F-Reorg: What Sellers Need to Know Before Entering a Deal
- Dr Allen Nazeri DDS MBA
- Sep 26
- 5 min read
When a buyer, particularly a private equity firm or strategic investor, mentions the term “F-Reorg” in the middle of deal discussions, many sellers are left wondering what it means for them. Is this just a technical formality? Does it change how much tax you owe? Will it delay your closing?
The reality is that an F-Reorg is one of the most common and powerful tools in modern M&A transactions. For sellers, understanding how it works and its implications can help you negotiate better terms and avoid surprises at closing.
What Is an F-Reorg?
An F-Reorg (short for F-Reorganization) comes directly from the U.S. Internal Revenue Code, Section 368(a)(1)(F). The IRS defines it as a “mere change in identity, form, or place of organization.”
That definition sounds abstract, but in practice, it usually means restructuring your company into a new legal entity—most often an LLC that is disregarded for tax purposes—while maintaining ownership continuity. This allows the buyer to treat the transaction as an asset acquisition for tax purposes even though it may legally look like a stock sale.
Why Buyers Push for an F-Reorg
From the buyer’s perspective, an F-Reorg is extremely valuable:
Tax Step-Up in Basis: Buyers get to “step up” the basis of the assets they acquire, creating larger depreciation and amortization deductions going forward.
Clean Structure: By moving your business into a fresh entity, buyers avoid historical liabilities tied to your old corporation.
Flexibility: It allows buyers to check both boxes—asset deal economics with stock deal legal form.
This is why private equity firms almost always request an F-Reorg in lower to middle market healthcare and professional services deals.
What Sellers Need to Know About an F-Reorg
1. Tax Neutrality for Sellers
The first piece of good news is that an F-Reorg is generally tax-free to the seller when executed correctly. That means you don’t trigger taxable gain simply by restructuring into a new entity before the sale.
2. The Real Tax Benefit Goes to Buyers
While sellers usually don’t get hurt by an F-Reorg, they also don’t gain the major tax advantage. The step-up in basis primarily benefits the buyer. Sellers should recognize this and, where possible, negotiate for a higher purchase price or better deal terms to reflect the extra value being delivered.
3. It Requires Precision
Not every restructuring qualifies as an F-Reorg. IRS rules impose strict requirements, including continuity of ownership and business operations. If these technical rules aren’t met, the IRS could re-characterize the transaction, leaving the seller with an unexpected tax bill.
4. State Laws Come Into Play
Each state has its own corporate statutes, which may affect whether and how an F-Reorg can be completed. Sellers should consult legal counsel to ensure state compliance—especially if the company is incorporated in a state with complex merger statutes like Delaware, Nevada, or California.
Advantages of an F-Reorg for Sellers
Even though the tax advantages largely benefit buyers, sellers can still gain:
Expanded Buyer Pool: Many institutional buyers will only look at businesses willing to do an F-Reorg. Agreeing opens more doors.
Smoother Negotiations: Since it solves the buyer’s tax and liability concerns, it can help sellers secure faster agreements.
Price Optimization: If handled correctly, sellers may be able to trade structural flexibility for a better valuation or improved terms.
Risks and Considerations for Sellers
Like all tax-driven structures, an F-Reorg is not risk-free. Sellers should carefully consider:
Execution Risk: If the restructuring isn’t executed with precision, the seller could face immediate taxable gain.
Added Complexity: The process requires extra legal and tax work, which can add both time and cost to the deal.
Cost Allocation: Sellers should negotiate who pays for the additional legal, filing, and accounting fees associated with the restructuring.
Hidden Liabilities: While an F-Reorg shields the buyer, the seller’s original entity still exists and may carry residual liabilities that need to be managed.
Negotiating an F-Reorg: Seller Strategies
When a buyer requests an F-Reorg, sellers should avoid treating it as a simple checkbox item. Instead, use it as leverage:
Negotiate for Value: Since the buyer receives the tax benefits, sellers should ask for higher pricing or better deal structure in return.
Push for Buyer to Cover Costs: Drafting and executing an F-Reorg requires tax counsel, legal filings, and corporate conversions. These costs should fall on the buyer.
Set Realistic Timelines: Adding an F-Reorg may extend the transaction timeline. Be sure your exclusivity agreements reflect this extra time.
Protect Against Tax Risk: If there’s even a small chance the F-Reorg could trigger taxes for the seller, negotiate indemnities or a purchase price adjustment.
Real-World Example
Consider a dental group structured as a C-Corporation. A private equity buyer wants to purchase it but prefers an asset deal to receive tax benefits. Selling assets directly would create a double taxation event for the seller—once at the corporate level, and again at the shareholder level.
Instead, the seller first undergoes an F-Reorg, converting the corporation into an LLC disregarded for tax purposes. Now, the buyer acquires the LLC units (which legally looks like a stock deal) but is treated as buying assets for tax purposes.
Buyer wins: receives the basis step-up.
Seller avoids double taxation: since the reorganization itself is tax-neutral.
Deal closes faster: because the buyer’s tax needs are satisfied without forcing the seller into a punitive structure.
Key Takeaways for Sellers
An F-Reorg is usually tax-neutral for sellers but highly beneficial for buyers.
Sellers should negotiate compensation for giving buyers tax advantages.
Precision in execution is critical—this is not a DIY process.
Always work with experienced M&A tax counsel to avoid missteps.
Final Thoughts
For sellers, an F-Reorg should not be seen as a red flag, but rather as a common and often necessary tool to complete a deal. When handled correctly, it won’t create additional tax exposure and may even improve your negotiating position.
Dr. Allen Nazeri, aka "Dr. Allen," boasts over 30 years of global experience as a healthcare entrepreneur. He is the Managing Director at American Healthcare Capital and Managing Partner at PRIME exits. Dr. Allen provides strategic growth consulting to leadership teams of both privately held and publicly listed companies, ensuring their preparedness for successful exits.
He holds a Dental Degree from Creighton University and an MBA in M&A and Investment Banking from the University of Bedfordshire. Dr. Allen is the author of "Value Engineering: Strategies to 10X the Value of Your Clinic and Dominate the Market!" and the brand new book "Selling Your Healthcare Company at a Premium". Dr. Allen offers a free valuation to business owners ready for a partial or complete exit strategy. Dr. Allen collaborates with strategic buyers, private equity firms, and institutional investors, taking direct accountability for the annual successful sell-side representation of nearly $750M in enterprise value.