Key Takeaways For Atlanta Dentists
- After-tax proceeds are the number that shapes your outcome. Transaction costs, debt payoff, allocations, federal tax, 3.8% NIIT, and Georgia’s 4.99% flat tax all reduce the headline price.
- Purchase-price allocation among goodwill, equipment, non-compete, and consulting determines how much is taxed at capital-gains versus ordinary rates, which can create a large federal rate gap.
- Georgia taxes every gain component at the same flat 4.99% rate, with no preferential capital-gains treatment. Sellers age 62 and older may also shelter up to $65,000 per person through the state’s retirement-income exclusion.
- Rollover equity is illiquid and depends on DSO performance, so it does not function as day-one cash. A higher headline price with heavy equity can produce less spendable cash than a lower all-cash offer.
- McLerran & Associates models these variables before an owner signs. The firm runs CPA-led EBITDA analysis and multi-year, multi-structure forecasts so sellers negotiate with clear after-tax numbers.
Talk through your potential sale with McLerran & Associates in a confidential call.
The Proceeds Waterfall: Headline Price To Net Cash At Close
The waterfall below shows how a $3,000,000 headline price can shrink to roughly $1,000,000 in day-one cash once equity, costs, debt, and taxes are subtracted. It uses a hypothetical Atlanta general practice, and every assumption is illustrative. This is not a prediction or benchmark. Actual outcomes depend on your practice, deal structure, entity type, depreciation history, and tax situation. Confirm every figure with a dental-specific CPA.
Illustrative assumptions: headline price of $3,000,000; cash at close of 70% ($2,100,000); rollover equity of 30% ($900,000); allocation of $2,400,000 to goodwill, $300,000 to fully depreciated equipment, $200,000 to a non-compete covenant, and $100,000 to a consulting or transition agreement; practice debt of $200,000; transaction costs of approximately 5% of cash at close ($105,000); seller is a married Atlanta resident filing jointly, materially participating in the practice, with other income placing the goodwill gain in the 20% long-term capital-gains bracket.
- Headline price: $3,000,000 (illustrative)
- Less: rollover equity (not day-one cash): −$900,000 → cash portion = $2,100,000
- Less: transaction costs (advisory, legal, accounting, illustrative ~5% of cash at close): −$105,000 → $1,995,000
- Less: practice debt payoff: −$200,000 → $1,795,000
- Less: ordinary-income components. Equipment recapture is $300,000 at an illustrative 37% federal ordinary rate, or $111,000. The non-compete is $200,000 at 37%, or $74,000, and consulting is $100,000 at 37%, or $37,000. Total federal tax on $600,000 of ordinary income: −$222,000 → $1,573,000
- Less: federal long-term capital gains on goodwill ($2,400,000 at illustrative 20% rate): −$480,000 → $1,093,000 (The IRS long-term capital gains rates for 2026 place the 20% rate at taxable income above $613,700 for married filing jointly, per Rev. Proc. 2025-32.)
- Less: 3.8% NIIT. This illustration applies NIIT only to the non-compete allocation as a conservative assumption. Goodwill gain is generally outside NIIT for a materially participating owner under IRC §1411. NIIT on $200,000 of non-compete income is −$7,600 → $1,085,400
- Less: Georgia flat income tax at 4.99% on total recognized gain. This example applies 4.99% to $1,800,000 of net recognized gain, for −$89,820 → approximately $995,580
Illustrative net cash at close: approximately $995,000–$1,050,000 (range reflects rounding and variable assumptions). Separately, the after-tax value of rollover equity at a hypothetical future recapitalization is deferred, illiquid, and contingent, and is not included in day-one proceeds.
That gap between the $3,000,000 headline and roughly $1,000,000 in day-one net cash is typical of DSO deals. It reflects the combined effect of the cash-versus-equity split, ordinary-income allocations, and layered federal and state taxes, which remain negotiable before the letter of intent (LOI) is signed.
How Purchase-Price Allocation Shapes Your Tax Bill
In a DSO dental practice sale, asset sales dominate over stock sales. Roughly 95% of dental practice sales are structured as asset purchases because buyers receive a fresh stepped-up tax basis and avoid inheriting the seller’s liabilities. The purchase-price allocation is the schedule that divides the total price among asset classes under IRC §1060 and IRS Form 8594 (Asset Acquisition Statement). Both buyer and seller file matching Form 8594 allocations, and a written allocation in the purchase agreement is generally binding on both parties.
