Short answer
The most expensive mistakes in a private equity practice sale are made before the letter of intent is signed and during the purchase agreement, not at tax time. They include signing an LOI without a term-sheet review, letting the buyer's side set the EBITDA adjustments, accepting a large non-compete allocation taxed at 37 percent instead of 20, ignoring the Section 453A interest charge on deferred payments over $5 million, treating rollover equity as liquid, missing the five-year Section 1374 window, not checking who pays tail coverage, moving states in the year of sale, gifting to charity after the deal is certain, and treating income repair as a promise the buyer must keep.
Key facts
- Non-compete allocation
- Ordinary income at up to 37 percent versus 20 percent for goodwill. A $2 million allocation to a covenant costs roughly $300,000 or more in added federal tax.
- Section 453A
- Interest charge on deferred tax when installment obligations over $5 million are outstanding at year end. Non-deductible for individuals.
- Section 1374
- 21 percent entity-level tax on built-in gain if the S election is less than five years old. The F-reorganization does not cure it.
- Tail coverage
- Roughly 200 percent of the annual premium as a lump sum (a $40,000 premium implies about $80,000). Who pays is contractual.
- Hoensheid
- Tax Court, 2023: a gift to a donor-advised fund two days before closing was taxed to the donor, and the $3.3 million deduction was denied for lack of a qualified appraisal.
- The scrape
- Buyers typically take 20 to 30 percent of practice profit (Commonwealth Fund, April 2026). Income repair is a promise, not a guarantee.
Selling a practice is a transaction most physicians do once. The buyer's team has done it dozens of times. That gap shows up in the same places over and over. Below are ten mistakes, in roughly the order they happen in a deal, with what to do instead. If you have not yet signed anything, all ten are avoidable. If you have, the already sold page covers what can still be done.
Mistake 1: Signing the letter of intent without a term-sheet review
The letter of intent looks harmless. It says it is non-binding, it is only a few pages, and the buyer's representative says it is just a starting point. In practice it does three binding things. It starts an exclusivity period during which you cannot talk to other buyers. It fixes the headline price and the cash and rollover split, which are very hard to move later. And it often sets the framework for the purchase price allocation and the employment terms by reference, so that "market terms" in the LOI becomes the buyer's standard form in the purchase agreement.
The fix is to have the LOI reviewed as an economic document, not just a legal one, before you sign. That review should model the after-tax cash you will receive, identify the rollover structure, and name the terms that must be settled in the LOI because they cannot be won later. Our downloadable list of 25 questions to ask before you sign the LOI is the checklist we use, and the pillar page on selling to private equity explains how exclusivity changes your position.
Mistake 2: Letting the buyer's side set the EBITDA adjustments
Your price is a multiple of EBITDA, and EBITDA is not a fact. It is a calculation with adjustments. The buyer's quality of earnings review will normalize your compensation downward to a "market" physician salary, which creates the profit the buyer is buying (the scrape), and it will scrutinize every add-back you propose for one-time costs and owner perks. If you let the buyer's side run that process alone, the EBITDA that comes out is the lowest defensible number, and at 8 to 10 times, every $100,000 of EBITDA you lose is $800,000 to $1 million of price.
The fix is a sell-side quality of earnings review, or at least a careful add-back schedule prepared by your own accountant, before the buyer's team arrives. Know which adjustments you will defend and which you will concede. The salary the buyer normalizes you to is the salary you will live on. The scrape page connects the EBITDA calculation to your future paycheck.
Mistake 3: Accepting a large non-compete allocation
The purchase price is split across asset classes on Form 8594, and each class has its own tax rate. Goodwill is long-term capital gain at 20 percent federal. A covenant not to compete is ordinary income at up to 37 percent. The buyer deducts both over 15 years, so the buyer often does not care how much goes to the covenant. You should. A $2 million allocation to the non-compete rather than to goodwill costs roughly $300,000 or more in additional federal tax on the same total price, before state tax.
