase, but it often narrows the gap compared with a small trust earning modest returns after fees. Confirm values with each insurer directly.
Should a seller just fund the whole shortfall before listing?
Sometimes, but not by default. Paying in the gap uses your cash at once, while a price credit is negotiated and may come out smaller. State rules may also limit how added money is treated. Missed deposits are different: counsel will usually want those fixed promptly, whatever happens with the sale.
Sources cited
- Planning Your Own Funeral — Federal Trade Commission
- Service Corporation International FY2025 Form 10-K — U.S. Securities and Exchange Commission (EDGAR)
- Guidance on preneed sales of funeral and burial merchandise — New York Department of State
- NFDA 2023 General Price List Study (as reported by Funeral Director Daily) — Funeral Director Daily