The four asset classes most relevant to a dental practice sale, and their typical federal tax treatment for the seller, are:
- Goodwill (Class VII): Long-term capital gain, taxed at 0%, 15%, or 20% federally depending on taxable income. This category is usually the most tax-efficient component for the seller and often the largest portion of a dental practice’s value.
- Equipment and furnishings (Class V): Ordinary income up to prior depreciation taken, under IRC §1245, which is called depreciation recapture. Any gain above original cost may receive capital-gains treatment. This category is usually the least tax-efficient component for the seller.
- Non-compete covenant (Class VI): Ordinary income to the seller, regardless of label. The buyer amortizes it over 15 years under IRC §197.
- Consulting or transition agreement: Ordinary income to the seller, with potential payroll tax implications depending on whether the seller is treated as an employee or independent contractor after closing.
The allocation functions as negotiated price, not simple paperwork. A DSO buyer often prefers more value in equipment and non-compete agreements because those deductions arrive faster than goodwill, which is amortized over 15 years. The seller prefers the opposite direction. Every dollar shifted from goodwill into equipment or non-compete is taxed at ordinary rates instead of capital-gains rates, which can create the federal rate gap described earlier. That allocation schedule at the back of the purchase agreement is effectively the second half of your price.
Depreciation Recapture: Why Equipment Can Trigger Ordinary Rates
Equipment is the least tax-efficient asset class in the allocation because of depreciation recapture. That recapture is the IRS mechanism that collects ordinary income tax on the tax benefit a seller previously received by depreciating personal property. Under IRC §1245 (IRS Publication 544, Sale of a Business), when depreciable equipment sells for more than its adjusted tax basis, which is original cost minus accumulated depreciation, the difference up to the original cost is taxed as ordinary income rather than capital gain.
The most common unpleasant surprise in a DSO asset deal involves Section 179 expensing and bonus depreciation. Under current law, 100% bonus depreciation is now permanent for property acquired after January 19, 2025, and the Section 179 expensing limit for 2026 is $2,560,000. A dental practice that aggressively expensed equipment such as CBCT scanners, intraoral scanners, chairs, and CAD/CAM mills may have an adjusted basis near zero in that equipment. When the DSO allocates $300,000 to equipment in the purchase agreement, the entire $300,000 can return as ordinary income recapture, taxed at rates up to 37% federally in 2026.
IRC §453(i) requires depreciation recapture to be recognized in the year of sale, even if the seller carries a buyer note and reports the rest of the gain on the installment method over multiple years. A seller financing part of the price needs cash available to cover the recapture tax bill in year one, even while most proceeds arrive later.
Georgia Tax Treatment Of A Dental Practice Sale
Capital gains tax on selling a dental practice in Georgia operates differently from the federal system in one key respect. Georgia does not offer a preferential state rate for long-term capital gains. Georgia’s flat individual income tax rate for 2026 is 4.99%, enacted by HB 463 (the Georgia Economic Growth and Tax Relief Act of 2026), signed by Governor Kemp on May 11, 2026. That rate applies identically to goodwill gain, equipment recapture, non-compete income, and consulting payments.
Georgia has no state equivalent of the federal 3.8% NIIT, and no Georgia county or city levies a local income tax on individuals. Atlanta sellers therefore face the state flat rate on top of federal taxes. Georgia’s income tax base starts from federal adjusted gross income, so gain recognized on a dental practice sale flows into the Georgia base after applicable federal adjustments.
The rate is set by statute and subject to scheduled further reductions toward a floor of 3.99% if state revenue conditions are met. Those steps depend on revenue performance and can pause. Any Georgia rate beyond tax year 2026 should be treated as a planning assumption rather than a published figure. Confirm the year-of-sale rate with a dental-specific CPA.
