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PRIVILEGED & CONFIDENTIAL ATTORNEY WORK PRODUCT / ATTORNEY-CLIENT PRIVILEGE

INTERNAL TAX MEMORANDUM

Calderwood & Harkness LLP

FROM: Sylvia Hartwell, Partner, Tax Practice, Calderwood & Harkness LLP

TO: Beatrice Holloway, Partner, M&A Practice, Calderwood & Harkness LLP Derek Okonkwo, Associate, M&A Practice, Calderwood & Harkness LLP

CC: James Prentice, Billing Partner, M&A, Calderwood & Harkness LLP Gregory Nolan, Partner, Transaction Advisory Services, Ashford & Creighton LLP

DATE: March 18, 2024

RE: Proposed Purchase Price Allocation Under IRC § 1060 — Acquisition of Substantially All Assets of Cardinal Peak Industries, Inc. by Ardent Healthcare Acquisition Corp.

MATTER NO.: 2024-M&A-0142

CLIENT: Ardent Capital Partners III LP

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I. Executive Summary

The purpose of this memorandum is to set forth the proposed allocation of the $620,000,000 base purchase price — together with assumed liabilities treated as additional consideration under Internal Revenue Code ("IRC") § 1060 and Treasury Regulations ("Treas. Reg.") § 1.1060-1 — among the seven residual asset classes prescribed by IRC § 338(b)(5) and the regulations thereunder, as applicable to asset acquisitions governed by IRC § 1060. This allocation is a critical component of the transaction structure and will have significant and lasting tax consequences for both Buyer and Seller. Accordingly, the analysis set forth herein should be treated as the starting point for both internal planning and external negotiations with Seller's counsel.

Because the transaction is structured as a direct asset purchase by Ardent Healthcare Acquisition Corp. (a newly formed Delaware corporation, Delaware File No. 7129384, EIN 93-2184720, wholly owned by Ardent Capital Partners III LP), IRC § 1060 governs the allocation of the purchase price among the acquired assets. No election under IRC § 338(h)(10) is necessary or applicable, as the transaction does not involve the purchase of stock of a target. The residual method set forth in Treas. Reg. § 1.338-6 and § 1.338-7, as incorporated by reference in Treas. Reg. § 1.1060-1, requires that aggregate consideration be allocated first to the lower-numbered asset classes in order of priority, with any residual consideration allocated to Class VII (goodwill and going concern value).

This memorandum supplements the Tax Structure Memorandum dated February 8, 2024, previously circulated to the deal team, which analyzed the overall tax implications of the asset purchase structure. That earlier memorandum addressed, among other things, the comparison of the direct asset purchase to alternative structures, including a stock purchase and a stock purchase coupled with an election under IRC § 338(h)(10). The conclusion reached in the February 8, 2024 memorandum — that the direct asset purchase structure best serves the Client's interests given the specific facts and circumstances of this acquisition — remains unchanged. The present memorandum builds upon that foundation by addressing in detail the allocation of the purchase price among specific asset classes.

Several important qualifications apply to the analysis herein. First, the allocation set forth in this memorandum is preliminary and will be finalized following the closing net working capital true-up. The parties have agreed to a Net Working Capital Target ("NWC Target") of $28,000,000. Based on our preliminary review of the December 31, 2023 financial data, estimated closing NWC is approximately $29,200,000, though the final determination will not be made until the post-closing true-up process is completed. The Asset Purchase Agreement ("APA") currently under negotiation provides for a final NWC determination deadline of 90 days post-closing (i.e., approximately September 28, 2024, assuming a June 30, 2024 closing). Any dollar-for-dollar adjustment to the purchase price resulting from the NWC true-up will affect the aggregate consideration to be allocated and, consequently, the residual amount allocated to Class VII (goodwill).

Second, we recommend the engagement of a third-party valuation firm to prepare a formal purchase price allocation study, both for financial reporting purposes under ASC 805 (Business Combinations) and for tax reporting purposes under IRC § 1060. The preliminary estimates contained in this memorandum are based on our review of available financial information, discussions with Ashford & Creighton LLP (the Client's transaction advisory services provider), and our experience with comparable healthcare services transactions. A formal, independently prepared valuation study will be necessary to support the allocation in the event of an IRS examination.

Third, a draft IRS Form 8594 (Asset Acquisition Statement under Section 1060) will be prepared for both Buyer and Seller based on this allocation and will be updated following the closing and the completion of the NWC true-up. Both parties are required to file Form 8594 with their respective federal income tax returns for the taxable year in which the acquisition closes.

Finally, the contingent earnout provision of the transaction — which provides for up to $45,000,000 in aggregate additional consideration contingent upon the Acquired Business achieving specified Adjusted EBITDA targets — requires special treatment under the § 1060 allocation framework. As discussed in detail in Section VII below, contingent consideration is generally not included in the initial purchase price allocation. Instead, it is allocated when and as the contingency is resolved, typically resulting in an adjustment to the residual Class VII allocation and requiring supplemental Forms 8594 to be filed by both parties.

II. Transaction Overview

Parties

Purchaser. Ardent Healthcare Acquisition Corp. (the "Buyer" or "Acquisition Sub") is a Delaware corporation formed on January 22, 2024, for the sole purpose of consummating this acquisition. Buyer's Delaware File Number is 7129384 and its Employer Identification Number (EIN) is 93-2184720. Buyer is a wholly owned subsidiary of Ardent Capital Partners III LP (the "Fund"), a Delaware limited partnership managed by Ardent Capital Management LLC, the Fund's general partner. The Fund is a healthcare-focused private equity fund with approximately $1.8 billion in committed capital. The acquisition of Cardinal Peak Industries, Inc. will be the Fund's seventh platform investment.

Seller. Cardinal Peak Industries, Inc. ("CPI" or "Seller") is a Delaware corporation qualified to do business in Tennessee, Georgia, North Carolina, South Carolina, Alabama, Virginia, and Kentucky. CPI's EIN is 82-3947561 and its Delaware File Number is 5487231. CPI operates a multi-site outpatient rehabilitation and behavioral health services business through 37 clinic locations across the seven states in which it is qualified. CPI was founded in 2011 by Dr. Randall J. Whitfield (Founder and Chief Executive Officer, 52% equity holder) and Elaine Whitfield-Torres (Co-Founder and Chief Clinical Officer, 18% equity holder). Ridgeline Growth Equity Fund II LP holds a 22% equity interest in CPI, acquired through a growth equity investment in 2017. The remaining 8% is held by various members of CPI's management team.

