Structuring the Sale of a Medical S-Corp - Equity vs Asset Sale Considerations

Thanks for the detailed response. The MSO structure makes sense, but I'm wondering about the long-term implications. If I sell the assets but maintain ownership of the S-Corp entity during a transition period, what happens when I want to fully exit? Also, how does compensation typically work in these arrangements - is it usually a percentage of collections or something else?

When you want to fully exit, you'll typically transfer your ownership shares to another physician. The MSO agreement usually includes provisions for this transition. This could be a new physician employee or partner who takes over your ownership role while the MSO continues to handle the business operations. Regarding compensation structures, most MSO arrangements involve a management fee of around 15-25% of collections, though I've seen arrangements ranging from 10-40% depending on services provided. Sometimes there's a base fee plus percentage. The MSO typically handles everything non-clinical: billing, HR, facilities, equipment, marketing, etc., while the physician entity handles all clinical decisions and care.

Did you find taxr.ai easy to use without an accounting background? I'm in pre-discussions about selling my dermatology practice and my accountant seems to be giving very generic advice. How detailed does the analysis get for different sale structures?

I'm skeptical about any online tool handling something this complex. Did your attorney actually think the analysis was legitimate? These deals have so many state-specific regulations, especially with medical practices and the corporate practice of medicine issues.

It was surprisingly straightforward to use without an accounting background. The interface walks you through uploading your documents and asks targeted questions about your situation. Within a day, I had a detailed analysis showing tax implications under different sale structures and price allocations. It got very granular - breaking down ordinary income vs. capital gains by asset category. My attorney was initially skeptical too, but was actually impressed by the quality of the analysis. He said it saved us time because it focused our discussions on the specific tax structures that would work best in our situation. The system accounts for state-specific regulations - you input your state during setup, and it factors those considerations into the analysis. For me in California, it specifically addressed our state's strict corporate practice of medicine laws.

How does this actually work? Isn't it just going to put you in the regular IRS queue like everyone else? I've been trying to get through to the IRS about a similar issue for months.

This sounds too good to be true. The IRS doesn't give specific guidance on hypothetical transactions. At best they'd point you to general regulations. What specific type of agent were you connected with that could actually give this kind of advice?

It doesn't put you in the regular queue - that's the whole point. Claimyr uses a system that navigates the IRS phone system and secures your place in line, then calls you when an agent is about to be connected. It saved me from having to sit on hold for hours. It's basically like having someone wait in line for you. I was connected with a senior tax specialist in the business division. You're right that they don't give hypothetical guidance, but my situation wasn't hypothetical - I had a letter of intent with specific proposed allocations. The agent reviewed the relevant tax code sections with me and clarified how the IRS typically treats personal goodwill in medical practice sales when there's an existing employment agreement with non-compete provisions. This was exactly the technical clarification I needed to counter the buyer's aggressive tax position.

That's a great point about payor contracts I hadn't fully considered. Do you know typically how long the Medicare/Medicaid re-credentialing process takes after an asset sale? And is there any way to expedite this to minimize disruption?

Medicare provider number applications after an asset sale typically take 60-120 days, though I've seen it take up to 6 months in some regions. Commercial insurers vary widely - some can be done in 30 days, others take 4+ months. There are a few ways to minimize disruption. First, you can structure a transition services agreement where you continue billing under your existing provider numbers during the transition (with proper legal guidance - this needs specific contractual terms). Second, start the credentialing process immediately after signing the LOI, not after closing. Third, some states allow you to submit a "change of ownership" for Medicare rather than a completely new application, which can be faster.

The step transaction doctrine is definitely a concern in these deals. The IRS may collapse a series of transactions into a single transaction if they appear to be pre-arranged steps of a single transaction. In medical practice/MSO arrangements, this often comes up when the practice "sells" assets to the MSO but continues operating as before with artificially high management fees flowing back. If the IRS applies the step transaction doctrine, they could recharacterize the entire arrangement, potentially causing the S-Corp to lose its status or treating the management fees as disguised purchase payments with different tax treatment. To avoid this, the MSO arrangement needs to have legitimate business purpose beyond tax advantages, the management fees must represent fair market value for actual services, and operational control needs to be appropriately divided between clinical (physician) and non-clinical (MSO) functions.

This is incredibly helpful insight about the valuation methodology impact on tax treatment. I hadn't fully grasped how the buyer's preferred valuation approach could essentially force me into ordinary income treatment on what should rightfully be capital gains. The 24-month earnout structure you mentioned sounds like a smart compromise - it seems like it would give me time to properly evaluate the MSO's operations while maintaining some control during the transition. Did you find that having the earnout tied to specific performance metrics helped or complicated the arrangement? I'm wondering if there's a risk of the MSO making operational changes that could negatively impact the earnout payments. Also, you mentioned orthopedics having different compliance requirements - I'm in internal medicine, so I imagine the regulatory landscape might be somewhat different. Did you encounter any specialty-specific issues with payor contract transfers or credentialing that I should be aware of?

The earnout structure definitely helped, but you're right to be concerned about performance metrics. We tied it to gross revenue and patient retention rather than profitability, which prevented the MSO from manipulating expenses to reduce my earnout. I'd strongly recommend avoiding net income-based earnouts since the MSO controls operational decisions that directly impact profitability. For internal medicine, you'll likely face fewer specialty-specific regulatory hurdles than orthopedics, but payor credentialing can still be tricky. Primary care contracts often have different requirements around medical home designations and quality reporting that need to transfer properly. Make sure your purchase agreement addresses who handles MIPS reporting during the transition period - this caught us by surprise. One thing specific to internal medicine practices is that many have ancillary revenue streams (lab work, imaging, etc.) that may require separate credentialing processes. The MSO structure works well for these since they can often handle the non-clinical ancillary services directly, but make sure the purchase price allocation properly reflects the value of these revenue streams. Also consider your existing patient panel demographics - if you have a high percentage of Medicare patients, the provider number transition becomes even more critical since any disruption in Medicare billing can significantly impact cash flow.

This is extremely valuable information about the Section 409A implications - I hadn't even considered how the employment agreement for the successor physician could trigger deferred compensation rules. That seems like exactly the kind of technical detail that could derail an otherwise well-structured transaction. The point about documenting the management fee with a formal valuation study is particularly important. I'm wondering - did you hire an independent valuation firm specifically for this, or was it something your attorney or CPA could handle? Given the IRS scrutiny you mentioned, it seems like having third-party validation of the fee structure would be essential. The retirement plan complications you mentioned are also concerning. How far in advance did you need to start planning for the plan termination? I have a decent amount in our practice 401(k) and hadn't thought about how the sale structure might force early distribution of those assets. One follow-up question about your 18-month transition period - were you able to maintain full clinical autonomy during that time, or did the MSO start influencing clinical decisions even before the ownership transfer was complete?