One Georgia-specific planning point can matter for older sellers. Georgia’s retirement income exclusion covers capital gains for taxpayers age 62 and older, with limits of up to $35,000 per person for ages 62 to 64 and up to $65,000 per person at age 65 and older. For a qualifying married couple, each spouse can claim the exclusion separately. The exclusion ceiling is shared across several income types, so a seller already drawing pension income may have limited room remaining for practice-sale gain. Discuss this interaction with your CPA well before closing.
The 3.8% Net Investment Income Tax And Dental Practice Sales
The net investment income tax (NIIT) is a 3.8% surtax imposed by IRC §1411 on the lesser of a taxpayer’s net investment income or the amount by which modified adjusted gross income (MAGI, which is adjusted gross income with certain add-backs) exceeds statutory thresholds. For 2026, those thresholds are $250,000 for married filing jointly, $200,000 for single filers, and $125,000 for married filing separately. These thresholds are not indexed for inflation, so more taxpayers become subject to the tax over time.
Whether the NIIT applies to a dental practice sale depends heavily on the purchase-price allocation and the seller’s level of participation in the practice. Under IRC §1411(c)(2), the NIIT applies to trade or business income only if the business is a passive activity for the seller under IRC §469. A dentist who materially participates in the practice, which describes most selling dentists, generally excludes goodwill gain from the NIIT base. However, gain attributable to passive or investment-character items, and potentially non-compete payments, may be captured. The same headline price can therefore create very different NIIT exposure depending on how the price is divided among asset classes.
The NIIT is reported on Form 8960 and paid with the individual’s Form 1040. Taxpayers expecting significant NIIT liability should adjust estimated tax payments to reduce the risk of underpayment penalties.
Model your NIIT and Georgia tax exposure with McLerran & Associates.
Cash At Close Versus Rollover Equity In DSO Offers
Rollover equity in a DSO dental practice deal is one of the most misunderstood elements of an offer. Rollover equity is an ownership interest in the DSO or its parent company, not cash. Its value on day one is theoretical. It depends on the DSO’s future performance, the private equity sponsor’s exit timeline, often 5 to 7 years, the seller’s position in the capital stack, and whether a liquidity event occurs at a favorable valuation.
A higher headline price with a heavy equity component can net less spendable cash than a lower all-cash offer. Consider two illustrative offers on the same practice. The first is $3,000,000 with 70% cash at close, or $2,100,000. The second is $3,500,000 with 50% cash at close, or $1,750,000. The second has the higher headline but delivers $350,000 less in day-one cash before taxes. After applying the same tax waterfall to each cash portion, the gap in spendable proceeds can widen further. The extra $500,000 of “value” in the second offer exists only on paper and remains subject to DSO performance risk that could reduce it significantly.
Equity defers the tax but carries immediate risk, and it is not spendable cash. Rollover equity can lose value if the platform underperforms, takes on excessive debt, or broader M&A market multiples cool, so sellers often treat it as a speculative investment. The cash-at-close percentage and earnout structure are negotiable terms. For current data on upfront cash ranges in Atlanta DSO deals, see How Much Upfront Cash Do DSOs Pay for Atlanta Practices?
Earnouts And Holdbacks: Tax Treatment And Timing
Earnouts are contingent payments tied to post-closing performance metrics such as production targets, EBITDA thresholds, or patient retention rates. They are paid only if those targets are hit, and the DSO typically controls the operations, staffing, and marketing that influence whether targets are reached. An earnout structured as contingent purchase price can qualify for installment-method reporting under IRC §453, which spreads gain recognition across the years payments arrive. An earnout tied to the seller’s continued personal production may be recharacterized as compensation for services, which is ordinary income plus payroll tax, rather than purchase price.
Holdbacks are escrow amounts withheld at close to cover potential indemnification claims, typically held for 12 to 18 months. They usually earn no interest and are released only when the conditions governing release are satisfied. Both earnouts and holdbacks are negotiable. Pro-rata earnout provisions, later start dates that account for integration disruption, and clearly defined measurement methodologies all protect the seller.
One timing rule applies regardless of structure. IRC §1245 depreciation recapture is taxed in year one, even if the cash arrives in later years through an earnout or seller note. A seller counting on earnout cash to fund the recapture tax bill may face a liquidity problem in year one.
