Funeral home working capital at closing: receivables, inventory, and cash-advance items

Price gets the attention, but closing day settles a second set of numbers. Receivables, merchandise, prepaid bills, and money held for families can move a funeral home’s final check by tens of thousands of dollars in either direction.

These items are small enough to ignore in a letter of intent and large enough to sour a closing. This guide covers how each one is usually treated in a funeral home asset sale. It fits into the full sale process and our owner’s guide to selling.

What counts as working capital in a funeral home sale?

Working capital is the short-term assets and liabilities the business runs on: receivables, inventory, and prepaid costs, minus payables and accrued obligations. In a funeral home, several of these carry rules of their own.

Who keeps the receivables when the funeral home changes hands?

Either the seller keeps and collects them, or the buyer purchases them at an agreed discount. Both work if the asset purchase agreement (APA) says exactly which accounts move and at what price.

Keeping receivables is common in smaller deals. You collect what families owe for services you performed, and the buyer starts fresh. The catch is that families keep calling the same office. Most sellers sign a short collection agreement: the buyer’s staff accept payments, apply them to the named invoice, and remit them monthly.

Selling receivables gives you cash at closing and gives families one billing voice. Buyers price each age bucket by its odds of collection. Bring your own history: if you have collected 97% of balances under 60 days old for three years, that record supports a near-face price.

How are insurance assignments handled at closing?

Treat them as receivables owed by insurers, listed claim by claim. They usually transfer near face value when the policy is in force and the claim is complete.

When a family assigns life insurance proceeds to pay for a funeral, the funeral home files the claim and the insurer pays it directly. At closing, some claims will still be pending. List each one with the insurer, policy number, amount assigned, and filing date. Flag any with known problems, such as a policy still in its contestable period or a missing death certificate.

Do not confuse these with insurance-funded preneed policies. Those fund future funerals, not past ones, and they move under the preneed terms. Our guide to preneed when selling a funeral home covers that transfer.

How do you count casket, urn, and vault inventory?

Count every unit a few days before closing, price it at your cost from supplier invoices, and remove anything damaged, discontinued, or not yours. The APA then adjusts the price for the gap between the count and an agreed target.

Three groups cause most disputes. Display caskets owned or financed by a supplier belong to that supplier, not to you. Merchandise already selected for an at-need family belongs to that case. And merchandise tied to preneed contracts follows state rules on storage and delivery, which vary.

What is a working capital peg, and does a small funeral home need one?

A peg is a target level of working capital, usually a trailing twelve-month average, built into the price. If less is delivered at closing, the price drops; if more is delivered, it rises.

Pegs are standard in larger consolidator and private equity deals. Smaller asset sales often skip the peg and use the simpler path: seller keeps receivables, buyer buys inventory at cost. Either way, the final figures land on the closing statement and get reviewed by your accountant; the closing-day checklist lists the documents involved.

With illustrative figures: a peg of $85,000 and delivered working capital of $62,000 cuts the price by $23,000. Delivering $97,000 raises it by $12,000, if the adjustment runs both ways. Check that it does, and set a deadline, a dispute process, and a neutral accountant for the post-closing true-up. Our APA key-terms checklist lists those clauses.

How do cash-advance items and open cases get settled?

Money a family paid you for a third party’s charge belongs to whoever pays that third party. Cases in progress need a written cutoff rule that splits revenue and costs.

The FTC Funeral Rule, at 16 CFR §453.1(b), defines the items involved.

The FTC’s compliance guide adds that a firm using someone else’s crematory may treat the cremation charge as a cash-advance item. Before closing, list every open item by case: what was collected, what is still owed to the cemetery, crematory, or newspaper. Then credit that net amount to the buyer.

For cases in progress, pick a rule. A common one gives the seller cases where the contract was signed before closing, with the buyer paid a fee for finishing them. Buyer-side accountants also check that cash advances were kept out of revenue; see what a quality of earnings review tests.

What should you do in the 30 days before closing?

Prepare the working-capital schedules yourself, so the buyer reviews your numbers instead of building its own. Each task below takes hours, not weeks, if your case files are current.

How does working capital affect taxes and the buyer’s financing?

Each item lands in an IRS asset class, and the buyer’s loan has to fund it. Both points shape how the closing numbers are negotiated.

Under the Form 8594 instructions, accounts receivable are Class III assets and inventory is Class IV. Both buyer and seller file the form. A post-closing price change that crosses a tax year requires a supplemental filing. How each class is taxed to you depends on your entity and basis, so ask your CPA; our asset sale vs. stock sale comparison covers the larger structural choice.

On the buyer side, SBA SOP 50 10 8.1 measures the 10% equity injection against total project cost. Purchased receivables, inventory, and starting working capital all raise that cost, so a financed buyer may push back on buying old receivables.