Short answer
A dermatologist, 58, one of four partners in a Southern California group, was offered $4.8 million for her share, 70 percent in cash and 30 percent in rollover equity. Before the letter of intent was signed, the buyer's draft allocation was renegotiated to move roughly $650,000 from a non-compete and a transition agreement into goodwill, an F-reorganization was used so the rollover stayed tax-deferred, and a cash balance plan was funded in the final year of ownership. The estimated cash in hand after tax at closing came to about $1.7 million against a $4.8 million headline, with $360,000 of holdback due later and $1.44 million riding on the second bite. The buyer's original draft would have cost roughly $120,000 more in federal and payroll tax for the same price.
Key facts
- Headline price for her share
- $4.8 million (the group's enterprise value was about 9 times adjusted EBITDA after the scrape).
- Terms
- 70% cash, 30% rollover equity, 7.5% holdback for 18 months, 5-year employment agreement, 25% scrape.
- Allocation change
- Non-compete reduced from $600,000 to $150,000; a $200,000 transition services agreement removed; both reallocated to goodwill.
- Federal and payroll tax difference from the allocation change
- Roughly $120,000 at 2026 rates, before the effect on state tax.
- Estimated cash after tax at closing
- About $1.7 million, plus $360,000 of holdback later, plus $1.44 million of rollover equity with about $534,000 of deferred tax embedded in it.
The situation
Dr. R. was 58, a dermatologist, and one of four partners in a group with three offices in Southern California. The group did general and surgical dermatology, some Mohs, and a growing cosmetic line. The partners had been approached by platforms before and said no. This time two of the four wanted to sell, one was undecided, and Dr. R. wanted to keep working for five or six more years and then stop.
A platform backed by a private equity sponsor offered to buy the group at about 9 times adjusted EBITDA. "Adjusted" meant after the scrape: the buyer recalculated the practice's profit as if each partner were paid about 25 percent less than they had been taking, and priced the practice on that number. Dr. R.'s share of the enterprise value came to $4.8 million. The terms were 70 percent cash, 30 percent rollover equity in the platform's holding company, a 7.5 percent holdback in escrow for 18 months, and a five-year employment agreement with a non-compete.
She came to us with the letter of intent in hand but unsigned. That timing mattered more than anything else that follows.
What the buyer's draft would have cost
The buyer's draft allocated her $4.8 million as follows: $600,000 to a covenant not to compete, $200,000 to a two-year "transition services agreement," and the rest to goodwill and equipment. The equipment included two lasers and a Mohs lab the group had written off under bonus depreciation, so about $180,000 of her share of the equipment price would be depreciation recapture taxed as ordinary income no matter what.
The non-compete and the transition agreement were also ordinary income, at 37 percent federal, and the transition pay would carry payroll tax as well. Against goodwill at 20 percent, that is a 17-point difference on $800,000, plus payroll tax on $200,000. Her CPA and we put the cost of the draft allocation at roughly $120,000 of federal and payroll tax compared with the same dollars as goodwill. The buyer would deduct goodwill and the covenant over the same 15 years, so the buyer's tax position was the same either way.
Buyer's counsel had allocated a large number to the non-compete to make the covenant look well-supported if it were ever challenged in court. That is a legitimate concern for a buyer. It does not require $600,000. The transition services agreement duplicated work already covered by the employment agreement. Neither item was there to hurt her; both were there because nobody on her side had asked about them yet.
What was negotiated before the LOI was signed
The allocation
The non-compete was reduced to $150,000, an amount her transaction attorney was comfortable would still support the covenant. The transition services agreement was dropped; the work it described was already required under the employment agreement. The $650,000 moved to goodwill. The LOI was amended to state that the final allocation would follow these principles, so the point could not be relitigated during exclusivity.
The structure
The group was an S corporation, and the election was twelve years old, so there was no Section 1374 built-in gains exposure. The buyer proposed an F-reorganization: the partners formed a new holding company, dropped the practice under it, converted the practice to an LLC, and sold 70 percent of the LLC interests. The buyer got a stepped-up basis in the assets. The partners' 30 percent stayed in the holding company as a tax-deferred rollover. The practice kept its tax ID and its payer contracts. This is the standard structure, and it was the right one; the review confirmed it rather than changing it.
The rollover terms
Her rollover units were confirmed to be the same class as the sponsor's common equity, with no preferred return or PIK accruing ahead of her at the holding company level (the sponsor's fund-level preferences were a separate matter, and she was told plainly that lenders and any preferred would still sit ahead of common in a sale). She received tag-along rights, annual financial statements, and a repurchase at fair market value rather than cost if she retired after the five-year term. Those were requests; two of the three were granted.
The tax year and the retirement plan
Closing was set for the first quarter, which put the sale and her final year of high owner compensation in the same tax year. The group adopted a cash balance plan for that year. Her share of the contribution, including profit sharing, came to roughly $280,000, deducted against income that would otherwise be taxed at 37 percent federal and 13.3 percent California. The plan covered staff as the nondiscrimination rules require, and the buyer agreed in the purchase agreement that the plan would be terminated and distributed rather than assumed.
The pieces she said no to
A charitable remainder trust was discussed and declined. The letter of intent was already in hand, which made the sale close to "practically certain" under the Hoensheid case, and she did not have a charitable goal large enough to justify giving up the income. A move out of state was never on the table. A larger rollover was declined for the reasons in the FAQ below.