What Is Negotiable And How An Advisor Models After-Tax Outcomes
Earnouts and holdbacks are two levers, but they are not the only ones. Three elements of a DSO deal can materially change your after-tax proceeds, and all three are negotiable before the LOI, not after:
- Purchase-price allocation: The split among goodwill, equipment, non-compete, and consulting determines how much of the price is taxed at capital-gains rates versus ordinary rates. Every dollar moved from goodwill into equipment or non-compete costs the seller at the federal rate gap described earlier.
- Cash-at-close percentage: A higher cash-at-close percentage reduces the portion of the deal that is illiquid, contingent, and subject to DSO performance risk. This term is negotiable, and the right advisor knows which buyers in the Atlanta market tend to be more cash-heavy.
- Earnout structure: Pro-rata provisions, later start dates, and clearly defined measurement methodologies protect the seller from losing earnout value because of post-close operational changes outside the seller’s control.
McLerran & Associates is a dental-specific sell-side advisor and advocate that models these variables before an owner signs. The Atlanta office, led by Matt Sutton, runs CPA-led EBITDA analysis and multi-year, multi-structure financial forecasting across 3-, 5-, 7-, and 10-year horizons, so owners see real after-tax proceeds across deal structures rather than headline multiples. McLerran has closed roughly 2,000 practice sales, representing approximately $2 billion in transaction volume, and has evaluated more than 10,000 practices. That depth supports a structured, auction-like bid process that typically generates around 10 offers and has produced approximately 30% higher valuations on average than owners achieve selling on their own. The firm’s transaction rate of approximately 85–90% reflects what happens when the arithmetic is done before the LOI.
For a broader view of how Atlanta DSO deal structures and outcomes compare, see Atlanta DSO Acquisitions: 2026 Deal Structures & Outcomes.
Questions To Review With Your Dental CPA
A dental-specific CPA can be a key partner before you sign any LOI or purchase agreement. Consider asking:
- What is my normalized EBITDA, and which add-backs are defensible under buyer scrutiny?
- What is the proposed cash-to-equity ratio, and what is the realistic after-tax value of the rollover component?
- Is this deal structured as an asset sale or a stock sale, and how does that affect my depreciation recapture exposure?
- What does the allocation schedule look like, and how much of the price sits in goodwill versus equipment and non-compete?
- Will I be a Georgia resident at the time of closing, and does the retirement income exclusion apply to any portion of my gain?
- Does the 3.8% NIIT apply to any component of this deal given my MAGI and level of material participation?
Conclusion: Focus On The Net Number Before You Sign
The headline price on a DSO term sheet rarely matches what you keep. The purchase-price allocation, the cash-versus-equity split, and Georgia’s flat income tax can be some of the main factors that shape your net proceeds, and these terms remain negotiable before the LOI. The waterfall’s gap between headline price and day-one cash is the number to negotiate against. That gap becomes a planning problem that you can partially address through allocation negotiation, structure selection, and timing.
McLerran & Associates is a dental-specific sell-side advisor that runs this arithmetic before you sign, modeling after-tax outcomes across deal structures and time horizons so you negotiate from a position of clear information. If you hold a DSO term sheet and want to see the waterfall for your specific practice, the next step is a free, confidential discovery call with the Atlanta team.
See what your term sheet nets after tax and book a confidential review.
Owners who are not yet ready to sell can still prepare. The McLerran M&A Summit (October 29–30, 2026) is built for owners who want education before they decide, with expert panels, one-on-one CPA sessions, and a complimentary practice valuation.
Frequently Asked Questions
How Much Of A DSO Offer Is Typically Paid In Cash At Close Versus Rollover Equity?
DSO deal structures vary by buyer type and practice profile. A common range in 2026 is approximately 60% to 75% of the headline price as cash at close, with the balance split between rollover equity and earnout. Some buyers offer higher cash-at-close percentages, particularly for practices with strong profitability and clean financials, while others push more value into equity to reduce their day-one capital outlay. The cash-at-close percentage is a negotiated term. Because rollover equity is illiquid, contingent on the DSO’s future performance, and tied to a private equity exit timeline that can stretch 5 to 8 years or longer, the cash-at-close percentage becomes one of the most important terms to address before signing the LOI. McLerran & Associates models the after-tax value of cash, equity, and earnout across multiple time horizons so owners can compare offers on an apples-to-apples basis rather than headline price alone.
