Selling Your Practice to Private Equity: The Annex Wealth Management Checklist

Step 1: Write down what cash at close has to pay for

Start with the cash need, not the buyer's valuation. Gather the practice loan payoff letter, the last 12 months of personal spending, the draft employment agreement showing post-sale W-2 pay, and last year's return so your CPA can estimate the sale-year tax.

Set a minimum after-tax cash figure: loan payoff, plus sale-year tax, plus no less than 24 months of any monthly gap between new salary and spending. Budget rollover equity at zero. It cannot pay the mortgage, alimony, or a staff-related expense until there is a buyer and a permitted sale.

At home, the spouse who keeps the books or works the front office often raises the first useful issue: what happens to our paycheck and health coverage after closing? That belongs in the plan before the price. A spouse may lose W-2 income or a 401(k) match at close, which raises the cash requirement.

Annex Wealth Management starts with this math because the portfolio, including sale proceeds, exists to fund monthly spending. A headline price is just a sales number until you know what arrives as usable cash and when.

Set the after-tax cash floor

• Practice loan payoff letter
• Twelve months of spending
• Draft post-sale employment agreement
• Prior-year tax return

Step 2: How is rollover equity taxed when you sell your practice to private equity?

Rollover equity is usually taxed later, not never: a qualifying Section 721 partnership contribution or Section 351 corporate exchange can defer gain, but your old basis carries into the new equity and the deferred gain generally surfaces when that equity is sold. Read the structure memo or term sheet, because “tax-deferred rollover” in a buyer deck is not a tax opinion.

Cash at close creates current gain, current tax, and current liquidity. A rollover defers some gain but leaves you with an illiquid interest in the buyer's group. The comparison matters because tax deferral is not a tax reduction, and the later sale may occur when you have less control over timing.

The IRS generally reports capital gains and losses through Form 8949 and Schedule D. Your CPA will determine whether the sale is capital gain, ordinary income, or a mix based on asset allocation, depreciation recapture, and the deal structure. That allocation can matter more than a polished presentation about “partnership.”

Some moves reduce tax; others merely change its date. A pass-through entity tax, or PTET, election may allow an S corporation to deduct certain state taxes at the entity level, subject to state rules. Gain from a business you actively run may also avoid the net investment income tax in some cases. An installment sale or earnout under Section 453 usually spreads recognized gain as payments arrive; it does not erase it. Section 1202 qualified small business stock is generally unavailable for health-field businesses.

Sale plans drawn up years ago can miss today's terms. Many states now offer PTET elections, some require healthcare-sale review or notice, and buyers often seek larger rollovers and earnouts. Check state rules early, because an election deadline that passes before closing cannot be repaired with better wording afterward.

Deferral keeps the old basis

Tax reducers and tax shifters

Step 3: Run the cash-versus-rollover split on your own numbers

Curtis, a hypothetical 57-year-old divorced orthopedic surgeon, has about $1.4 million saved, pays alimony, and spends roughly $14,000 each month. He owns a small surgery-center stake that a private-equity-backed buyer values at $90,000. His tax basis, the amount not treated as gain, is $10,000.

The offer is 70% cash, or $63,000, and 30% rollover equity, or $27,000. If the rollover qualifies for tax deferral, basis splits in the same proportion: $7,000 goes with the cash and $3,000 goes with the rollover. His taxable cash gain is $63,000 minus $7,000, or $56,000.

At an assumed 25% combined tax rate, for illustration, $56,000 multiplied by 25% is $14,000. Curtis keeps $63,000 minus $14,000, or $49,000 in cash. The remaining $24,000 of gain stays deferred in rollover equity with a $3,000 basis.

If the rollover is taxable, all $80,000 of gain is taxed now. At 25%, that is $20,000. Curtis then has $43,000 of cash and $27,000 of equity he cannot sell, so a taxable rollover costs him $6,000 of cash today. At $14,000 a month, his $49,000 after-tax cash lasts roughly three and a half months. None of those proceeds belongs in his planned part-time-at-age-62 income draws.

Use the calculator on this site to run your own cash share, basis, and assumed tax rate. Watch the last row in this lookup: the added tax from a poorly structured rollover rises from $6,000 to $135,000, and it is due in cash on equity that may be unsellable.

Hypothetical 70% cash / 30% rollover split; basis of $10,000, $50,000 and $200,000; all gain treated as long-term; assumed 25% combined rate, for illustration

A small stake can still squeeze cash

Choose the split by cash need

Step 4: Sign the practice-sale papers in the right order

Signing a letter of intent before a CPA confirms that the rollover qualifies for tax deferral is a timing error. Once exclusivity begins, the buyer's structure tends to stick; on a hypothetical $2,000,000 offer with a 30% rollover, a taxable rollover adds about $135,000 of tax due at close on equity you cannot sell.

A state PTET election deadline that passes before closing cannot be recovered. Terminating the practice 401(k) only after closing can be the wrong order. The IRS has plan-termination rules, and if the buyer's group maintains a successor plan, distributions can be blocked unless the practice plan was ended by resolution before the sale date. Get the plan's written rules from whoever administers it, not a hallway answer.

Step 5: Make these first moves once a letter of intent arrives

Put the cash calculation ahead of the counteroffer. Your CPA needs the allocation terms and rollover structure before exclusivity narrows the room to negotiate. A deal attorney should review the employment agreement, noncompete, and sale paperwork; this article does not value the buyer's equity or replace that work.

A small rollover may not justify a long tax fight if the buyer will not change its structure and the accounting and legal cost exceeds the tax saved. But a large rollover deserves plain answers about basis, sale rights, and what happens if you leave before the next recapitalization.

Annex Wealth Management can place this practice-sale decision beside financial planning for doctors, including debt payments and the accounts that will fund income draws after employment income changes.

Questions for the CPA

Questions for the advisor and plan administrator

• Get the loan payoff letter
• Build post-sale monthly spending plan
• Model tax with and without PTET
• Confirm tax-deferred rollover terms
• Set a minimum cash percentage
• Ask about 401(k) termination timing
• Is the rollover under Section 721 or Section 351, and what basis will I carry?
• Does our S corporation qualify for a PTET election this year, and by what date?
• How is an earnout taxed if paid over three years?
• Will net investment income tax apply to any gain?
• What share of my net worth will rolled equity represent?
• What happens if I leave before recapitalization?
• Does the buyer adopt our 401(k) or require termination?
• When does staff vesting become full?

Where Annex Wealth Management looks first in a practice sale offer

Annex Wealth Management advisors would begin with the practice loan payoff letter, post-sale salary, and monthly spending plan to calculate how much after-tax cash the close must produce. Then Annex Wealth Management would read the term sheet's rollover language with your CPA before the letter of intent is signed. Nothing about the buyer's equity value is assumed.