Quality of earnings for a funeral home: what the buyer's accountant will test

A seller’s recast tells the buyer what the business earns. A quality of earnings review is how the buyer finds out whether to believe it. For a funeral home, that means testing things a general accountant may never have seen: cash-advance pass-throughs, insurance assignments, preneed deposits, and a call count that should match the deposits to the dollar.

This guide walks through the tests in the order a buyer’s accountant usually runs them, and what a seller can do first. It sits in our valuation, finance, and tax hub.

What is a quality of earnings review for a funeral home?

It is an independent analysis of whether a business’s historical earnings are accurate, recurring, and likely to continue after a sale. It ends in one adjusted earnings figure that the buyer and lender will price and lend against.

SBA’s own definition is a useful benchmark. SOP 50 10 8.1 describes a QoE as “a financial due diligence report that examines the reliability, sustainability, and accuracy of a business’s historical and projected earnings.” Our definition of quality of earnings covers the terms that appear in a report.

When does a lender require a QoE?

SBA requires one for initial acquisitions and business expansions where the purchase price is $3 million or more. The threshold is measured before buyer equity, seller debt, or other financing is applied.

The rule arrived with SOP 50 10 8.1, which took effect October 1, 2026. Per SBA Information Notice 5000-880695, the new SOP governs applications that receive an SBA loan number on or after that date. Under it, the QoE must be independent, prepared for the lender, and “must not be prepared by or for the seller.” A buyer may commission one early, but the lender can rely on it only after its own approved vendor reviews it. The lender must then use QoE earnings when it tests debt-service coverage, and reduce the loan if coverage falls short.

Two details matter for funeral homes. Owner buyouts and ESOP deals are exempt. And the SOP waives the QoE for an acquisition of an owner-occupied special purpose property that is integral to the business, though the lender must document why the property qualifies. Whether a particular funeral home fits that exception is the lender’s call, so do not plan around it. Outside SBA, consolidators and private equity buyers commission their own financial diligence regardless of size.

How does the accountant tie revenue to the call records?

By matching every case in the test period to its contract, its price list, and its deposit. Revenue that cannot be traced to a call, or calls that cannot be traced to revenue, become adjustments.

The FTC Funeral Rule helps here. Under 16 CFR Part 453, providers must give each family an itemized Statement of Funeral Goods and Services Selected and keep a copy, along with each price list, for at least one year. Those records let the accountant check that what was charged matches the General Price List (GPL) in effect.

The last row feeds the second number in the Four-Number Funeral Home Valuation Screen, average revenue per call by disposition mix.

What does the cash proof show?

It shows whether money in the bank matches the earnings on paper. SBA requires the proof on both a trailing 12-month basis and for the last two fiscal years.

Funeral homes have unusual cash flows that make this test revealing. Insurance companies pay assigned policy proceeds weeks after a service. Trusts release funds when a preneed contract matures. Cash advances flow in and straight back out. Trade work for other firms may be paid in bulk. Each must be separated before deposits can be compared with revenue.

The SOP also requires the QoE to reconcile accountant-prepared statements, tax returns, internal statements, and IRS transcript data. A gap between the internal P&L and the tax return is not fatal, but it needs a written bridge.

How is preneed accounting tested?

The accountant checks when preneed money is recognized as revenue and whether trust and insurance income will continue. Getting the timing wrong can make a year with heavy preneed sales look far more profitable than it was.

Large operators defer that revenue. In its FY2025 Form 10-K, Service Corporation International says revenue from preneed sales “is deferred until” the merchandise is delivered or the services are performed, and that unfulfilled insurance-funded contracts are not on its balance sheet because the contract is between the customer and the insurer. Many small firms keep cash-basis books, where a preneed payment can land in revenue the day it arrives. A QoE moves it out.

The accountant will also separate insurance commissions and trust income from operating revenue and ask whether each continues after closing. Our guide to how preneed trust earnings and insurance commissions affect value covers those lines, and the backlog’s funding is tested separately in preneed diligence.

What payroll and owner-compensation tests come up?

The SOP lists them: the report must document every add-back and adjustment, including “above- or below-market owner compensation, related-party transactions, deferred maintenance,” and cash-versus-accrual differences.

In a funeral home, that usually means pricing the owner’s and family’s roles at market wages, adding on-call pay that was never recorded, normalizing rent paid to the owner’s real estate entity, and rejecting “one-time” repairs that recur. Our guide to funeral home add-backs sorts which items usually survive.

Why do cutoffs and accruals matter?

Because a cash-basis funeral home records revenue when it is collected, not when the service happens. Moving cases into the right period can shift earnings by tens of thousands of dollars.

A service in late December paid by an insurer in February belongs to December’s year. Inventory bought in bulk before year-end should not hit cost of goods all at once, and expenses prepaid in December for the coming year belong to that coming year. Expect the accountant to rebuild each period on an accrual basis before comparing years. Receivables at closing are settled separately in the working capital true-up.

Is a sell-side QoE worth it?

Often, for larger firms or messy books. It cannot stand in for the SBA lender’s report, but it lets the seller find the problems first and fix or explain them on the seller’s schedule.

1. Close the books monthly, with cash advances, trade work, and preneed in separate accounts.
2. Build a case list for three years that ties to deposits and itemized statements.
3. Reconcile the preneed register to trust statements and insurer confirmations.
4. Write a bridge from the internal P&L to each tax return.
5. Document every add-back with a source record.

Our due diligence workstreams show where the QoE sits among the buyer’s other reviews.