Understanding ‘Rollover Equity’ When Selling Your Practice

Answer: It is typical for private equity-backed buyers to require sellers to invest some of their purchase price in the acquiring company or an affiliated dental service organization entity. This helps keep you interested in the practice post-sale the same as you were when you owned it, incentivizing you to remain employed there, work to make the entity profitable, give you an opportunity to share in the company’s growth, future sale or other liquidity event. Requiring you to take stock also reduces the cash the private equity firm needs to complete the purchase.

There are tradeoffs, however. The investment is not liquid and the investment gives your new employer much greater control over you following the closing. Whether you ultimately receive the full value of the stock often depends on continued employment and compliance with agreements. Those agreements commonly address issues such as termination for cause, retirement, restrictive covenants, and other post-employment obligations.

The advantages of the investment are that you will share in the growth of the company over time as the value of the investment increases and share in any “liquidity event” involving the company, such as a sale, public offering, or debt restructuring.

To what extent you may sell the stock depends entirely on the terms contained in the shareholder agreement, buy-sell agreement, and related documents. I have not reviewed those agreements. These agreements often restrict transfers and may require continued employment for a specified period. They may also condition ownership on compliance with noncompete and other post-termination obligations.

The taxation of your rollover equity can be problematic. You must consult with your lawyer and accountant about this prior to closing and consider making an election allowed by Internal Revenue Code section 83(b). The deadline for making that election is 30 days following the closing.

If you do not make an 83(b) election, you pay no tax as a result of receiving the stock and instead pay tax each year as the stock vests. The tax is on the difference between the amount you paid for the stock (i.e. the value of the assets you sold) and the fair market value of the stock at the time of vesting. This amount is taxed at ordinary income rates (not the lower capital gain rates). This can be problematic because the tax will be due even though the stock likely will remain illiquid (i.e. even though now vested it remains subject to transfer restrictions).

If you do make an 83(b) election, the payment of tax is accelerated. You elect to pay tax on the difference between the amount you paid for the stock (i.e. the value of the assets you sold) and the fair market value as of the closing (these amounts are typically the same, resulting in no taxable gain) at ordinary income tax rates. However, you will not be taxed again until the stock has vested and has been sold (there are no tax payments as the stock vests). At this time, the tax is paid at the lower capital gain tax rate (usually the lowest long term capital gain rate). In addition, this gain may be excludable from your taxable income under the qualified small business stock rules under Section 1202 of the Internal Revenue Code.

Because these transactions are highly individualized, dentists should consult both legal and tax advisers before closing. Missing the 30-day deadline to file an 83(b) election could eliminate an opportunity for significant tax savings.

This article originally appeared in the September 2026 edition of the Journal of the Michigan Dental Association.