The number
| Line | Amount |
|---|---|
| Headline price for her share | $4,800,000 |
| Rollover equity (30%), tax deferred | ($1,440,000) |
| Holdback (7.5%), paid after 18 months if clean | ($360,000) |
| Her share of banker, legal, and quality of earnings fees | ($110,000) |
| Cash wired at closing, before tax | $2,890,000 |
| Taxable consideration (price less rollover) | $3,360,000 |
| Of which ordinary income (non-compete $150,000, recapture $180,000) | $330,000 |
| Of which long-term capital gain (basis near zero) | $3,030,000 |
| Federal tax on capital gain at 20% | ($606,000) |
| Federal tax on ordinary income at 37% | ($122,000) |
| Net investment income tax (excluded; material participation) | $0 |
| California tax at 13.3% | ($447,000) |
| Estimated cash after tax at closing | $1,715,000 |
| Holdback, if paid in full, after tax | about $240,000 more |
| Rollover equity, at deal value | $1,440,000 |
| Deferred tax embedded in the rollover (20% + 3.8% + 13.3%) | about $534,000 |
The cash balance plan contribution is not in the table because it is not a cost; it is $280,000 of her money moved into a retirement account. Its tax effect was to reduce the ordinary income she paid tax on that year, which lowered the combined federal and state bill by roughly $140,000 compared with not funding the plan.
Two things about the table deserve a plain statement. First, $1.7 million is about 36 percent of the $4.8 million headline. The rest is either deferred (the rollover), delayed (the holdback), paid to advisors, or paid in tax. Physicians who hear "$4.8 million" and plan for $4.8 million are the ones who are surprised. Second, the $1.44 million of rollover equity is carried at the deal value because that is the only value anyone has. It could be worth more in eight years. It could be worth nothing. Her plan does not depend on it.
What changed in her life after closing
Her pay dropped by about a quarter. Her retirement contributions dropped from roughly $280,000 in the final ownership year to the $24,500 deferral plus the $8,000 catch-up and a modest match in the platform's 401(k). Her health insurance, continuing education, and auto expenses stopped being business deductions. Her income tax bracket fell, which opened room for Roth conversions from the IRA that received the cash balance plan, and those conversions are being done in measured amounts each year. The after-tax proceeds were invested to replace the income the scrape removed, with the rollover treated as a possible bonus rather than a retirement asset.
Her malpractice coverage was claims-made. The buyer provided prior-acts coverage for continuing physicians, so she did not need to buy a tail; the retiring partner did, and that cost was negotiated into the purchase agreement as a closing expense rather than a surprise.
What this case study does not show
It does not show a second bite. Her platform has not been sold, and with recapitalizations at their lowest count in a decade, it may be years. It does not show a move to a no-tax state, because there was none. It does not show a charitable strategy, because she chose not to use one. It does not show what a C corporation seller would face, or a young S election, or an earnout; those are on their own pages. And it does not show a result you should expect. It shows a sequence: a term-sheet review before the LOI, an allocation fight that cost the buyer nothing and saved the seller six figures, a structure that kept the rollover deferred, a final-year deduction, and a household plan built on the cash rather than the headline.
If your letter of intent is unsigned, that sequence is available to you. If it is signed, some of it still is. The contact page explains what a review involves and what it costs.
Questions people ask
Is this a real client?
It is a composite. The situation, the sequence of decisions, and the mechanics are drawn from our work with physicians selling to platforms. The name, location, group size, and dollar figures have been changed so that no client can be identified, and the figures are illustrative rather than a record of any one engagement. It is not a promise of a similar result.
Why did the buyer agree to change the allocation?
Because it cost the buyer almost nothing. A buyer deducts goodwill and a non-compete over the same 15 years. The buyer's counsel had proposed a large non-compete allocation out of habit, to make the covenant look well-supported if it were ever litigated. A $150,000 allocation still supports the covenant. The buyer's tax position did not change; the seller's did.
Why not roll more than 30 percent to defer more tax?
Because deferral is not elimination, and the rollover sits behind the platform's lenders and preferred investors. At 30 percent she already had $1.44 million in a single illiquid private position, roughly a fifth of her net worth after the sale. Her plan was built to work with that position worth zero. Rolling more would have deferred about $100,000 of tax per additional $300,000 rolled, in exchange for putting that $300,000 at the back of the waterfall for eight or more years.
Did she owe the 3.8 percent net investment income tax?
Not on the sale of the practice. She worked full time in the practice, so the gain came from a trade or business in which she materially participated, which Section 1411 excludes. Her CPA documented the position. She expects to owe it when the rollover equity is sold, because by then she will be a W-2 employee rather than an active owner of the entity being sold.
What about California tax?
She stayed in California, so the sale was taxed at 13.3 percent on nearly every dollar, and that state tax was effectively non-deductible federally because the SALT cap phases down to $10,000 at her income. A pass-through entity tax election for the sale year was evaluated with her CPA; it required a prepayment by June 15 and coordination with the F-reorganization timing. She did not move states. Moving in the year of a sale is the highest-audit-risk pattern California has, and her family was not going anywhere.
Why a cash balance plan in the final year?
Because it was her last year with high owner compensation and a large ordinary-income component from the non-compete and equipment recapture. At 58, the plan allowed a contribution of roughly $280,000 for her between the cash balance credit and profit sharing, deductible against income taxed at 37 percent federal and 13.3 percent state. The plan was terminated after closing and rolled to an IRA. The buyer's 401(k) had no cash balance component.
What happened to her income?
Her pay fell by about a quarter, in line with the 20 to 30 percent scrape the Commonwealth Fund describes. The employment agreement promised production bonuses that could restore part of it. Her household budget was rebuilt on the lower figure, with the after-tax proceeds invested to replace the difference and the rollover treated as a possible bonus in her mid-sixties rather than a retirement asset.