Transaction Structure

The transaction is structured as an asset purchase of substantially all of the assets of CPI, to be consummated pursuant to an Asset Purchase Agreement currently in advanced negotiation. The first draft of the APA was circulated by Calderwood & Harkness on February 12, 2024, and the parties are working toward an expected signing date of April 2, 2024, with a target closing date of June 20, 2024 (subject to customary closing conditions, including regulatory approvals and healthcare change-of-ownership filings).

Because the transaction involves the purchase of assets constituting a trade or business — rather than the purchase of CPI's stock — the purchase price allocation is governed by IRC § 1060 and the regulations thereunder, which require the application of the residual method prescribed by IRC § 338(b)(5). This structure provides Buyer with a cost basis in all acquired assets equal to the allocated portion of the purchase price (plus any assumed liabilities treated as additional consideration), which in turn generates future depreciation and amortization deductions that would not be available in a straight stock purchase.

Purchase Price and Consideration

The components of the transaction consideration are as follows:

Base Purchase Price: $620,000,000 (Six Hundred Twenty Million Dollars).

Consideration Components:

(a) Cash at Closing (Net of Escrow). At closing, Buyer will pay to Seller (or to such persons as Seller may direct, including for the payoff of Seller's existing indebtedness) cash consideration of $558,000,000, representing the Base Purchase Price of $620,000,000 less the Escrow Holdback of $62,000,000.

(b) Escrow Holdback. $62,000,000 (representing 10% of the Base Purchase Price) will be deposited at closing with Commonwealth Trust & Escrow Company (the "Escrow Agent") pursuant to a separate Escrow Agreement to be executed concurrently with the APA. The escrowed funds will serve as security for Seller's indemnification obligations under the APA and will be released in two tranches: $31,000,000 on June 30, 2025, and $31,000,000 on December 30, 2025, in each case subject to reduction for any pending or resolved indemnification claims. For purposes of the § 1060 allocation, the full $62,000,000 escrow holdback is treated as consideration paid at closing, consistent with Treas. Reg. § 1.1060-1(c)(1), because the escrow is held for the benefit of Seller and subject only to contingent reduction for indemnification claims.

(c) Contingent Earnout Consideration. Up to $45,000,000 in additional consideration contingent upon the Acquired Business achieving specified Adjusted EBITDA targets over two measurement periods. Tranche 1 provides for up to $22,500,000, and Tranche 2 provides for up to $22,500,000. The treatment of the contingent earnout for § 1060 allocation purposes is addressed in detail in Section VII of this memorandum.

(d) Working Capital Adjustment. The Base Purchase Price is subject to a dollar-for-dollar adjustment based on the difference between actual closing Net Working Capital and the NWC Target of $28,000,000, subject to a $500,000 de minimis collar (i.e., no adjustment will be made if the difference between actual NWC and the NWC Target is less than or equal to $500,000 in either direction). Based on preliminary estimates, closing NWC is expected to be approximately $29,200,000, which would result in a positive adjustment to the purchase price of approximately $1,200,000 (assuming the final figure exceeds the collar threshold). This adjustment will affect the aggregate consideration to be allocated.

Assumed Liabilities Treated as Additional Consideration

In addition to the Base Purchase Price and any working capital adjustment, certain liabilities assumed by Buyer in connection with the acquisition are treated as additional consideration for purposes of the § 1060 allocation. Under Treas. Reg. § 1.1060-1(c)(1), the total consideration for allocation purposes includes "the amount of liabilities assumed or taken subject to by the purchaser" as part of the transaction. The assumed liabilities include:

(a) Trade Payables. Trade accounts payable arising in the ordinary course of business within 90 days of closing.

(b) Assumed Contract Obligations. Obligations arising after closing under contracts that are assumed by Buyer as part of the acquisition, including clinic lease obligations, vendor agreements, and managed-care contracts.

(c) Accrued Employee PTO. Accrued paid time off for employees of CPI who are offered and accept employment with Buyer (the "Transferred Employees"). Based on preliminary estimates, approximately 1,950 of CPI's 2,100 employees are expected to be offered employment with Buyer.

The aggregate amount of assumed liabilities treated as additional consideration will be quantified at closing and added to the Base Purchase Price (as adjusted for the NWC true-up) to determine total allocable consideration. Based on our preliminary analysis of CPI's balance sheet and discussions with Ashford & Creighton LLP, we estimate that assumed liabilities will be in the range of approximately $18,000,000 to $22,000,000, with a midpoint estimate of approximately $20,000,000.

Excluded Assets

The following assets are expressly excluded from the transaction and will be retained by Seller:

(a) All cash and cash equivalents of CPI.

(b) Tax refunds and credits attributable to pre-closing tax periods.

(c) Certain personal property of Dr. Randall J. Whitfield that is maintained at CPI's Nashville headquarters (as specifically identified on a schedule to the APA).

(d) The CPI corporate name "Cardinal Peak Industries" — this name is not being permanently transferred to Buyer. Instead, it will be licensed back to Buyer under a Transition Services Agreement for a period of 12 months post-closing, solely to permit an orderly rebranding.

(e) Equity interests in Cardinal Peak Labs, Inc., a dormant Delaware subsidiary of CPI that holds no material assets and conducts no operations.

Purchase Price Multiple and Financial Summary

The Base Purchase Price of $620,000,000 represents a multiple of approximately 8.36x CPI's last-twelve-months ("LTM") Adjusted EBITDA of $74,160,000, as determined by Ashford & Creighton LLP's quality of earnings analysis. This multiple is within the range of recent comparable healthcare services transactions, which have generally ranged from approximately 7.5x to 10.0x EBITDA depending on the sub-sector, growth profile, and payor mix.

