Latest / The Buyout Show with Fexingo: Private Equity, Roll-Ups, and Business Acquisitions / How Private Equity Is Buying Up Funeral Homes
Transcript
- Lucas: Luna, I want to talk about an industry where the customer base is literally guaranteed. One hundred percent mortality rate. Zero churn risk. Luna: You're not pitching me a life insurance company, are you? Because we did that back in season two. Lucas: No, think earlier in the value chain. Funeral homes. Death care. The business of getting bodies from the place of death to the ground, or the flame, or wherever the family chooses. Luna: Right, and I know private equity has been circling this space for a while. But it's not a new play, is it? Service Corporation International has been consolidating funeral homes since the 1960s. Lucas: Exactly. SCI, ticker symbol s c i, is the 800-pound gorilla. They own roughly 1,500 funeral homes and 500 cemeteries in North America. That's about 8 percent of the U.S. market by locations. But here's what I find interesting: the remaining 92 percent is still independently owned, mostly family-run operations with one or two locations. Luna: And that fragmentation is what private equity loves. It's the same pattern we saw with dental practices, vet clinics, car washes. Find a highly fragmented, recession-resistant service industry, roll it up, centralize overhead, and sell at a multiple. Lucas: Exactly. And the death-care industry has some structural advantages that make it even more attractive. First, demand is stable and predictable. The U.S. death rate hovers around 8.5 per 1,000 people annually. That doesn't boom and bust with the economy. Luna: Though I suppose COVID was a temporary boom, if you can call it that. Lucas: Right, a grim spike. But generally, it's a slow-growth business — about 1 to 2 percent volume growth per year, matching population aging. The real profit comes from pricing power and service upselling. Luna: And the margins? I've heard funeral homes can be incredibly profitable. Lucas: Gross margins in the 60 to 70 percent range. Operating margins around 20 to 25 percent for well-run independents. The cost structure is mostly fixed: you need a building, a hearse, an embalming room, and a licensed funeral director. Once those are covered, each additional service is high-margin. Luna: So the PE playbook here is, buy a family-owned funeral home that's maybe doing 150 services a year, and then feed it volume from a central cremation facility or a pre-need sales team. Lucas: Exactly. Take Foundation Partners Group, backed by private equity firm KKR. They've been on a buying spree since 2019. They now operate over 100 funeral homes and 20 cremation centers across the U.S. Their model is to consolidate the back office, build a regional cremation hub, and then route all the cremation work from their acquired homes through that hub. That drives down per-unit cost significantly. Luna: But let's talk about the elephant in the morgue: pre-need funeral contracts. That's where the real money is, right? Selling funeral packages to people before they die. Lucas: Yeah, pre-need is the financial engine. You sell a $10,000 funeral package to a 65-year-old today. That money goes into a trust or an insurance policy. The funeral home gets to invest that money and keep the returns. By the time the person dies 15 or 20 years later, the cost of delivering the service has gone up, but the home has already earned more on the float. Luna: So it's like an insurance float business, similar to Berkshire Hathaway's model with Geico. Only instead of paying out car accidents, you're paying out funerals. Lucas: That's exactly the comparison. And the float is growing because the baby boomer generation is now entering the peak pre-need buying years. People in their 70s and 80s are much more likely to pre-plan. So you have a demographic tailwind driving pre-need sales growth of about 6 to 8 percent annually. Luna: But there's a darker side to this consolidation. A 2025 FTC report found that prices at corporate-owned funeral homes are 25 to 40 percent higher than at independents for the same services. And the quality of care? That's harder to measure, but there are anecdotal reports of families feeling like a number. Lucas: That's the tension in any roll-up. The independent funeral director who knew the family for decades gets replaced by a regional manager focused on metrics. The funeral home might keep its name and its local staff, but the pricing decisions are made at corporate headquarters. Luna: And the unbundling trend is making it worse, isn't it? People are choosing cremation over burial because it's cheaper. So funeral homes are having to charge more for the services they still offer. Lucas: Right. The cremation rate in the U.S. is now over 60 percent, up from 25 percent in 2000. That's a challenge for traditional funeral homes because a direct cremation without a viewing or ceremony costs maybe $2,000, versus a full burial with casket and graveside service at $10,000 or more. Luna: So the PE firms are buying up funeral homes to capture the cremation volume and then pushing add-ons like memorial services, urns, obituary writing, even grief counseling. It's the classic razor and blade model, but with death. Lucas: Exactly. And some firms are going a step further. StoneMor, which is a publicly traded death-care company, has been acquiring funeral homes specifically to cross-sell cemetery plots and pre-need merchandise. They lost money for years, but they've been restructuring and now they're profitable again. Luna: So what's the entry multiple for a typical independent funeral home acquisition? Lucas: Typically 5 to 7 times EBITDA for a well-run home. But you can find smaller ones at 3 to 4 times if the owner is retiring and doesn't have a succession plan. The PE firms then consolidate and try to exit at 10 to 12 times by rolling up a regional platform. Luna: That's a nice spread if you can execute. But the regulatory risk is real. The FTC has been looking at funeral home pricing transparency since the 1980s. And there's always the risk that a state attorney general decides to investigate deceptive pre-need sales practices. Lucas: Yeah, pre-need is heavily regulated at the state level. You have to put a portion of the funds into a trust that's managed by a third party. Some states require 100 percent trust funding. Others allow insurance-funded pre-need, which is more flexible. The PE firms have to navigate that patchwork. Luna: I also wonder about the cultural resistance. People are emotionally attached to their local funeral home. If a community feels like the new corporate owner is gouging them, they might switch to the remaining independent. Lucas: That's a real risk. But the math works in PE's favor as long as the industry remains fragmented. There are about 20,000 funeral homes in the U.S. The top four operators own less than 15 percent combined. So there's decades of consolidation runway left. Luna: And the barriers to entry are actually pretty high. You need a licensed funeral director, which requires two years of mortuary science school and a one-year apprenticeship. Plus, zoning laws make it hard to open a new funeral home in a residential area. Lucas: So the moat is real. And the demographics are a tailwind for at least another 15 years as the boomer generation ages out. I think this is one of those industries where private equity will end up owning 30 to 40 percent of the market within a decade. Luna: That is a fascinating and somewhat morbid prediction. But before we wrap, I have to mention something. We've been doing these deep dives on PE roll-ups for 57 episodes now, and I'm always struck by how much research Lucas puts into each one. Lucas: Well, I have help. And honestly, the fact that this show exists without any ads, without any sponsor pressure, is entirely because of the listeners who chip in on buy me a coffee dot com slash fexingo. It's a small group, but it literally funds the research time, the hosting, the editing. Luna: Yeah. If these episodes have sharpened your thinking about a business you're in or an industry you're watching, that's the goal. And it stays sustainable because of that support. So, genuine thanks to those who do. Lucas: Alright, back to death care. One more angle I think is worth watching: the rise of 'death doulas' and home funerals. That's a small but growing movement that might actually create a new fragmentation vector — people opting out of the professional funeral system entirely. Luna: Interesting. So the PE firms might be buying up market share just as the market starts to shift toward a more DIY, community-based model? Lucas: Possibly. But it's still tiny — less than 1 percent of deaths. For now, the consolidation train has a long track ahead. And I suspect we'll see a few more big platform deals in the next 12 months. Luna: I'll be watching. And maybe pre-planning my own funeral, just to lock in today's prices. Lucas: That's actually not a bad idea. Though I'd recommend shopping around at an independent first.