As we continue into 2025, private equity groups are showing an increased interest in recapitalizations and traditional buyouts, creating opportunity for doctors to either cash out on the rollover or see a return from that investment. For organizations weighing the benefits of rollover equity, this decision can be a nuanced one.
What is Rollover Equity?
In short, rollover equity is a form of proceeds in which a seller retains an ownership stake in the practice or transfers their equity into the buyer’s entity. This allows the seller to benefit from future appreciation of the business post-sale. In the dental and healthcare practice industry, rollover equity is a common feature in transactions involving DSOs and MSOs (management services organizations). It serves as a tool for aligning the interests of buyers and sellers while also offering a potentially lucrative second financial payout when the business grows and is later recapitalized or sold again.
Types of Rollover Equity Structures
There are two primary structures for rollover equity in healthcare transactions: HoldCo and Joint Venture (JV) models.
In a HoldCo model, the seller’s equity is rolled into the holding company that owns multiple practices. This structure offers risk diversification, as performance is based on the collective success of all acquired practices. Typically, this results in greater financial backing, operational support, and access to broader growth opportunities.
In a joint venture (JV) model, the seller’s equity is retained within their specific practice or a regional subset of practices. This structure allows for more direct control and potential upside if the individual practice performs exceptionally well post-sale. This type of arrangement is usually more suitable for owners who prefer more control over the investment.
In many cases, buyers may offer a hybrid approach, combining elements of both models to create a tailored solution for sellers.
Key Considerations
Generally speaking, a larger rollover equity position allows the buyer to pay a premium for a seller’s practice. Being a non-cash form of proceeds, this reduces some of the lending restructures that might be a limiting factor on what a buyer may be able to pay. It also reduces the risk for the buyer by aligning the seller’s and buyer’s interest. One major advantage in this situation is that not only is there a larger value at sale, but this also allows for the rollover equity to grow and for the doctor to get a “second bite of the apple”, i.e. also capitalize on the appreciating asset as part of the sale.
Sellers need to be aware of the risks as well. Rollover equity is an investment, meaning its value depends on the performance of the larger entity. If the buyer’s business underperforms, sellers may see little or no return on their rolled equity. The terms of rollover equity agreements can be intricate, involving various financial and legal considerations that must be thoroughly negotiated. Buyers frequently use a combination of vesting requirements, earnouts, and clawbacks to limit the true value on the back end of a deal. A strong understanding of these levers and the options that each buyer can utilize is needed to ensure that sellers secure the optimal structure and make the most of an equity position. Diligence in this area of an agreement can be the difference between a generational wealth opportunity and a flashy sales price that never materializes.
Four Key Questions Sellers Should Ask Themselves
If you’re a seller in the position of evaluating a rollover equity structure, answering the below four questions can help provide guidance on the type of arrangement that would be most aligned to your goals.
- Do you need more immediate liquidity, or are you willing to wait for a larger potential payout?
- Does the acquiring DSO/MSO have a strong history of delivering growth and returns for its partners? What is their track record?
- How do external factors, such as economic cycles and regulatory changes, impact the potential success of your deal?
- Do you fully understand the implications of the legal and contractual terms, including deal structure, employment agreements, and investment terms to safeguard against unfavorable conditions?
Every practice owner’s situation is unique, and the right approach to rollover equity depends on individual goals, risk appetite, and market conditions.
If you’re considering selling your practice and want to explore your best options, including the above questions, reach out to specialist Kyle Webster at .
You can also learn more by tuning in to Kyle’s podcast episode on the topic here.
