Earnouts tied to call volume: how they work and how to protect yourself

An earnout is the part of a funeral home price that the seller has not been paid yet and may never be. It often appears when a buyer and seller agree on what the firm earned last year but not on what it will do next year. The buyer says “prove it,” and the earnout is how the seller does.

Whether an earnout is fair depends almost entirely on the drafting. This guide covers the mechanics and the protections; whether to accept one instead of a fixed price is covered in earnout vs. fixed price. Both are part of our valuation, finance, and tax hub.

What is a call-volume earnout?

It is a deferred payment that becomes due only if the funeral home reaches agreed call-volume targets after closing. The amount, the targets, and the test period are set in the purchase agreement.

Call volume is a popular metric because it is simpler to count than profit and harder for either side to manipulate through accounting. Some agreements use revenue or gross margin instead. A revenue test protects the seller if the buyer’s pricing rises, but it exposes the seller if families shift toward lower-priced direct cremation. Our definition of a call-volume earnout lists the variations.

When do earnouts appear in funeral home deals?

Mostly in sales to consolidators, private equity platforms, and regional groups paying with their own capital. They do not appear in sales financed with SBA loans.

SBA SOP 50 10 8.1 states that seller earnouts are prohibited in SBA-financed changes of ownership; buyer rebates are allowed. If your buyer is a licensed director using an SBA 7(a) loan, a valuation gap has to be bridged another way, usually with a seller note on full standby or a lower price.

How should the baseline be set?

On a multi-year average of verified calls, not on the best recent year. A single year can be high or low for reasons no one controls.

Deaths move. CDC’s provisional 2025 mortality report counted 3,094,593 U.S. deaths in 2025, while the age-adjusted death rate fell 4.6% to the lowest ever recorded. National totals are steady compared with a single town, where a mild winter can move calls by several percent. A three-year average dampens that noise, and the buyer will usually check it against the same call reports it used in underwriting call volume.

Thresholds matter as much as the baseline. Many earnouts pay nothing below a floor, scale up between the floor and the target, and cap at the target. Small changes in the floor change the expected payout a great deal.

How should calls be counted and attributed?

Define a call in writing, decide which calls count, and stop the buyer from moving calls out of the measurement. Vague definitions are where most earnout disputes start.

Mix shift is not hypothetical. The Cremation Association of North America reports a U.S. cremation rate of 62.8% in 2025 and projects 69.1% by 2030. A revenue-based earnout written in a market moving toward cremation carries that drift inside it.

Should the test be annual or cumulative?

It depends on the pattern you expect, so model both. An annual test pays year by year; a cumulative test compares total calls with a total target and lets a strong year offset a weak one.

Test your own baseline and thresholds in the call-volume earnout calculator, and see an illustrative earnout when a new competitor opens for a harder case.

How much is an earnout worth on the day you sign?

Less than its face. Discount it three ways: for the chance targets are missed, for the years until payment, and for the buyer’s ability to pay when it comes due.

A simple version: a $600,000 earnout you expect to collect at about 60% is worth $360,000 in expected payments. Received on average two years out and discounted at 10% a year, that is $360,000 ÷ 1.21, or about $297,500 today. Those inputs are illustrative, but the habit is not. Compare offers on cash at closing plus the discounted earnout, never on the headline that assumes every target is hit.

What happens to the earnout if the buyer sells or changes the business?

Unless the agreement says otherwise, the earnout may follow the business to a new owner who never negotiated it, or be put at risk by decisions that change the firm. Ask for acceleration.

Funeral home buyers change hands. Park Lawn, once a public consolidator, completed its going-private transaction in August 2024. Sellers should ask that the full unpaid earnout become due on a change of control, a sale of the location, a closure or merger of the firm into another location, or a material breach. Tie these terms to your other legacy commitments; the Legacy Terms Ledger tests whether each one is written, lasts, carries a remedy, and survives a resale.

How are earnout disputes resolved?

With a written process agreed before closing. Courts are slow and expensive, so most agreements send disputes to an independent accountant.

1. The buyer delivers an earnout statement with case-level detail within a set number of days after each period.
2. The seller has a review window and access to case records, removal logs, and the books.
3. Disputed items go first to a meeting, then to an agreed independent accountant whose decision binds both sides.
4. Undisputed amounts are paid on time, and late payments carry interest.
5. The buyer’s right to offset indemnity claims against the earnout is limited or excluded.

How is an earnout taxed?

Generally as part of the sale price, reported as it is received, but under special rules. Talk to your CPA before agreeing to the structure.

IRS Publication 537 calls a sale whose total price cannot be determined by the end of the tax year a contingent payment sale, with different rules for contract price and gross profit percentage. On Form 8594, the IRS instructions say both parties must report the maximum consideration assuming all contingencies are met. Our guide to taxes on selling a funeral home covers how the price is allocated.