The fix is to negotiate the allocation in the purchase agreement, not accept the buyer's schedule after closing. A non-compete allocation should be small and supportable. If you have not already signed an employment agreement and non-compete with your own professional corporation, ask whether a separate personal goodwill sale is available, which matters most for C corporations. The tax pillar walks through every class.
Mistake 4: Ignoring the Section 453A interest charge on deferred payments
Buyers in 2025 and 2026 have pushed more of the price into seller notes, earnouts, and holdbacks. Deferred payments are taxed under the installment method as they arrive, which sounds like a benefit. But Section 453A adds an interest charge when the installment obligations you hold at year end from sales over $150,000 exceed $5 million in face amount. The charge equals your deferred tax multiplied by the federal underpayment rate, it is not deductible for individuals, and it is owed every year the obligations remain outstanding. Depreciation recapture on equipment under Section 453(i) is also taxed in the year of sale even if the payment comes later.
The fix is to model the deferred consideration before you agree to it. Sometimes a smaller cash price beats a larger price with $6 million of notes. Sometimes electing out of installment treatment makes sense. And if an earnout is tied to your continued employment, the IRS can treat it as compensation, which is ordinary income plus payroll tax. The earnouts and 453A page works through the arithmetic.
Mistake 5: Assuming rollover equity is liquid or has a fixed value
Physicians routinely add their rollover to their net worth at the deal value and plan around it. But rollover units are valued at a price the buyer set, cannot be sold until the fund sells the platform, sit behind the lenders and any preferred equity in the waterfall, and can be worth zero. Platform resales fell from roughly 100 a year in 2021 and 2022 to 13 in 2024, and hold periods have stretched to 8 to 10 years. If the holdco is a partnership, you may also receive a K-1 with taxable income and no cash to pay the tax. When the second sale finally arrives, the gain is usually taxed at 23.8 percent, because the 3.8 percent net investment income tax applies once you are a W-2 employee rather than an active owner.
The fix is to plan the rest of your finances as though the rollover were zero, and to negotiate the terms that protect it: the same class of units as the sponsor, no PIK preferred ahead of you, tag-along and information rights, and a put right at retirement. The rollover equity page has a table of what to ask for, and the second bite page has the resale data.
Mistake 6: Missing the Section 1374 five-year window
Most physician practices are S corporations. If your S election took effect less than five years before the sale, or your corporation was a C corporation when the goodwill was built and later converted, Section 1374 taxes the built-in gain at 21 percent at the corporate level before the remaining gain passes through to you. The F-reorganization that buyers use for S corporation targets does not start, shorten, or cure the five-year period.
The fix is to find out the date of your S election before the LOI. If you are inside the window, the choices are to wait, to price the tax into the deal, or to look at structures such as personal goodwill that move part of the value outside the corporation. The F-reorganization page explains how the standard structure works and where 1374 fits.
Mistake 7: Not checking who pays for tail coverage
If your malpractice policy is claims-made, it covers only claims filed while the policy is in force. When you leave the practice, retire, or the policy is cancelled at closing, you need a tail (extended reporting) endorsement to cover claims filed later for care you already delivered. A tail typically costs roughly 200 percent of the annual premium as a lump sum, so a $40,000 premium implies a tail of about $80,000, and the purchase window after the policy ends is often 30 to 60 days. Who pays is not set by law. It is set by the contract, and if the contract is silent, the answer is you.
The fix is to address tail coverage in the purchase agreement and the employment agreement. For physicians who continue with the platform, the buyer often assumes the group policy and provides prior-acts coverage, which should be confirmed in writing. For retiring or departing partners, and for the selling entity itself, negotiate the tail as a closing cost paid by the buyer or out of the price before it is split. The after-the-sale page lists the other benefits that change at closing, including disability coverage and the retirement plan.