Key financial metrics for CPI, based on the twelve-month period ended December 31, 2023, are as follows:

Seller's Existing Indebtedness

CPI has outstanding indebtedness of $87,400,000 in principal under its senior secured term loan facility with Velthorn Merchant Bank, N.A., pursuant to a Credit Agreement dated March 15, 2018, as amended. This indebtedness will be repaid in full at closing from the sale proceeds and is not being assumed by Buyer. Accordingly, this debt is not included in the total consideration for § 1060 allocation purposes. The payoff amount at closing may differ from the stated principal balance due to accrued interest, prepayment premiums, and breakage costs; however, none of those amounts are borne by Buyer and therefore have no effect on the allocation analysis.

III. Legal Framework — IRC § 1060 and the Residual Method

A. Overview of IRC § 1060

IRC § 1060 governs the allocation of consideration in any "applicable asset acquisition." An applicable asset acquisition is defined under § 1060(c) as any transfer of assets that constitutes a trade or business (within the meaning of § 1060(c)(2)) and with respect to which the transferee's basis in such assets is determined wholly by reference to the consideration paid for such assets. The statute does not require that literally all assets of the trade or business be transferred; rather, the threshold question is whether the transferred assets constitute a "trade or business," which is generally satisfied where goodwill or going concern value could, under any circumstances, attach to the transferred assets. See Treas. Reg. § 1.1060-1(b)(2).

The present transaction plainly qualifies as an applicable asset acquisition. Ardent Healthcare Acquisition Corp. is acquiring substantially all of the assets that comprise CPI's multi-site outpatient rehabilitation and behavioral health services business, including patient relationships, managed-care contracts, clinic equipment, leasehold improvements, proprietary software, trademarks, assembled workforce, and healthcare licenses and permits. These assets, in the aggregate, constitute a going concern, and goodwill indisputably attaches to the business being acquired.

Under § 1060(a), the consideration paid in an applicable asset acquisition must be allocated among the acquired assets using the "residual method" prescribed by § 338(b)(5). The residual method, as implemented by Treas. Reg. § 1.338-6 and § 1.338-7 (incorporated by reference in Treas. Reg. § 1.1060-1(a)(1)), requires that consideration be allocated among acquired assets based on their fair market values, proceeding through seven classes of assets in order of priority. Consideration is first allocated to assets in Class I (cash and cash equivalents) to the extent of their fair market values; then to Class II (actively traded personal property), and so on through Class VI (§ 197 intangibles other than goodwill and going concern value). Any remaining consideration — i.e., the residual — is allocated to Class VII (goodwill and going concern value).

The significance of this ordering is that the total consideration in excess of the aggregate fair market value of all identifiable assets (Classes I through VI) is, by definition, attributable to goodwill and going concern value. In a transaction such as the present one, where the purchase price substantially exceeds the fair market value of the identifiable tangible and intangible assets, a material portion of the purchase price will be allocated to Class VII.

B. The Seven Asset Classes

The seven asset classes prescribed by Treas. Reg. § 1.338-6(b) are as follows:

Class I — Cash and Cash Equivalents. This class includes cash, demand deposits, and similar items. In the present transaction, cash and cash equivalents are excluded assets retained by Seller. Accordingly, no consideration will be allocated to Class I. Allocation: $0.

Class II — Actively Traded Personal Property. This class includes actively traded personal property within the meaning of § 1092(d)(1) (i.e., property for which there is an established financial market), certificates of deposit, and foreign currency. Based on our review of CPI's asset portfolio, CPI does not hold material amounts of actively traded personal property, certificates of deposit, or foreign currency. Allocation: $0.

Class III — Accounts Receivable, Mortgages, and Credit Card Receivables. This class encompasses all accounts receivable (whether or not from the performance of services), mortgages, and credit card receivables. In the present transaction, CPI's trade accounts receivable and accrued revenue constitute the assets in this class. The fair market value of Class III assets may differ from face value due to collection risk, timing of collection, and the specific characteristics of the payor mix (government payors, commercial insurers, and patient self-pay).

Class IV — Inventory. This class includes stock in trade, inventory, and property held primarily for sale to customers in the ordinary course of business. CPI's operations as an outpatient healthcare services provider result in relatively modest inventory holdings, consisting primarily of medical supplies, therapeutic equipment consumables, and general office supplies.

Class V — All Assets Not in Classes I, II, III, IV, VI, or VII. This is a broad residual class that captures tangible personal property and any other assets not specifically enumerated in the other classes. For the present transaction, Class V includes all furniture, fixtures, and equipment ("FF&E") across CPI's 37 clinic locations, including rehabilitation and therapy equipment, diagnostic equipment, office furniture, computer hardware, servers, leasehold improvements, and vehicles.

Class VI — All § 197 Intangibles Except Goodwill and Going Concern Value. This class includes all intangible assets that are described in § 197(d) other than goodwill and going concern value. Specifically, Class VI encompasses: workforce in place; business books and records, operating systems, or any other information base; any patent, copyright, formula, process, design, pattern, know-how, format, or other similar item; any customer-based intangible (including customer lists, patient relationships, and referral relationships); any supplier-based intangible; any license, permit, or other right granted by a governmental unit; any covenant not to compete entered into in connection with an applicable asset acquisition; any franchise, trademark, or trade name; and any other similar item. This is the most analytically complex class in the present transaction and is discussed in detail in Section IV.F below.

Class VII — Goodwill and Going Concern Value. This class consists of goodwill and going concern value, and it receives any consideration remaining after allocation to Classes I through VI. Goodwill, for these purposes, is the value of a trade or business attributable to the expectation of continued customer patronage, whether due to the name or reputation of the business or any other factor. Going concern value is the additional value that attaches to property by reason of its existence as an integral part of an ongoing business activity, including the value attributable to the ability of a business to continue functioning and generating income without interruption.

C. Consistency Requirement

A critical aspect of the § 1060 framework is the consistency requirement. IRC § 1060(a) provides that, in the case of an applicable asset acquisition, the consideration transferred shall be allocated among the assets in the same manner as amounts are allocated under § 338(b)(5). Treas. Reg. § 1.1060-1(a)(1) further provides that both the transferor (Seller) and the transferee (Buyer) are bound by the allocation to which they agree, and each must use the agreed-upon allocation for purposes of determining the respective tax consequences of the transaction.

