Thanks for the comment, Martin! It would appear that the state is simply challenging the prior tax treatment via random audit. While I understand the seller perspective that this is, at worst, a quick payment in the short-term, I'm concerned about whether this audit could snowball into a full reclassification requirement down the line. The economics of the business would certainly change with a reclass, as you mentioned.

Helpful context ^redacted‌. Random audits do happen, but your instinct to think about second-order effects is smart. I’d want to understand is whether the audit findings could create a precedent or signal that invites further/future scrutiny — either from the same state in later years or from other states if the company operates across state lines. Some things to perhaps clarify in diligence: • whether the state has indicated any concern about the structure of the contractor model itself or only the tax treatment in that specific year • how similar companies in the same state/industry are structuring clinician relationships • whether the economics of the deal still hold if some portion of the workforce had to move to W2 over time In my past experience advising private equity investors, the best ones always explicitly model the downside case — not just the expected outcome — including when regulatory classification could change the economics of the business. It’s probably worth underwriting a scenario where the classification model gets revisited later.