Asset sale vs. stock sale for a healthcare practice

The basic trade-off

Buyers traditionally prefer asset purchases: they choose which liabilities to take on and get a stepped-up tax basis in what they buy. Sellers traditionally prefer stock sales: liabilities go with the company, and the gain is more often taxed as capital gain.

Asset sale

Buyer picks assets and liabilities, gets a basis step-up, but must transfer or re-obtain licenses, enrollments, and contracts.

Stock sale

Company, licenses, and contracts stay in place, but the buyer inherits the company's history, so it negotiates stronger indemnities and escrows.

Why licensing changes the answer in healthcare

Many state licenses for home care and behavioral health cannot be transferred, and some states treat any change in the licensed entity as requiring a brand new license. Illinois voids a substance use disorder license after a change of more than 25 percent of ownership in a year. Washington treats any change in a behavioral health agency's UBI or federal tax ID as a change of ownership that needs a new license before services continue. Ohio's behavioral health certificates do not transfer even to a buyer of the corporate entity. Our state guides cover these rules state by state.

Medicare draws its own line. Under 42 CFR 489.18, a sale of a provider's assets is a change of ownership in which the existing provider agreement is assigned to the new owner, along with its history and liabilities. A transfer of corporate stock is not a change of ownership for a corporation. Separately, the 36-month rule in 42 CFR 424.550 stops a home health agency's billing privileges from conveying on a change in majority ownership, whether by asset sale or stock transfer, within 36 months of its initial enrollment or last majority change, unless an exception applies.

Taxes: why the allocation matters

In an asset sale, buyer and seller allocate the price across seven classes of assets and report it on IRS Form 8594. The allocation determines how much of your gain is capital gain, such as goodwill, and how much is ordinary income, such as depreciation recapture on equipment. If your practice is a C corporation, an asset sale can also mean tax at the corporate level and again when proceeds are distributed.

Buyers of S corporations often use an F reorganization to get both: the target becomes a single-member LLC under a new holding company, and the buyer purchases the LLC interests, which is treated as an asset purchase for tax while the legal entity, and often its contracts, stay in place. The IRS addressed this structure in Revenue Ruling 2008-18. Whether it works for your licenses still depends on your state, so tax and regulatory counsel should review it together.

How structure maps to licensing, state by state

The same deal can be simple in one state and slow in another. Florida's home health rule treats a purchase of 100 percent of the licensed company's stock as not a change of ownership if the company continues to own the agency, while an asset sale to a new entity is one. Texas HCSSA licenses are not transferable, and HHSC can do a desk review instead of an on-site inspection when less than half the ownership changes. In California, a home health change of ownership is triggered by a transfer of 50 percent or more of stock, assets, or partnership interests, or of management.

Behavioral health rules are often stricter. Ohio certificates do not transfer even to a buyer of the corporate entity, Washington treats any change in UBI or tax ID as a change of ownership, and Illinois voids a substance use license after a 25 percent ownership change in a year. See the state guides for the details in your state.

Questions to settle in the letter of intent

Agree on structure early, because it drives the timeline and the tax result.

How Lartico fits in

Buyers in Lartico's network already know the licensing rules in the states where they buy, which helps you agree on a structure early. You choose which buyers to speak with, and the buyer pays our fee.