If the parties do not agree on an allocation, each party may adopt its own allocation, but each must disclose the other party's allocation (or the fact that the other party has adopted a different allocation) by attaching to its Form 8594 a statement identifying the items of disagreement. While such inconsistency is permissible as a legal matter, it invites IRS scrutiny and should be avoided if possible.

We strongly recommend that the APA include a mutual agreement on purchase price allocation methodology and that both Buyer and Seller commit to filing consistent IRS Forms 8594. The APA should include a specific provision requiring the parties to negotiate in good faith to reach agreement on the final allocation, with a dispute resolution mechanism (e.g., engagement of an independent valuation firm as arbiter) in the event agreement cannot be reached.

We note that Seller's counsel, Barrow, Kensington & Pratt LLP (Catherine "Kit" Barrow, lead partner), and Seller's auditor, Linden Hayes & Co., P.C. (Roberta Chen, engagement partner), will likely review and negotiate the allocation. We should anticipate pushback on certain allocation positions, particularly with respect to the allocation to non-competition agreements (which generate ordinary income to the individual covenantors) and the allocation to Class III accounts receivable (which may generate ordinary income to Seller to the extent the face value exceeds Seller's tax basis in such receivables). These negotiation dynamics are addressed in greater detail in Section VIII below.

D. Buyer's Incentive — Step-Up in Basis

One of the principal tax advantages of the asset purchase structure (as compared to a stock purchase) is that Buyer obtains a cost basis in all acquired assets equal to the allocated purchase price plus any assumed liabilities treated as additional consideration. This cost basis reflects the fair market value of the acquired assets at the time of the acquisition — typically significantly higher than Seller's historical (often fully depreciated) tax basis in those same assets. The resulting "step-up" in basis generates future depreciation and amortization deductions for Buyer that would not be available in a stock purchase (absent a § 338(h)(10) election).

The step-up in basis is particularly valuable in two respects:

Section 197 Intangibles (Classes VI and VII). All § 197 intangibles acquired in an applicable asset acquisition — including goodwill, going concern value, customer-based intangibles, workforce in place, trademarks, trade names, covenants not to compete, and other enumerated intangibles — are amortizable on a straight-line basis over a 15-year period beginning in the month the intangible is acquired. In the present transaction, the aggregate allocation to Classes VI and VII is expected to exceed $565,000,000, generating annual amortization deductions in excess of $37,000,000. Over the 15-year amortization period, these deductions will provide substantial tax savings to Buyer.

Tangible Personal Property (Class V). Tangible personal property acquired in the transaction is eligible for accelerated depreciation under IRC § 168 (the Modified Accelerated Cost Recovery System, or "MACRS"), with recovery periods of 5 years or 7 years depending on the specific asset type. In addition, certain tangible personal property may be eligible for immediate expensing under IRC § 179 and/or bonus depreciation under IRC § 168(k). Under the current phase-down schedule enacted by the Tax Cuts and Jobs Act of 2017, property placed in service in calendar year 2024 is eligible for 60% first-year bonus depreciation (down from 80% in 2023 and 100% in 2022 and prior years).

From Buyer's perspective, the ideal allocation would maximize the amounts allocated to shorter-lived tangible assets (Class V) and amortizable intangibles with separately identifiable value (Class VI), while minimizing the residual allocated to goodwill (Class VII). However, from Seller's perspective, the ideal allocation would maximize the amount allocated to goodwill (Class VII), because gain on the sale of goodwill is generally treated as long-term capital gain, while minimizing the amounts allocated to ordinary income assets such as accounts receivable (Class III, to the extent the allocated amount exceeds Seller's basis), depreciation recapture property (Class V, subject to ordinary income treatment under § 1245 to the extent of prior depreciation), and covenants not to compete (which are treated as ordinary income to the individual covenantor). These competing incentives are the source of the principal negotiation tension in any § 1060 allocation and are addressed in Section VIII.

It is worth noting that, from Buyer's perspective, the distinction between Class VI and Class VII is less significant than the distinction between Class V and either of the intangible classes, because both Class VI and Class VII assets are amortizable over the same 15-year period under § 197. The key Buyer incentive is therefore to maximize the allocation to Class V (where accelerated depreciation, including bonus depreciation, provides a faster cost recovery) relative to the intangible classes, while maintaining overall defensibility.

IV. Description of Acquired Assets by Class

A. Class I — Cash and Cash Equivalents

Cash and cash equivalents are expressly excluded from the transaction. CPI retains all cash, demand deposits, money market funds, and other cash equivalents held as of the closing date. Accordingly, no portion of the purchase price is allocated to Class I assets.

Proposed Allocation to Class I: $0.

B. Class II — Actively Traded Personal Property

Based on our review of the information provided in the data room and discussions with CPI's management during the due diligence process (which commenced on February 5, 2024), CPI does not hold any material actively traded personal property as defined in IRC § 1092(d)(1). CPI does not maintain certificates of deposit, positions in publicly traded securities, foreign currency accounts, or other financial instruments that would fall within Class II. Accordingly, no portion of the purchase price is allocated to Class II assets.

Proposed Allocation to Class II: $0.

C. Class III — Accounts Receivable and Similar Assets

CPI's trade accounts receivable represent amounts due from patients, commercial insurance payors, government payors (Medicare and Medicaid), and other third-party payors for outpatient rehabilitation and behavioral health services rendered by CPI prior to the closing date. These receivables are being acquired by Buyer as part of the transaction and constitute the principal Class III asset.

The fair market value of the accounts receivable will be determined as of the closing date. Based on our preliminary review of CPI's balance sheet as of December 31, 2023, net accounts receivable (after deducting the allowance for doubtful accounts of approximately $3,800,000) totaled approximately $40,200,000. We note, however, that the receivable balance fluctuates with patient volume, billing cycles, and payor reimbursement timing, and the closing date balance may differ from the year-end figure. Based on historical trends and seasonal patterns, we estimate that net accounts receivable at closing will be in the range of approximately $38,000,000 to $42,000,000.