Mistake 8: Moving states in the year of the sale
The plan sounds simple: move to Florida or Texas, then sell, and avoid California's 13.3 percent or New York's up to 10.9 percent. In practice, a move in the same year as a large gain is the single highest-audit-risk pattern the California Franchise Tax Board and the New York Department of Taxation look for. California applies a closest-connections test with a presumption of residency after nine months of presence. New York applies a domicile test plus a statutory residency test (183 days and a permanent place of abode). Both states also reach income from the sale regardless of where you live: California installment payments remain California-source if you were a resident at the sale, and a 338(h)(10) or asset sale of a New York practice is New York-source income even for a Florida resident. Non-compete, consulting, and employment pay is sourced to where you perform the work.
The fix is to decide about a move at least a full year before the sale, complete it with the paper trail the state expects, and accept that some components of the deal will be taxed by your old state anyway. Where a move is not realistic, a pass-through entity tax election can recover part of the state tax as a federal deduction, since the SALT cap phases down to $10,000 in a sale year. The California, New York, Florida, and Texas pages cover each state.
Mistake 9: Gifting to charity after the deal is certain
Giving part of your practice interest to a donor-advised fund or a charitable remainder trust before the sale can remove the gain on the gifted portion and produce a deduction. The timing rule is strict. In Estate of Hoensheid v. Commissioner (T.C. Memo 2023-34), the donor gave stock to a donor-advised fund two days before closing, after the sale was practically certain. The Tax Court taxed the gain to him under the anticipatory assignment of income doctrine, and then denied the entire $3.3 million charitable deduction because he had not obtained a qualified appraisal under Section 170(f)(11). He got neither benefit. Earlier cases (Revenue Ruling 78-197, Dickinson in 2020) respected gifts where the charity was not obligated to sell.
The fix is to make the gift before the letter of intent hardens into a deal, with a qualified appraisal and Form 8283, and with no agreement that the charity must sell. Know the 2026 limits: a 0.5 percent of AGI floor on itemized charitable deductions and a 35 percent cap on the value of itemized deductions for taxpayers in the 37 percent bracket. And know that a charitable remainder trust cannot hold S corporation stock without ending the S election. The charitable strategies page covers CRTs and donor-advised funds in order.
Mistake 10: Treating income repair as guaranteed
Buyers typically take 20 to 30 percent of practice profit as the scrape, according to the Commonwealth Fund's April 2026 study. Your upfront check is a multiple of that forgone income, taxed largely at capital gains rates. The pitch is that your pay will be "repaired" over time through growth, productivity bonuses, and ancillary revenue. Sometimes it is. But most employment agreements set a base salary, often 40 to 50 percent of total compensation compared with 60 to 80 percent before the deal, plus a production formula at $40 to $70 per wRVU. They do not promise that your total pay will return to its old level, and the lock-up of three years or more with a clawback of the lump sum for early departure means you cannot easily leave if it does not.
The fix is to model your household cash flow on the base salary plus a conservative production estimate, and to put the gap between your old income and your new one in a reserve funded from the sale proceeds. Ask what happens to ancillary income you used to receive (imaging, pathology, physical therapy, ASC distributions), because in many deals it moves to the MSO. The scrape and income repair page shows how to build the cash-flow plan, and the cash balance plan page covers the last big deduction available while you still own the practice.
When these mistakes matter less
Not every item applies to every seller. If you are retiring at closing and will not sign an employment agreement, mistakes 7 and 10 largely fall away, and mistake 3 becomes more important because the non-compete is the buyer's main lever on you. If your deal is a small add-on with a single buyer and no rollover, mistakes 2 and 5 are secondary to the question of whether to sell at all. If you live in a no-tax state and are staying there, mistake 8 does not apply. If your estate is modest and you have no charitable intent, mistake 9 is not a mistake for you. Use the list to find the three or four items that apply to your deal, and spend your attention there.
What to do next
Before signing the LOI
Confirm your entity type and the date of your S election. Prepare your own add-back schedule. Decide on charitable gifts and any residency change, both of which must be finished before the sale becomes certain. Model the offer in the after-tax proceeds calculator.
