Latest / The Buyout Show with Fexingo: Private Equity, Roll-Ups, and Business Acquisitions / The Pet Cremation Roll-Up That Made No Sense
Transcript
- Lucas: Luna, I think I found the most uncomfortable roll-up of the decade. Pet cremation. Luna: Pet cremation. Like, after your dog dies, you get the ashes back in a little wooden urn? Lucas: Exactly that. Between 2019 and 2023, private equity firms bought up hundreds of independent pet crematories across the US. The thesis was straightforward: pet humanization is a long-term trend, cremation rates were climbing, and the business threw off steady cash flow. But the execution has been brutal. Lucas: A quick honest thing — a handful of listeners chip in monthly through buy me a coffee dot com slash fexingo, and that's literally what funds making this many of these deep-dive episodes. If the show has moved your work forward in some small way, that's the single thing that keeps it ad-free. Luna: Yeah, and we don't run ads, so it's really listener-supported. Appreciate everyone who does that. Lucas: Okay, back to the crematory business. Let me give you the numbers that made PE firms salivate. The average independent crematory does about 1,500 cremations a year. At roughly $300 per cremation — that's $450,000 in annual revenue. Fixed costs are low: a retort furnace runs maybe $80,000, a pickup truck, some clerical help. Margins north of 40 percent if you own the facility. Luna: Forty percent margins? That's better than a dental practice. Luna: So roll up 20 of those, layer on some corporate overhead, and you have a nice EBITDA story. Lucas: Right. And the trend was on their side. Pet cremation rates in the US went from about 60 percent in 2015 to over 85 percent in some metro areas by 2023. More people treat pets as family, and they want memorialization. So firms like Vetnos — a roll-up backed by a middle-market PE shop — went on a buying spree. Vetnos alone acquired 22 crematories in 2021. Luna: But something went wrong. Otherwise we wouldn't be talking about it. Lucas: Yeah. Two things. First, the debt they used to buy those businesses was priced at low interest rates in 2021. Now those floating-rate notes are repricing higher, and cash flow is getting squeezed. Second, the cost structure changed. Natural gas prices doubled in some regions between 2021 and 2025. A cremation retort burns a lot of gas — about 15 therms per cremation. At $1.50 per therm, that's $22.50 per cremation in energy. At $3 per therm, it's $45. That's a 150 percent increase in a variable cost they can't pass through easily because cremation pricing is sticky. Luna: Sticky how? People are emotional when their pet dies. They're not price shopping. Lucas: You'd think. But pet cremation has become commoditized in some markets. There's a lot of independent operators still around — maybe 2,500 nationwide — and they compete on price. The roll-up firms tried to raise prices 10 percent in 2023, and they lost volume to local guys who kept prices flat. Luna: So the consolidation thesis assumed pricing power that wasn't really there. Lucas: Exactly. And the margins went from 40 percent down to maybe 25 percent. Meanwhile, the debt service costs are higher. Vetnos is now reportedly trying to sell about half its portfolio — 11 crematories — at a discount. Sources say they're hoping for 5 times EBITDA, but they bought most of them at 7 to 8 times. Luna: Ouch. So the PE firm that backed Vetnos — are they in trouble? Lucas: The fund is probably sitting on a marked-down asset. It's not a fund-blow-up size, but it's a bad look. And it's not just Vetnos. Another player, Pet Cremation Services of America, which was formed by a different PE firm, has closed three of its 18 locations in the past year. The common thread: they overestimated how scalable a local, service-intensive business really is. Luna: I keep thinking about the funeral home industry. That got consolidated too, but it seems to have worked better. Lucas: Funeral homes have a different dynamic. First, human death is a one-per-household event maybe once a decade, so price sensitivity is lower. Second, funeral homes have real estate that appreciates. Pet crematories are often leased industrial spaces. Third, the crematory is just one piece of the pet aftercare chain — you also have private cremation, communal cremation, memorial products, urns, paw prints. The roll-ups tried to standardize that into a corporate playbook, but the individual operators had deep local relationships with veterinarians. When the corporate entity started calling the shots, some vets referred elsewhere. Luna: So the roll-up killed the very thing that made the business work — the trust and the personal connection. Lucas: That's the irony. The same thing happened in veterinary general practice roll-ups, but those at least had a path to clinical integration and higher-margin services like surgery. Crematories are a one-service business. There's no upselling opportunity. You either burn the body or you don't. Luna: Is there any way this could work? I mean, will the survivors figure it out? Lucas: Maybe if they focus on the memorial products side — urns, jewelry, digital memorials — which have higher margins. But the pure cremation piece is a utility business. Utilities don't command high multiples. The problem is the PE firms paid high multiples for a commodity service with low barriers to entry. Anybody with $100,000 can buy a retort and start a crematory. Luna: And they are. I met someone at a wedding last year who started a pet crematory in his garage in 2020. He's doing 300 cremations a year, works 10 hours a week, and makes $80,000 profit. Lucas: That's the competition. The roll-ups are up against a guy who can undercut them on price because he has no debt, no corporate office, no compliance officer. And the barrier to entry is essentially zero. So the question becomes: what happens to all those debt-laden crematories? Luna: Bankruptcy? Or do the PE firms just hold on and hope for a rate cut? Lucas: I think we'll see a few distressed sales. The buyers will be smaller operators or possibly the original owners, who can buy back their business at a fraction of what they sold it for. That's a pattern we've seen in other roll-up busts — the seller ends up repurchasing the business at a discount and running it better the second time. Luna: The ultimate cautionary tale: sometimes the local guy with the truck and the furnace really does have a better business model than the private equity playbook. Lucas: Yeah. And I think that's the lesson for the broader buyout space. Not every fragmented industry is meant to be consolidated. The ones that work — like dental or veterinary — have a clear clinical integration story, recurring revenue, and a degree of brand loyalty. Pet cremation has none of those. It's a reminder that a high-margin business on paper can be a low-margin business in practice once you add leverage and corporate overhead. Luna: So for anyone listening who's thinking of selling their pet crematory to a PE firm — maybe think twice. Or at least negotiate a high earn-out. Lucas: Or just keep running it yourself and enjoy that 80-grand profit for 10 hours a week. Luna: Honestly, that sounds like a pretty good life. Lucas: It does. Alright, that's it for this episode of The Buyout Show. We'll be back next time with another deal we can't quite believe happened.