The fair market value of the accounts receivable may differ from their face value for several reasons. First, the payor mix affects collection risk and timing. Government payors — primarily Medicare (Part B) and Medicaid — account for approximately 31% of CPI's net revenue. While government payor receivables generally have lower collection risk than commercial or self-pay receivables, they are subject to potential retroactive adjustments, recoupments, and regulatory audits. Second, the aging profile of the receivable portfolio affects collectibility: receivables aged beyond 90 days carry higher collection risk. Third, Buyer will need to assess whether there are any systematic billing or coding issues that could affect future collections of pre-closing receivables. Our preliminary assessment, informed by Ashford & Creighton's quality of earnings analysis, is that the fair market value of the receivable portfolio is approximately equal to its net book value, with a modest discount of approximately 1% to 3% to reflect collection risk and time value of money.

For purposes of this preliminary allocation, we propose allocating approximately $39,500,000 to Class III assets, representing the midpoint of our estimated range. This figure will be refined as part of the NWC calculation at closing, as accounts receivable is a significant component of Net Working Capital.

Proposed Preliminary Allocation to Class III: $39,500,000 (subject to adjustment based on closing balance sheet).

D. Class IV — Inventory

CPI operates as an outpatient rehabilitation and behavioral health services provider. Unlike a pharmaceutical manufacturer or medical device company, CPI does not maintain large inventories of finished goods or raw materials. CPI's inventory consists primarily of medical supplies (e.g., therapeutic tapes, braces, hot/cold packs, electrodes), therapeutic equipment consumables, and general office and clinic supplies. These items are consumed in the course of providing patient care and are replenished on a regular basis through purchase orders with medical supply distributors.

Based on CPI's December 31, 2023 balance sheet, inventory was stated at approximately $2,800,000, valued at the lower of cost or net realizable value. Given the nature of the inventory (relatively low-value consumable items with short shelf lives), we believe that the fair market value of the inventory approximates its book value. There is no material obsolescence risk, as the inventory turns over rapidly (approximately 18 to 20 times per year based on historical patterns).

Proposed Preliminary Allocation to Class IV: $2,800,000.

E. Class V — Tangible Personal Property and Other Assets

Class V encompasses all assets not falling within Classes I through IV, Class VI, or Class VII. In the present transaction, this class primarily consists of furniture, fixtures, and equipment ("FF&E") across CPI's 37 clinic locations, as well as certain corporate-level assets maintained at CPI's Nashville headquarters.

CPI's clinic footprint spans seven states, with the following distribution:

The tangible personal property being acquired includes the following categories of assets:

(a) Rehabilitation and Therapy Equipment. This includes treatment tables, exercise machines, parallel bars, balance equipment, ultrasound therapy units, electrical stimulation devices, traction equipment, isokinetic testing systems, and other specialized rehabilitation equipment.

(b) Diagnostic Equipment. This includes electrodiagnostic equipment (EMG/NCV), vital signs monitors, pulse oximeters, and related diagnostic devices.

(c) Office Furniture and Fixtures. This includes desks, chairs, reception area furnishings, filing cabinets, shelving, and clinic interior build-outs.

(d) Computer Hardware and Servers. This includes desktop and laptop computers, tablets used by clinicians for point-of-care documentation, printers, network switches, servers (both on-premises and co-located), and other IT infrastructure hardware.

(e) Leasehold Improvements. All 37 clinics operate under triple-net leases with third-party landlords. CPI does not own any real property. Leasehold improvements — including interior build-outs, specialized flooring (required for rehabilitation spaces), plumbing modifications, HVAC upgrades, signage, and ADA-compliant modifications — are included as Class V assets. The average remaining lease term across the portfolio is approximately 4.2 years, which affects the valuation of certain leasehold improvements whose useful life is limited by the lease term.

(f) Vehicles. CPI operates a small fleet of approximately 12 vehicles used for home health visits, inter-clinic transport of equipment, and administrative purposes.

Based on our preliminary review of CPI's fixed asset register — provided in the electronic data room on February 15, 2024 (Data Room Index No. 4.3.1) — and discussions with Gregory Nolan and his team at Ashford & Creighton LLP, the estimated aggregate fair market value of tangible personal property is approximately $31,000,000 to $35,000,000. CPI's net book value for these assets (i.e., original cost less accumulated depreciation) is approximately $22,500,000 as of December 31, 2023, but fair market value exceeds net book value because many assets with remaining useful life have been substantially depreciated on CPI's books under accelerated depreciation methods and because replacement costs for certain categories of medical equipment have increased in recent years.

The fair market value estimate is preliminary and subject to refinement. We recommend that the third-party valuation firm engaged for the formal purchase price allocation study perform a detailed asset-by-asset or asset-category appraisal of CPI's tangible personal property. In the interim, we are using a midpoint estimate of $33,000,000 for this preliminary allocation.

From a Buyer tax perspective, Class V assets are among the most valuable from a cost recovery standpoint. Rehabilitation equipment and computer hardware generally fall within the 5-year MACRS recovery class, while office furniture and fixtures fall within the 7-year class. Leasehold improvements have varying MACRS recovery periods. Importantly, all eligible Class V assets placed in service in 2024 will qualify for 60% first-year bonus depreciation under IRC § 168(k), providing an accelerated tax benefit to Buyer.

Proposed Preliminary Allocation to Class V: $33,000,000.

F. Class VI — Intangible Assets (Other Than Goodwill and Going Concern Value)

Class VI is the most analytically significant class in this allocation exercise. It encompasses all § 197 intangibles — i.e., all intangible assets described in IRC § 197(d) — other than goodwill and going concern value (which are allocated to Class VII). The distinction between Class VI and Class VII is important for several reasons, even though both classes are subject to the same 15-year amortization period under § 197: first, the allocation to specific Class VI intangibles must be defensible based on their independently determined fair market values (as opposed to the Class VII residual); second, Seller's tax treatment of certain Class VI intangibles (particularly non-competition agreements) differs from the treatment of goodwill; and third, a well-supported Class VI allocation demonstrates to the IRS that the parties conducted a rigorous, arm's-length valuation process.

