Thirty percent of your purchase price, converted into units of the buyer's holding company at the price the buyer assigns to those units. If your share of the deal is $5 million, you receive $3.5 million in cash and $1.5 million of units. The $1.5 million figure is the buyer's number, not a market price, and the units cannot be sold until the fund sells the company.
" - q: "Is rollover equity taxed when I receive it?" a: "Usually not. When the deal is structured as a contribution to a partnership under Section 721, or to a corporation where the contributing group holds 80 percent control under Section 351, the rolled portion is not taxed at closing. The cash you receive is taxed now. Your original basis, often close to zero, carries over into the units, so the tax is postponed rather than removed. See how a practice sale is taxed.
" - q: "What is the difference between rolling into a partnership and a corporation?" a: "A partnership holdco sends you a K-1 each year, which can include taxable income even when no cash is paid to you (phantom income). At exit, part of the gain can be ordinary income under Section 751. A corporate holdco gives you stock, no K-1, and a cleaner capital gain at exit. Whether that stock could qualify for the QSBS exclusion is unsettled and should not be assumed.
" - q: "Can my rollover equity be worth zero?" a: "Yes. Your units are common equity. When the company is sold, the lenders are paid first, then any preferred equity and its accrued return, and only then the common holders. Research on orthopedic deals summarized in our sources notes that physician common equity can receive nothing in a moderate downside once debt and the sponsor's preferred are paid. Several large platforms have restructured or filed for bankruptcy since 2023.
" - q: "What happens to my rollover if I retire or leave?" a: "It depends on the good leaver and bad leaver terms in the operating agreement. A good leaver (retirement after the lock-up, death, disability) usually keeps units or is bought out at fair market value. A bad leaver (leaving early, termination for cause, breaching the non-compete) may be bought out at the lower of cost or fair value, sometimes at a discount. Read these clauses before you sign, not after.
" - q: "What is a drag-along right?" a: "A contract right that forces you to sell your units on the same terms when the fund sells its stake. You cannot hold out. The mirror image is a tag-along right, which lets you sell alongside the fund if it sells part of its position. Ask for tag-along rights; drag-along you will almost certainly have to accept.
" - q: "How should I count rollover equity in my retirement plan?" a: "As zero for planning purposes, and as upside if it pays. It is a single private position, it cannot be sold on your schedule, and its value depends on a sale that may be 8 to 10 years away. Build your spending, retirement date, and tax plan on the cash you receive at closing and your post-sale salary. Treat any second bite as a bonus.
" - q: "Can I negotiate the rollover terms?" a: "Often, yes, and more than most physicians realize. The most valuable asks are that your units be the same class as the sponsor's, that no preferred return with PIK accrue ahead of you, tag-along rights, information rights (annual audited financials and quarterly reports), and a put right that lets you sell at retirement. Buyers do not offer these by default, but many will agree to some of them.
" - q: "Should I make an 83(b) election on my rollover?" a: "Only if part of your rollover vests over time tied to your employment. Unvested units tied to continued service are treated as compensation under Section 83. An 83(b) election filed within 30 days of receipt locks in today's value and preserves capital gain treatment on later growth. Miss the 30 days and there is no cure. Ask your deal counsel whether any units are unvested before closing.
" llms_summary: "Explains rollover equity in a private equity physician practice sale: the 20 to 40 percent of price taken as units in the MSO holding company, valued at the buyer's deal price. Deferred under Section 721 (partnership) or 351 (corporation) with carryover basis; taxed at the second sale at 20 percent plus likely 3.8 percent NIIT, with Section 751 ordinary income possible for partnership units. Covers partnership versus corporate holdco (K-1 phantom income, Up-C, QSBS unsettled), vesting and 83(b), the waterfall (lenders, PIK preferred, then common), management fees, good and bad leaver terms, drag-along, tag-along, information rights, planning as if rollover were zero, and a table of what to ask for versus buyer defaults." ---Rollover equity is the part of your sale price that you do not receive in cash. Instead of a check, you receive ownership units in the company that is buying you, usually the holding company that owns the management services organization (the MSO). The textbook deal is 70 percent cash and 30 percent rollover. In practice, 60 to 70 percent cash and 30 to 40 percent rollover is common, and buyers in 2025 and 2026 have pushed more of the price into rollover, earnouts, and holdbacks as the market has cooled.