During the purchase agreement
Negotiate the allocation, the rollover terms, the earnout structure and any 453A exposure, and who pays for tail coverage. Have your employment agreement's compensation formula modeled before you accept it.
After closing
Set aside the tax in cash. Plan around the rollover as if it were zero. Read life as a W-2 employee for the retirement plan, Roth, and asset location decisions that come next.
Questions people ask
What is the single most expensive mistake in a private equity practice sale?
Signing the letter of intent without a review of the economic terms. The LOI is mostly non-binding, but it locks you into exclusivity and sets the price, the cash and rollover split, and often the allocation framework. Everything negotiated after the LOI is negotiated from a weaker position, because you have stopped talking to other buyers.
Why does the non-compete allocation matter so much?
Because a dollar allocated to the covenant not to compete is ordinary income to you at up to 37 percent federal, while the same dollar allocated to goodwill is long-term capital gain at 20 percent. The buyer deducts both over 15 years, so the buyer is often indifferent. On a $2 million allocation, the difference is roughly $300,000 or more of federal tax before state tax.
What is Section 453A and when does it apply?
It is an interest charge the IRS adds when you defer tax under the installment method and hold more than $5 million of installment obligations (seller notes, earnouts) at the end of the year. The interest is charged on the deferred tax at the federal underpayment rate and is not deductible. Many physicians with large earnouts or seller notes are surprised by it on their first post-sale return.
How do I know if the Section 1374 tax applies to my practice?
Ask your CPA two questions: when did the S election take effect, and did the S corporation ever hold assets acquired from a C corporation with carryover basis? If the election is less than five years old, or the corporation was a C corporation when the goodwill was built, a sale during the recognition period is taxed at 21 percent at the entity level before the gain reaches you. Converting to an LLC through an F-reorganization does not restart or cure the period.
Who usually pays for tail coverage in a private equity deal?
It depends on the contract. For physicians who stay on, the buyer often assumes the group policy and provides prior-acts coverage. For retiring or departing physicians, and for the selling entity itself, a tail is often needed and should be negotiated as a closing cost paid by the buyer or from the purchase price. Only claims-made policies need a tail. The cost is roughly twice the annual premium, and the purchase window is often 30 to 60 days.
Can I move to Florida or Texas before the sale to avoid state tax?
Sometimes, but not in the year of the sale if you want to avoid an audit. California and New York both scrutinize large-gain years with mid-year residency changes. Both states also source certain sale income to the state regardless of where you live: California installment payments trail back if you were a resident at the sale, and a 338(h)(10) or asset sale of a New York practice is New York-source income. A move that is real and complete well before the sale can work; a move timed around the closing usually does not.
When is it too late to give practice interests to charity?
When the sale is practically certain. In Estate of Hoensheid (Tax Court, 2023), the donor gave stock to a donor-advised fund two days before closing; the court taxed the gain to him and denied the entire $3.3 million deduction because he lacked a qualified appraisal. The safe pattern is to complete the gift before the letter of intent hardens, with a qualified appraisal and Form 8283, and with no obligation on the charity to sell.
Is income repair a contractual promise?
Rarely. Income repair is the idea that your pay will recover toward pre-sale levels through growth, bonuses, or ancillaries. Most employment agreements set a base salary and a production formula; they do not guarantee that your total pay returns to what it was. Buyers typically take 20 to 30 percent of practice profit as the scrape. Plan your household budget on the contract, not the pitch.
I already signed the LOI. Is it too late to fix these?
Not all of them. The allocation, rollover terms, tail coverage, and earnout structure are negotiated in the purchase agreement after the LOI, so they can still change. Charitable gifts are likely too late. Residency changes for this tax year are too late. The 1374 issue cannot be fixed but can be priced. Bring the LOI to your advisors before the purchase agreement draft arrives.