We have identified the following categories of Class VI intangible assets in the present transaction:

1. PeakConnect Patient-Engagement Software Platform

CPI has developed and deployed a proprietary software platform known as "PeakConnect," which serves as the company's patient engagement, scheduling, outcomes tracking, and clinical documentation system. PeakConnect was developed internally by CPI's technology team beginning in approximately 2016, with significant enhancements deployed in 2019 and 2021. The platform integrates with electronic health records (EHR) systems and supports patient self-scheduling, telehealth capabilities, automated appointment reminders, outcomes measurement (using standardized functional assessment tools), and patient satisfaction surveys.

PeakConnect is a material intangible asset being acquired in this transaction. The APA includes all source code, object code, technical documentation, user manuals, update logs, and related intellectual property associated with PeakConnect. CPI's management has represented that the platform is a significant competitive differentiator and a key driver of patient retention and clinical efficiency.

For purposes of valuing PeakConnect, we recommend that the valuation firm employ both the replacement cost approach (estimating the cost to recreate the software from scratch, including developer labor, overhead, and opportunity cost) and the income approach (estimating the incremental revenue and cost savings attributable to the platform over its expected useful life, discounted to present value). Based on our preliminary assessment and discussions with CPI's Chief Technology Officer during management presentations on February 22, 2024, we estimate the fair market value of PeakConnect at approximately $28,000,000 to $35,000,000. For purposes of this preliminary allocation, we are using a midpoint estimate of approximately $31,000,000.

We note that software developed internally and held by the developer for use in its business is generally not a § 197 intangible in the hands of the developer. However, when such software is acquired as part of an applicable asset acquisition under § 1060, it is treated as a § 197 intangible in the hands of the acquirer and is amortizable on a straight-line basis over 15 years. See IRC § 197(c)(1); Treas. Reg. § 1.197-2(b)(1). Accordingly, the full amount allocated to PeakConnect will be recoverable by Buyer through 15-year amortization commencing in the month of closing.

2. Trademarks and Trade Names

The following trademark and trade name assets are being acquired in the transaction:

(a) PeakConnect Registered Trademark. CPI holds a registered trademark for "PeakConnect" with the United States Patent and Trademark Office, Registration No. 5,412,887. The registration is in good standing and covers goods and services related to healthcare software platforms and patient engagement tools.

(b) Service Marks and Branding. CPI utilizes various service marks and branding elements in connection with its clinic operations, including clinic-specific logos, taglines, and marketing materials. To the extent these branding elements are being transferred as part of the transaction (as opposed to elements tied exclusively to the CPI corporate name, which is an excluded asset), they constitute Class VI intangible assets.

It is important to note that the CPI corporate name "Cardinal Peak Industries" is not being permanently transferred to Buyer. Instead, the APA provides for a 12-month license-back arrangement under the Transition Services Agreement, permitting Buyer to continue operating under the CPI name during the rebranding period. Because the CPI name is an excluded asset, it receives no allocation. Only the PeakConnect mark and associated service marks that are being permanently transferred receive an allocation.

We estimate the preliminary fair market value of the PeakConnect trademark and related transferred service marks at approximately $5,000,000 to $8,000,000. For this preliminary allocation, we use a midpoint of approximately $6,500,000. The valuation firm should apply the relief-from-royalty method, which estimates the value of the trademark by reference to the royalty payments that Buyer would hypothetically have to pay to license the mark from a third party, discounted to present value.

3. Patient Lists and Patient Relationships

CPI's patient base across its 37 clinics represents a substantial intangible asset. CPI served approximately 187,000 unique patients in the twelve-month period ended December 31, 2023, with a significant portion of revenue derived from recurring patients (patients returning for multiple episodes of care, follow-up visits, or treatment across multiple clinical disciplines). CPI's business model benefits from established referral patterns: referring physicians and hospital systems in the seven-state operating territory routinely direct patients to CPI's clinics based on longstanding relationships, clinical reputation, and geographic convenience.

In valuing patient relationships and lists, we recommend that the valuation firm employ the multi-period excess earnings method ("MEEM") under the income approach. This method isolates the portion of the Acquired Business's projected cash flows that is attributable to existing patient relationships (as distinguished from cash flows attributable to new patients acquired after closing, workforce, tangible assets, and other contributory assets) and discounts those cash flows to present value over the expected attrition period of the patient base. An alternative approach, the distributor method (also known as the "with-and-without" method), may be considered as a reasonableness check.

Key factors bearing on the value of the patient relationships include:

(a) Payor Mix. CPI's revenue is derived from a diverse mix of payors: commercial insurance (~60% of net revenue), Medicare/Medicaid (~31% of net revenue combined), workers' compensation (~5%), and patient self-pay (~4%). The managed-care agreements with 12 major commercial payors are a significant component of the patient relationship value. SummitCare Health Plans, Inc. alone represents approximately 22% of CPI's net revenue.

(b) Patient Retention and Attrition. Outpatient rehabilitation services tend to have moderate-to-high patient attrition rates, as individual episodes of care are finite (a typical course of physical therapy lasts 6 to 12 weeks). However, CPI benefits from a "replenishing" patient base driven by physician referrals and community reputation, which mitigates the effect of individual patient attrition on total revenue.

(c) Managed-Care Contracts. The 12 major managed-care contracts are valuable intangibles in their own right, as they define reimbursement rates, covered services, and network participation terms. The loss or renegotiation of a major managed-care contract could have a material adverse effect on revenue. These contracts are being assigned to Buyer (with payor consent, where required) and are included within the patient relationship / customer-based intangible category.

(d) Medicare/Medicaid Provider Enrollments. CPI's Medicare and Medicaid provider enrollment numbers are discussed separately below in Section IV.F.7.

Based on our preliminary analysis and analogous transactions in the healthcare services sector, we estimate the fair market value of patient relationships and patient lists at approximately $55,000,000 to $65,000,000, with a midpoint estimate of approximately $60,000,000. This is the largest single component of the Class VI allocation and will be the focus of the formal valuation study.

