This article is part of our complete legal guide to selling a medical practice.
Our firm represented the selling physician in a medical practice sale with a $9 million purchase price that included an F reorganization, an equity rollover, and a management services agreement. Whether these features are appropriate for a particular practice depends on its facts. The structure is common in private equity practice acquisitions, but it is unfamiliar to most physicians the first time they see it.
Why do buyers want an F reorganization?
Buyers generally prefer to buy assets because they receive a stepped-up tax basis they can depreciate or amortize. Buying stock of an S corporation does not provide that step-up on its own. An F reorganization lets the buyer acquire interests in an entity that is disregarded for tax purposes, which is generally treated as an asset purchase, without a direct asset sale by the practice.
How do the steps work?
- The practice owners form a new holding corporation, owned in the same proportions as the existing S corporation.
- The owners transfer all of their shares of the existing S corporation to the holding corporation. The holding corporation makes its own S election and elects to treat the old company as a qualified subchapter S subsidiary, with the effective dates coordinated so there is no gap in S corporation status.
- The old company converts to a limited liability company under state law. In a medical practice, the resulting entity must still satisfy applicable licensing and professional-ownership rules, which differ by state and entity type.
- In a separate, taxable transaction, the buyer purchases membership interests in the LLC, and any rollover is structured at the holding company or platform level. The F reorganization itself is complete before this step.
The exact sequence and elections depend on the transaction and must be planned with tax advisors. Where state professional-ownership or corporate practice rules apply, a lay buyer generally cannot own the converted medical entity, so the structure is adapted, for example by moving the non-clinical business into the MSO.
What should physicians review?
| Issue | Why it matters |
|---|---|
| Tax result | The allocation of price and treatment of any rollover should be modeled by your CPA before you agree |
| Entity history | Pre-closing liabilities of the practice usually stay with the entity the buyer acquires, so indemnities and escrows matter |
| Contracts and enrollment | Payer contracts, Medicare enrollment, and licenses may require notices or updates even when the legal entity continues. A physician organization generally must report a Medicare change of ownership within 30 days, depending on the enrolled entity and the ownership changes involved. |
| Timing | The reorganization steps must be completed in order before closing, often on a tight schedule |
| Rollover documents | Equity issued as part of the deal carries its own terms, covered in our guide to rollover equity |
Is an F reorganization right for every practice?
No. It is primarily a solution for S corporation sellers and buyers who want asset-purchase tax treatment. Practices organized as partnerships, LLCs taxed as partnerships, or C corporations face different structuring choices. The decision should be made with your tax advisor before the letter of intent is final.
Related guides
- Selling a Medical Practice: The Complete Legal Guide (start here)
- 7 Common Mistakes Physicians Make When Selling a Practice
- Selling Your Practice to Private Equity
- What Is an MSO?
- How to Value a Medical Practice
- The Corporate Practice of Medicine in a Practice Sale
- Stark Law and the Anti-Kickback Statute in a Practice Sale
- Letters of Intent When Selling a Medical Practice
- Rollover Equity: What Physicians Should Know
- Your Employment Agreement After Selling Your Practice
- Non-Competes After Selling a Medical Practice
- Due Diligence When Selling a Medical Practice
- Selling to a Hospital, Private Equity, or Another Physician
About Med Contract Law. Med Contract Law is a focused practice group of McCormick Law & Consulting dedicated to physicians. We represent physicians and physician-owned practices in practice sales, private equity and MSO transactions, and hospital acquisitions. In these matters, we represent the physician side, not hospitals or health systems, so our focus is always on the physician's side of the deal.
If a buyer has proposed an F reorganization, have the structure and documents reviewed before closing. Schedule a confidential consultation to talk through your situation.
Unfamiliar with a term? See our physician contract and practice sale glossary.
Frequently asked questions
What is an F reorganization? It is a tax-free reorganization involving a mere change in identity, form, or place of organization of one corporation. In practice sales, it is used as a pre-closing restructuring of an S corporation.
Why would a buyer ask for one? It lets the buyer obtain asset-purchase tax treatment, including a stepped-up basis, when acquiring an S corporation practice.
Does it affect my taxes? Yes. The allocation of the price and the treatment of any rollover equity should be modeled by your CPA.
Does the practice keep its contracts? The operating entity generally continues, but payer contracts, Medicare enrollment, and licenses may still require notices or approvals. Check each one.