Latest / The Buyout Show with Fexingo: Private Equity, Roll-Ups, and Business Acquisitions / How Private Equity Is Buying Up Funeral Homes
Transcript
- Lucas: So there's this quiet corner of the economy that's been consolidating for decades, but most people only ever encounter it once or twice in their lives, and by then they're not exactly comparison shopping. Luna: You're talking about funeral homes. Lucas: Exactly. The death care industry. It's roughly a $20 billion market in the U.S., and it's been a target for private equity for years. But unlike pet care or urgent care, this is an industry where the emotional weight of the transaction makes it really hard for consumers to push back on price. Lucas: And we're about to see another wave of consolidation. In fact, just last year, a mid-market PE firm called Propel Equity acquired a chain of 12 funeral homes in the Midwest, and their plan is to use that as a platform to roll up independent operators across Ohio, Indiana, and Illinois. Luna: Let's take a step back. We do want to mention that this show is entirely ad-free. If these deep dives into niche industries have helped you think about business differently, and you'd like to support that, there's a link at buy me a coffee dot com slash fexingo. No pressure, just helps keep the conversations going. Lucas: Yeah, exactly. So back to the funeral home play. The big player here is Service Corporation International, or SCI. They're publicly traded, market cap around $12 billion, and they own about 2,000 funeral homes and 500 cemeteries across North America. But they only have about 15% market share. Luna: Which means the rest is incredibly fragmented. Thousands of mom and pop funeral homes, many of them run by families for generations. Lucas: Right. And that fragmentation is exactly what attracts PE. These are small businesses with stable cash flows, no real technology disruption, and a built-in moat: the funeral home industry has high barriers to entry because of state licensing, local reputation, and real estate. Luna: And there's also the pre-need contract angle. A lot of people buy funeral plans in advance, locking in today's prices. That gives funeral homes a kind of float — cash they hold for years before delivering the service. Lucas: That's the key financial metric. Pre-need contracts create a recurring revenue stream, but they also come with a liability. The funeral home has to provide the service at the price agreed, sometimes decades later. If they've invested that cash poorly, or if inflation eats into the margins, they can get squeezed. Luna: So PE firms see an opportunity to professionalize the back office, centralize purchasing for caskets and flowers, maybe even renegotiate real estate leases. But the question is, does that improve the experience for families? Lucas: That's the tension. Look at SCI. They've been accused of upselling and pushing higher-margin packages. There's a well-known case from 2022 where an SCI funeral home in Texas charged a family $8,000 for a basic cremation that independent homes in the area offered for $2,000. Luna: And because people in grief don't shop around, that markup sticks. The FTC's Funeral Rule requires itemized pricing, but studies show that fewer than 20% of consumers even ask for it. Lucas: That's the dark side. But the PE pitch is that they can bring efficiency. A typical independent funeral home might have a 20% operating margin. After consolidation, centralizing embalming, fleet management, and marketing, PE firms claim they can push that to 30% or higher. Luna: And the multiples? What are they paying for these businesses? Lucas: Typically five to seven times EBITDA for a single location. For a platform with multiple homes, it can go up to eight or nine times. Compare that to the broader market — it's not cheap, but it's stable. Funeral home revenue is remarkably recession-proof. Luna: So what's the regulatory landscape? Are there any antitrust concerns? Lucas: Not really at the national level. The FTC has looked at SCI a few times, but because the market is local — most families choose a funeral home within 10 miles of their home — consolidation doesn't raise national antitrust flags. But in a small town, if the PE firm buys both funeral homes, prices can go up significantly. Luna: There was a 2019 study that found that in markets where SCI had a dominant share, the average cost of a funeral was about 18% higher than in markets with multiple independents. That's real money. Lucas: And it's hard to reverse. Once a family sells their funeral home, they're often locked into non-compete agreements for 10 to 20 years. So the independent operators disappear, and the corporate brand takes over. The name on the sign might stay the same, but the pricing and the sales culture change. Luna: Let's talk about one specific deal. Propel Equity's acquisition in the Midwest — what was the structure? Lucas: They bought a 12-location chain called Heritage Funeral Group out of Indiana. Heritage had been built by a single family over 40 years, and the founder wanted to retire. Propel paid around $60 million, or about seven times EBITDA. Their plan is to add 20 to 30 more homes over the next three years, using Heritage as the operating platform. Luna: So they're not just buying a portfolio. They're building a regional roll-up with a centralized call center, a shared logistics network for hearses and flower delivery, and a common pricing strategy. Lucas: Exactly. And they're also going after the cremation trend. Cremation rates have gone from about 25% in 2000 to over 60% now. Cremation is cheaper and lower-margin than a traditional burial, so PE firms are trying to capture volume. They need to process more bodies to maintain revenue. Luna: That changes the business model. You're not selling a $10,000 package with a casket and a vault. You're selling a $2,000 cremation with an urn. You need more volume, and that puts a premium on efficient logistics. Lucas: And that's where PE's operational expertise comes in. They can standardize the process in a way that independent operators often can't. But it also creates a pressure to upsell — 'Would you like a memorial service? How about a bronze urn?' — which can feel exploitative. Luna: Is there any resistance from the industry? I know there are groups like the National Funeral Directors Association that have spoken out against corporate consolidation. Lucas: They've been vocal, but they're also representing their members — the independents who are being bought out. The NFDA has lobbied for stronger state regulations on pre-need contracts and for more transparency in pricing. But the tide is hard to turn. The economics favor consolidation. Luna: What about StoneMor? They're another big player, but they've had a rocky history. Lucas: StoneMor is a publicly traded cemetery and funeral home operator. They filed for Chapter 11 in 2020 after a accounting scandal tied to their pre-need trust funds. They've since restructured, but the case is a cautionary tale about the risks of pre-need cash management. If you're collecting payments today for services 30 years from now, you need to invest that money conservatively. Luna: And some PE firms have been burned. There was a case in 2023 where a private equity-backed funeral chain in the UK collapsed because they overleveraged on acquisitions and couldn't service the debt when interest rates rose. Lucas: Right. So it's not a guaranteed win. The funeral home roll-up works best when you have a patient capital structure, a focus on operational efficiency, and a commitment to maintaining local relationships. The ones that fail are the ones that try to squeeze too much too fast. Luna: So what's the outlook? Will we see more of these deals in the next few years? Lucas: I think so. The demographics are actually favorable: the baby boomer generation is aging, and death rates are rising. The number of deaths in the U.S. is projected to increase from about 3.3 million per year now to over 4 million by 2040. That's a growing market. Luna: And many independent funeral home owners are themselves aging. A 2024 survey found that nearly 40% of funeral home owners are over 60, and many don't have a succession plan. That's a massive opportunity for PE to step in. Lucas: Exactly. The question is whether the consolidation will lead to higher prices and less choice, or whether it will bring better service and more options. My guess is it'll be a mix — some markets will see real improvements in logistics and availability, and others will see price hikes and a loss of personal touch. Luna: And the consumer? We're all going to be a consumer of this industry at some point. What should listeners know? Lucas: Know the FTC Funeral Rule. You have the right to an itemized price list. You can buy a casket from a third party — Costco sells them, believe it or not. And you can compare prices online. Don't assume that the family-owned name on the sign is still family-owned. Check who's behind it. Luna: That's good advice. And maybe plan ahead. Pre-need contracts can lock in prices, but make sure the money goes into a trust that's well-managed. Lucas: Absolutely. The funeral home roll-up is a classic PE story: stable cash flows, fragmented market, aging owners. But the emotional weight of the industry makes it unique. It's worth watching how this plays out.