4. Assembled Workforce

CPI employs approximately 2,100 individuals across its 37 clinic locations and its Nashville headquarters. The workforce includes approximately 1,450 licensed clinicians (physical therapists, occupational therapists, speech-language pathologists, licensed clinical social workers, licensed professional counselors, and behavioral health technicians) and approximately 650 administrative, support, and management personnel (including clinic directors, billing specialists, scheduling coordinators, IT staff, and corporate overhead functions).

The assembled workforce represents a significant intangible asset because it reflects the cost that Buyer would avoid by acquiring an already-functioning employee base rather than having to recruit, hire, train, and credential each employee individually. For licensed clinicians in particular, the cost of recruitment (including recruiter fees, signing bonuses, and relocation assistance) and credentialing (including state licensure verification, payor enrollment, and background checks) is substantial. CPI's workforce has a relatively low voluntary turnover rate for the healthcare services industry — approximately 14% annually for clinical staff and 18% for administrative staff — reflecting a stable and experienced employee base.

Assembled workforce in place is expressly identified as a § 197 intangible under IRC § 197(d)(1)(C)(i) and is amortizable over 15 years when acquired as part of an applicable asset acquisition. The valuation firm should apply the cost approach to value the assembled workforce, estimating the costs that would be incurred to recruit, hire, train, and bring to equivalent productivity a workforce comparable to CPI's existing employee base.

We estimate the preliminary fair market value of the assembled workforce at approximately $8,000,000 to $12,000,000, with a midpoint estimate of approximately $10,000,000.

5. Favorable Lease Terms

CPI operates all 37 of its clinics under triple-net lease arrangements with third-party landlords. CPI does not own any real property. To the extent that any of these leases have rental rates that are below current market rates — i.e., the contractual rent is less than the rent that would be payable under a lease negotiated at arm's length as of the closing date — the present value of the below-market differential over the remaining lease term represents a Class VI intangible asset.

Favorable lease terms are a § 197 intangible when acquired as part of an applicable asset acquisition. See IRC § 197(d)(1)(C)(iv); Treas. Reg. § 1.197-2(b)(9). The value of the favorable lease intangible is amortized over the 15-year § 197 period (not the remaining lease term), consistent with the anti-churning and simplification principles underlying § 197.

Our preliminary analysis of CPI's lease portfolio — informed by Tiffany Rosenthal's lease review workstream, which is being conducted as part of the real estate due diligence — suggests that several of CPI's leases, particularly those executed prior to 2020, carry rental rates modestly below current market rates in their respective metropolitan areas. This is consistent with the general trend of rising commercial rental rates for medical office space in the Southeast United States over the past several years. However, the favorable differential is not dramatic in most cases, and several leases are at or above current market rates.

In the aggregate, we estimate the fair market value of favorable lease terms at approximately $2,000,000 to $4,000,000, with a midpoint of approximately $3,000,000. This estimate is preliminary and will be refined based on a lease-by-lease comparison of contractual rents to market rents, to be completed by the valuation firm in coordination with Ms. Rosenthal's workstream.

6. Non-Competition Agreements

As a condition to closing, two key individuals — Dr. Randall J. Whitfield (Founder and CEO, 52% equity holder) and Elaine Whitfield-Torres (Co-Founder and CCO, 18% equity holder) — will each enter into non-competition and non-solicitation agreements with Buyer. The material terms of the non-compete agreements, as currently contemplated, are as follows:

(a) Restrictive Period: Three (3) years from the closing date.

(b) Geographic Scope: The seven states in which CPI currently operates (Tennessee, Georgia, North Carolina, South Carolina, Alabama, Virginia, and Kentucky).

(c) Restricted Activities: Ownership, management, operation, or employment by any business that provides outpatient rehabilitation services, behavioral health services, or healthcare-related software and technology services competitive with the Acquired Business.

(d) Non-Solicitation: Prohibition on soliciting or hiring CPI employees or soliciting CPI patients during the restrictive period.

(e) Governing Law: Tennessee.

Non-competition agreements entered into in connection with an applicable asset acquisition are § 197 intangibles under IRC § 197(d)(1)(E) and are amortizable over the 15-year § 197 period — not the contractual term of the covenant (which in this case is only 3 years). This mismatch between the economic life of the covenant (3 years) and the tax amortization period (15 years) is a well-known feature of § 197 and generally works to the disadvantage of the buyer.

For Seller, the allocation to non-competition agreements is a point of particular sensitivity. Under IRC § 1060 and the regulations thereunder, amounts allocated to non-compete covenants are treated as ordinary income to the individual covenantor. See IRC § 1234A (as applicable); Rev. Rul. 69-643. Both Dr. Whitfield and Whitfield-Torres will therefore report their respective shares of the non-compete allocation as ordinary income, taxed at rates of up to 37% (plus the 3.8% net investment income tax, if applicable), rather than at the preferential long-term capital gains rate of 20% (plus 3.8% NIIT) that would apply to amounts allocated to goodwill. For this reason, Seller and its counsel will likely resist any significant allocation to the non-competition agreements.

From Buyer's perspective, the allocation to non-competes provides a 15-year amortization deduction — the same as goodwill. There is therefore no marginal Buyer benefit to allocating additional amounts to non-competes rather than goodwill. However, there is an important compliance reason to allocate a reasonable amount to the non-competes: the IRS may challenge an allocation that assigns zero value (or only nominal value) to restrictive covenants entered into with the former owner and key executive of a $620 million healthcare services business. The failure to allocate an appropriate amount to the non-competes could expose Buyer (and Seller) to the risk of an IRS reallocation, potentially resulting in adverse tax consequences to one or both parties.

Based on the income approach (estimating the incremental value protected by the covenants during the three-year restrictive period) and considering the significance of Dr. Whitfield's and Whitfield-Torres's roles in CPI's business operations and referral relationships, we estimate the combined fair market value of the non-competition agreements at approximately $6,000,000 to $10,000,000, allocated as follows:

• Dr. Randall J. Whitfield: approximately $4,000,000 to $7,000,000 (reflecting his role as Founder, CEO, and primary physician referral relationship holder, and his 52% ownership interest).

• Elaine Whitfield-Torres: approximately $2,000,000 to $3,000,000 (reflecting her role as Co-Founder and CCO, her 18% ownership interest, and her involvement in clinical program development and payor relationships).

