This article is part of our complete legal guide to selling a medical practice.
How does rollover equity work?
At closing, part of the purchase price is paid in equity of the buyer's holding company instead of cash. When the private equity fund later sells the platform, rollover holders typically share in the proceeds. In some structures, the rolled portion can be tax-deferred, for example through a contribution to a partnership-taxed buyer vehicle under IRC § 721. The conditions are technical, the cash portion remains taxable, and a small contribution to an existing corporation generally does not qualify for deferral under IRC § 351. Deals often use structures such as an F reorganization. Tax treatment depends on the exact structure and should be confirmed with your CPA.
What should physicians review before rolling equity?
| Term | Question to ask |
|---|---|
| Class of equity | Is it the same class the fund holds, or a junior class with different economics? |
| Valuation at rollover | Is your rolled equity valued on the same basis as the fund's investment? |
| Distributions | Will the platform make distributions before a sale, or is all value deferred? |
| Repurchase rights | Can the company buy your equity back if you leave, and at what price? |
| Leaver provisions | Does a termination for cause, or a resignation, reduce your equity to cost or less? |
| Drag-along and tag-along | Can you be forced to sell, and can you join a sale on the same terms? |
| Information rights | Will you receive financial information about the platform you now own a piece of? |
What are the risks?
Rollover equity is an investment in a leveraged company you do not control. Its value depends on the platform's performance, debt, and future sale, none of which are guaranteed. A second bite can be larger than the first, or worth little. Physicians should decide how much of the price to roll based on how much risk they can accept, not on projected returns alone.
How does rollover equity interact with employment?
Equity documents are often tied to your post-closing employment agreement. Leaving early, or being terminated, can trigger repurchase at a reduced price. The definitions of cause and good reason in the employment agreement and the leaver terms in the equity documents need to be read together.
Is rollover equity a securities offering?
Generally, yes. Issuing new platform equity to selling physicians requires a securities law exemption, often under Regulation D. Rule 506(b) permits a limited number of non-accredited purchasers but adds disclosure requirements, while Rule 506(c) requires every purchaser to be accredited and verified. The buyer's counsel usually handles the offering, but you should understand what you are being asked to represent about your investor status.
Are there regulatory issues?
Yes. If the platform furnishes designated health services, your rollover equity can be an ownership interest under the Stark Law, and privately held platform equity does not fit Stark's exceptions for publicly traded securities. The ownership chain needs to be analyzed for an applicable exception, and returns should not track the volume or value of your referrals. Under the Anti-Kickback Statute, returns on platform equity are protected by the investment interest safe harbor only if all of its conditions are met, including limits on how much of each class of investment is held by investors in a position to refer and how much of the entity's revenue comes from those investors' referrals (generally 40 percent each). Outside the safe harbor, the arrangement is judged on its facts and intent. See our guide to Stark and the Anti-Kickback Statute in a practice sale.
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
- Your Employment Agreement After Selling Your Practice
- Non-Competes After Selling a Medical Practice
- F Reorganizations in a Medical Practice Sale
- 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 an offer includes rollover equity, have the equity documents reviewed alongside the purchase agreement and employment agreement. 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 rollover equity? It is part of the sale price paid in equity of the buyer's platform rather than cash, giving the seller a stake in a future sale.
Is rollover equity taxed at closing? It can often be structured to defer tax on the rolled portion, but the result depends on the transaction structure. Confirm it with your tax advisor.
Can I lose my rollover equity if I leave? Often, at least in part. Many equity agreements let the company repurchase a departing physician's equity, sometimes at a reduced price.
How much should I roll? It depends on your risk tolerance and financial goals. Rollover equity is illiquid and its value is not guaranteed.