The pitch is simple. You sell most of your practice now, keep a slice of the bigger company, and when the private equity fund sells that company in a few years, your slice is worth more. That later payday is called the second bite of the apple. Whether it arrives, and when, is covered on the second bite page. This page is about what you are holding in the meantime.
If you are new to why the buyer owns an MSO rather than your practice directly, read what is an MSO first. Your rollover is in the business company, not in a medical entity.
At the deal price, which the buyer sets. If the buyer says the platform is worth $400 million and your share of the transaction is $5 million with 30 percent rollover, you receive $1.5 million of units priced off that $400 million figure. Nobody outside the deal checks that number. There is no exchange, no daily quote, and no independent appraisal unless you ask for one.
This matters because the buyer decides both what your practice is worth and what its own company is worth, and it has an interest in each number. If the platform is later sold for less than the value at which you rolled, your units lose value even if the platform grew. Public healthcare-services companies traded at a median of about 11.5 times EBITDA in 2025, down from 14.5 times in 2024, so the value assigned to a platform can fall even when its business is fine.
Usually not, and this is the one part of rollover that works in your favor. The cash you receive is taxed at closing, mostly as long-term capital gain. The rolled portion is deferred under one of two code sections.
If the holding company is a partnership or an LLC taxed as one, Section 721 says you recognize no gain when you contribute property in exchange for a partnership interest. If the holding company is a corporation, Section 351 gives the same result as long as the group contributing property holds 80 percent control right after the deal. The fund's cash contribution at the same time supplies that control.
Deferral is not forgiveness. Your basis in your practice, which is often close to zero if you built it rather than bought it, carries over into the units. When the units are eventually sold, nearly the whole amount is gain. Under Section 704(c), a partnership holdco allocates that built-in gain back to you at the later sale, so nobody else absorbs it. The tax pillar page covers the rest of the sale; the calculator lets you model cash versus rollover under your own numbers.
Ask this before you sign, because the two behave very differently every year you hold them.
You receive a Schedule K-1 each year reporting your share of the company's income, whether or not you receive any cash. This is phantom income: a tax bill with no distribution to pay it. Many agreements include tax distributions to cover it, but not all do, and the amount may not cover state tax. At exit, Section 751 treats your share of certain "hot assets" (unrealized receivables and depreciation recapture) as ordinary income, not capital gain. Basis tracking is complicated. The benefit is that partnership structures, including the Up-C structure where a public or corporate parent sits above the partnership, preserve Section 721 deferral through later transactions.
You receive stock. No K-1, no phantom income, and the later sale is taxed as capital gain. Whether that stock could ever qualify for the qualified small business stock exclusion under Section 1202 is unsettled. The medical practice itself never qualifies because Section 1202 excludes health services businesses; whether an MSO holding company qualifies has not been resolved. Do not count on it. Our QSBS page explains the open questions.
Sometimes. If part of your rollover vests over time and is forfeited if you leave, that part is treated as compensation under Section 83, not as a tax-deferred exchange. The fix is an 83(b) election filed with the IRS within 30 days of receiving the units. It locks in the current value as your starting point and preserves capital gain treatment on later growth. There is no extension. Separately, some deals grant incentive equity for future services as a profits interest, which is a different instrument from rollover and has its own rules. Ask your counsel to label each piece.
At the bottom. The order in which sale proceeds are paid is called the waterfall. It generally runs as follows.
Private equity buys with borrowed money. The platform's debt is repaid first, in full, before any owner receives anything. Platforms that have run into trouble, such as Envision (Chapter 11 in May 2023, emerged lender-owned) and Radiology Partners (a 2024 restructuring that S&P called tantamount to default, debt of 7.7 times earnings at March 2025), show what it looks like when the lenders are the ones who end up owning the company.
In many deals the fund's own investment is structured as preferred units that earn a set yearly return before the common units receive anything. When that return is paid in kind (PIK), it is not paid in cash; it is added to the preferred balance and compounds. Every year the company is held, the amount ahead of you grows.
This is you, and often the fund as well for its common piece. Whatever remains after the lenders and the preferred is split among the common holders by percentage.
Management fees sit outside the waterfall but ahead of you in a different way. The MSO charges the practice a fee for running it, and the fund often charges the MSO a monitoring fee. Both come out of operating cash before profit is measured, so they reduce the EBITDA on which your units will be valued at the next sale. The Commonwealth Fund's April 2026 study found that rising management fees and opaque accounting were among the top sources of physician dissatisfaction after a sale.