Can I Negotiate The Purchase-Price Allocation With A DSO?
Sellers can negotiate allocation, and doing so before the LOI is signed can be one of the highest-value steps in the entire deal. The allocation among goodwill, equipment, non-compete, and consulting determines how much of the sale price is taxed at long-term capital-gains rates versus ordinary-income rates, which ties back to the federal rate gap described earlier. DSO buyers typically want more value allocated to equipment and non-compete agreements because those generate faster tax deductions for the buyer. The seller’s interest runs in the opposite direction, because more goodwill means more capital-gains treatment. Because both buyer and seller must file matching Form 8594 allocations with the IRS, the allocation appears as a negotiated term in the purchase agreement, and a written allocation is generally binding on both parties. Sellers who do not engage on allocation during negotiation often accept whatever split the buyer’s advisors propose first. A dental-specific sell-side advisor who understands the tax mechanics can push for a defensible, seller-favorable allocation as part of the overall deal structure.
Does Georgia Tax Capital Gains From A Dental Practice Sale Differently Than Ordinary Income?
Georgia does not apply a preferential state rate for long-term capital gains. As covered above, Georgia applies its flat 4.99% rate to every gain component, so the capital-versus-ordinary distinction matters mainly at the federal level. Georgia also has no state equivalent of the federal 3.8% net investment income tax and no local income tax on individuals. The state does offer a retirement income exclusion for taxpayers age 62 and older that can cover capital gains up to certain limits, which may be relevant for sellers in that age range. Because the flat rate is subject to scheduled reductions conditioned on state revenue performance, confirming the year-of-sale rate with a dental-specific CPA remains prudent.
What Happens To My Rollover Equity When The DSO Is Eventually Sold?
When the DSO’s private equity sponsor sells the platform, typically through a sale to a larger buyer or a recapitalization, rollover equity holders generally participate in the proceeds at the platform’s exit valuation. If the platform has grown and commands a higher EBITDA multiple than when the seller joined, the rollover equity can produce a meaningful “second bite.” The outcome depends on several factors the seller does not control, including the DSO’s financial performance, the amount of debt ahead of the equity in the capital structure, whether the seller’s equity class participates equally with the sponsor’s equity, dilution from new equity issuances, and the timing of the exit relative to broader M&A market conditions. Rollover equity can lose value or become worthless if the platform underperforms or takes on excessive leverage. From a tax perspective, a qualifying rollover structured under IRC §721, for a partnership-taxed entity, can defer gain recognition until the equity is sold, at which point the deferred gain generally becomes due. The tax treatment at the second exit depends on the equity instrument, the seller’s basis, the holding period, and how the transaction is structured. A Section 83(b) election, which must be filed within 30 days of closing, can be critical for sellers receiving vesting rollover equity. Missing that deadline can eliminate significant tax savings, so engaging both legal and tax advisors before closing to review the equity documents and vesting terms is wise.
Why Should I Work With A Dental-Specific Sell-Side Advisor Rather Than Negotiating Directly With The DSO?
A DSO negotiates practice acquisitions frequently, while a practice owner usually sells once in a career. That information gap can affect both price and structure. An unrepresented seller negotiating directly with a single DSO has no competitive tension pushing the price up, no independent EBITDA analysis controlling the narrative around profitability, and no multi-structure financial model showing what the deal nets after taxes. McLerran & Associates addresses each of these gaps. The firm’s bid process and track record, described above, are built to close that information gap. The CPA-led EBITDA analysis is diligence-grade work completed before the deal goes to market, so the valuation is more likely to hold under buyer scrutiny and the deal is less likely to be renegotiated down later. For an Atlanta dentist holding a DSO term sheet, a focused review of that term sheet, including allocation, cash-to-equity ratio, earnout structure, and Georgia tax exposure, before exclusivity begins can be one of the most valuable hours in the process.
This article is provided for educational purposes only and does not constitute tax, legal, or investment advice. Every figure in the illustrative waterfall is hypothetical and labeled as such; actual after-tax proceeds depend on your specific practice, entity structure, depreciation history, deal terms, and personal tax situation. Confirm all figures, rates, and assumptions with a dental-specific CPA before making any decision.
