How preneed shortfalls and guaranteed-price contracts change the purchase price

A preneed backlog is a stack of promises with money set aside behind each one. The purchase price question is simple to state: is there enough money behind the promises, at what it now costs to keep them? The answer is not simple, because “enough” depends on which promises carry price risk, which price list you use, and what you assume about the years before each contract matures.

This page works through that arithmetic. For the seller’s preparation and the state transfer mechanics, see preneed and the sale of your funeral home. Both pages sit in our valuation, finance, and tax hub.

Which preneed contracts create a shortfall?

Only guaranteed-price contracts do. On those, the funeral home must deliver the goods and services selected for whatever money is there when the death occurs, so any price increase since the sale is the funeral home’s cost.

The largest operator puts the bet plainly. In its FY2025 Form 10-K, Service Corporation International says trust earnings “are expected to mitigate the inflationary costs” of delivering preneed goods and services “at the prices that were guaranteed at the time of sale.” A shortfall is what you have when that expectation has not come true.

Our definition of a guaranteed-price contract covers the wording to look for. Read the contract itself, not the register summary, because older forms are often ambiguous.

Why can a contract start out underfunded?

Because many states do not require the full price to go into trust. When less than the full price is deposited, a guaranteed contract opens with a gap that only investment earnings can close.

The rules differ widely. Florida Statutes § 497.458 requires trusting at least 70% of the price of services and facilities, and for merchandise the greater of 30% of the price or 110% of wholesale cost. Under Ohio Revised Code § 4717.36, contract payments go to the trustee and remain intact in trust, though the seller may charge an initial service fee of up to 10% on guaranteed-price contracts.

So a $9,000 guaranteed services contract sold in Florida could start with $6,300 in trust. Unless earnings outpace price increases on the full $9,000, that contract drifts further below its re-priced obligation each year. The FTC’s consumer guidance on prepaying states the governing principle: “Laws of individual states govern the prepayment of funeral goods and services.” Rules vary by state, so confirm yours with the regulator.

Merchandise brings its own trap. Some sellers treat caskets or vaults as “delivered” to storage so the money leaves trust. The New York Department of State does not recognize that kind of constructive delivery for merchandise not actually delivered or used before death. A buyer will re-price any such item as fully unfunded until the state’s rule is confirmed.

How is the shortfall measured: snapshot or projection?

The market default is a snapshot: total verified funding today minus every guaranteed obligation re-priced at the current General Price List (GPL). It is the fourth and fifth rungs of the Preneed Reconciliation Ladder, and it is the measure most purchase agreements reference.

A projection asks a different question. Instead of pricing every contract as if it matured today, it grows the obligation at an assumed price increase, grows the funding at an assumed net trust return, and discounts the future gap back to today. Sophisticated buyers and sellers sometimes run both, because the projection can land above or below the snapshot.

Notice which side each assumption favors. Buyers prefer conservative trust returns and higher price growth; sellers prefer the reverse. A discount rate helps the seller because the gap is paid years from now. The snapshot avoids the argument, which is one reason it is the default.

What is the difference between face value and real value?

Face value is the total contract price families paid. It says almost nothing about the shortfall, because the gap depends on funding today against prices today.

Face value still shows up in seller marketing (“a $2 million backlog”), and buyers discount it immediately. Two backlogs with the same face can differ by hundreds of thousands of dollars in shortfall, depending on when contracts were sold, how much was trusted, and how the trust was invested. Lead with the funding ratio instead. It is the fourth number in the Four-Number Funeral Home Valuation Screen, and a ratio at or above 100% is a selling point.

How is the shortfall turned into price terms?

The parties agree on a measurement method, run it on verified data, and then choose who carries the gap. The four common tools are a price reduction, an escrow, an indemnity, and a seller cure before closing.

1. Fix the method in the LOI. Name the snapshot or projection, the dated GPL, and the data sources (trustee statements and insurer confirmations, not internal ledgers).
2. Run the Ladder together. Agree on the register and the matched funding before arguing about any number.
3. Separate the certain from the uncertain. A measured gap on matched contracts suits a price reduction; orphan contracts and disputed items suit an escrow released as they are traced.
4. Size any indemnity to the unknowns. An indemnity covers contracts that surface after closing; cap it and set a survival period.
5. Price the seller cure. Paying money into trust before closing removes the dispute, but the rules on deposits and the tax treatment vary, so involve your CPA and attorney first.

The offset question in the last item matters more than it looks. Netting surpluses against shortfalls can cut the adjustment sharply, and buyers often resist it because a surplus on one family’s contract cannot fund another’s.

How do guaranteed and non-guaranteed contracts compare in a real backlog?

Most older backlogs mix both, and only the guaranteed share drives the deduction. Split the register first, then measure.

A backlog that is 60% non-guaranteed carries far less price risk than one that is entirely guaranteed, even at the same face value. Insurance-funded contracts usually test cleaner because the insurer confirms the current benefit in writing; our comparison of trust-funded vs. insurance-funded preneed covers why buyers often prefer them. Buyers on the other side of the table should read preneed diligence for buyers for sampling and confirmation methods.

To test your own figures, run them through the preneed shortfall calculator, shown below this article, with a snapshot first and then a projection or two.