An analysis of orthopedic deal structures in our research notes that in a moderate downside, once the debt and the sponsor's preferred return are paid, physician common equity can receive nothing. This is not a rare edge case; it is how the structure works when a platform is sold for less than it was bought. If your rollover is not the same class of unit as the sponsor's, ask exactly what stands ahead of you and how fast it grows.
Your units are tied to your employment through good leaver and bad leaver clauses. A good leaver usually means retirement after the lock-up period (three years is the common minimum), death, or disability. A good leaver typically keeps the units or is bought out at fair market value, which is determined by the company or its board. A bad leaver means quitting early, being fired for cause, or breaching the non-compete. A bad leaver is often bought out at the lower of cost or fair market value, sometimes at a discount to that, and sometimes the units are forfeited.
Two other rights affect you. A drag-along right forces you to sell your units when the fund sells, on the fund's terms; you cannot hold out for a better price. A tag-along right lets you sell alongside the fund if it sells only part of its position, so you are not left behind holding a minority stake in a company with a new majority owner. Drag-along you will have to accept. Tag-along you should ask for.
Information rights are the quiet term that matters most over an 8 to 10 year hold. Without them, you may not receive audited financials, may not learn about a dividend recap or a refinancing until after it happens, and may have no way to estimate what your units are worth. Ask for annual audited statements, quarterly reports, and notice of any transaction that changes the capital structure.
As a single, concentrated, illiquid private investment that you did not choose and cannot sell. For a physician who receives $5 million at closing with 30 percent rollover, $1.5 million is now in one company, in one specialty, in one fund's hands, with no exit date. For many selling physicians, that is 30 to 40 percent of their net worth in a single position, and how to diversify around it is one of the most common questions physicians ask after a deal closes.
The approach we take is to size the rest of the plan as if the rollover were zero. That means your retirement date, your spending, your children's education funding, and your tax plan should all work on the cash you received and the salary you will earn, without the second bite. If the second bite arrives, it funds things you want but do not need, or it retires early. If it does not, nothing important breaks. The already sold page covers what to do when a rollover is already causing trouble, and the estate planning page covers gifting units while their value is low.
One more planning point: the rest of your portfolio should not add more concentration in healthcare services or in private equity. It should be the boring part.
Buyers present rollover terms as standard. They are standard because sellers rarely negotiate them. The table below compares what buyers offer by default with what a well-advised seller asks for.
| Term | What buyers offer by default | What to ask for |
|---|---|---|
| Class of units | Common units, sometimes a separate physician class | The same class of units the sponsor holds, with the same rights |
| Preferred return | Sponsor preferred with PIK accrual ahead of common | No preferred ahead of you, or a cap on the accrual rate and a cash-pay requirement |
| Tag-along | Not included | Right to sell alongside the sponsor on the same terms in any partial sale |
| Drag-along | Included, on sponsor's terms | Accept, but require same price and form of consideration as the sponsor |
| Information rights | Annual K-1 or 1099, little else | Annual audited financials, quarterly reports, notice of any recap, refinancing, or fee change |
| Put right at retirement | Not included; company option to repurchase | Your right to require repurchase at fair market value after a set date or at retirement |
| Leaver terms | Broad bad leaver definition; repurchase at lower of cost or FMV | Narrow bad leaver (cause only); good leaver at FMV by independent appraisal |
| Vesting | Sometimes a portion vests over 3 to 5 years | Fully vested at closing; if not, 83(b) election within 30 days |
| Re-roll at exit | Sponsor may require you to roll into the next buyer | Right to take cash for at least a stated share of your units at any exit |
| Tax distributions (partnership) | At company discretion | Mandatory distributions covering federal and state tax on allocated income |
You will not get every item on this list, but each one is negotiable, and a seller who asks for none of them is accepting terms written by the other side's lawyers.
Rollover terms are not the deciding factor in every deal, and there are cases where you should not spend much on negotiating them.
If you have a letter of intent or a draft operating agreement in hand, these are the steps that matter in the next few weeks.
Ask for a one-page summary of the holdco's capital structure: total debt, preferred units and their accrual rate, common units by holder, and management and monitoring fees.
Ask your counsel whether the rollover relies on Section 721 or 351, whether the holdco is a partnership or corporation, and whether any units are unvested. Calendar the 83(b) deadline if they are.
Use the table above. Prioritize the same class of units and information rights if you can only win two.
Run the calculator with rollover set aside, and make sure the cash at closing and your new salary support the life you want. Then read the second bite page to decide how much hope to attach to the units.