For purposes of this preliminary allocation, we are using a combined midpoint estimate of approximately $6,500,000 ($4,500,000 to Dr. Whitfield; $2,000,000 to Whitfield-Torres). This level of allocation is moderate and defensible — it represents approximately 1% of the total purchase price and is consistent with non-compete allocations in comparable healthcare services transactions. We believe this figure strikes an appropriate balance between (a) ensuring that the allocation is supportable in the event of an IRS examination and (b) minimizing the adverse ordinary income treatment for Seller's principals, thereby facilitating agreement on the overall allocation.

We anticipate that Seller's counsel will seek to reduce the non-compete allocation, potentially to zero or a nominal amount. The APA should include a specific provision addressing the agreed-upon non-compete allocation to avoid post-closing disputes. We are prepared to support the proposed allocation with a valuation analysis if necessary.

7. Healthcare Licenses, Permits, and Provider Enrollments

CPI holds various state healthcare licenses and permits across its seven states of operation, including facility licenses, clinical practice registrations, and other regulatory authorizations required for the operation of outpatient rehabilitation and behavioral health clinics. In addition, CPI holds Medicare and Medicaid provider enrollment numbers — known as Provider Transaction Access Numbers ("PTANs") for Medicare and Medicaid provider identification numbers — that are essential for billing and receiving reimbursement from government payors.

These licenses and permits present a somewhat unique valuation challenge. Many state healthcare licenses are not freely transferable; instead, the change of ownership of a licensed healthcare facility typically requires a new license application or a change-of-ownership filing with the applicable state regulatory authority. CPI has already filed change-of-ownership applications in Tennessee, Georgia, and North Carolina as of March 4, 2024, with filings in the remaining states expected to be made prior to closing. For Medicare and Medicaid, a CMS-855B (Medicare enrollment application) and corresponding state Medicaid change-of-ownership forms will need to be filed.

To the extent that the change-of-ownership filings result in the continuation of CPI's existing provider enrollment numbers under Buyer's ownership — which is the expected outcome in most jurisdictions for a properly structured asset acquisition — there is some value attributable to the avoidance of the time, cost, and revenue disruption associated with obtaining entirely new provider enrollments. However, because these licenses and enrollments are not freely alienable (they are granted by governmental authorities and subject to regulatory approval), their separable fair market value is limited.

We estimate a nominal allocation of approximately $1,000,000 to $2,000,000 for the aggregate value of healthcare licenses, permits, and provider enrollments, using a midpoint of approximately $1,000,000. The valuation firm may adjust this figure based on a more detailed analysis of the specific regulatory landscape in each state.

8. Total Proposed Class VI Allocation

Based on the foregoing analysis, the aggregate preliminary allocation to Class VI intangible assets is as follows:

The midpoint estimate of $118,000,000 is used for purposes of this preliminary allocation. All Class VI intangibles are amortizable on a straight-line basis over 15 years under IRC § 197, commencing in the month of closing. At $118,000,000, the annual amortization deduction attributable to Class VI intangibles is approximately $7,867,000.

G. Class VII — Goodwill and Going Concern Value

Class VII consists of goodwill and going concern value and receives the residual consideration after allocation to Classes I through VI. Goodwill, for tax purposes, is the value of a trade or business attributable to the expectation of continued customer patronage, whether due to the name or reputation of the business or any other factor. Going concern value is the additional value that attaches to property by reason of its existence as an integral part of an ongoing business activity.

The residual allocation to Class VII is calculated as follows:

Step 1: Determine Total Allocable Consideration.

Total allocable consideration equals the Base Purchase Price, as adjusted for the Net Working Capital adjustment, plus assumed liabilities treated as additional consideration.

• Base Purchase Price: $620,000,000

• Estimated NWC Adjustment: +$1,200,000 (estimated closing NWC of $29,200,000 vs. NWC Target of $28,000,000; assumes the adjustment exceeds the $500,000 de minimis collar)

• Estimated Assumed Liabilities: +$20,000,000 (midpoint estimate of $18,000,000 to $22,000,000)

• Total Estimated Allocable Consideration: approximately $641,200,000 (for illustrative purposes, we use a rounded figure of approximately $640,000,000)

Note: the contingent earnout of up to $45,000,000 is not included in the initial allocable consideration. As discussed in Section VII below, earnout payments will be allocated when and as paid.

Step 2: Subtract Preliminary Allocations to Classes I through VI.

Step 3: Calculate Class VII Residual.

Total Estimated Allocable Consideration: ~$640,000,000 Less: Total Classes I–VI: ~$193,300,000 Residual to Class VII (Goodwill and Going Concern Value): approximately $446,700,000

For purposes of this preliminary allocation, we use a rounded figure of approximately $447,000,000 for the Class VII allocation. This figure will vary depending on the final determination of assumed liabilities, the NWC true-up, and any adjustments to the Class I through Class VI allocations resulting from the formal valuation study.

Goodwill as a Percentage of Total Consideration. At approximately $447,000,000, goodwill represents approximately 69.8% of total allocable consideration (~$640,000,000). This is consistent with healthcare services acquisitions at premium EBITDA multiples. At a purchase price of approximately 8.36x LTM Adjusted EBITDA, a significant portion of the enterprise value being acquired reflects the going concern value of CPI's business — including its reputation in the outpatient rehabilitation and behavioral health markets, its geographic footprint across seven Southeastern states, its established referral network with physicians and hospital systems, its clinical expertise and outcomes track record, and its competitive position — that is not separately identifiable as a Class VI intangible. A goodwill allocation in the range of 65% to 75% of total consideration is typical for healthcare services platform acquisitions in this EBITDA multiple range.

Goodwill is a § 197 intangible and is amortizable on a straight-line basis over 15 years. At $447,000,000, the annual goodwill amortization deduction is approximately $29,800,000.

Proposed Preliminary Allocation to Class VII: approximately $447,000,000 (residual; subject to adjustment based on final consideration and Class I–VI allocations).

V. Proposed Preliminary Allocation Summary Table

The following table summarizes the proposed preliminary purchase price allocation across all seven asset classes. All figures are estimates and are subject to the qualifications set forth throughout this memorandum.

The Class VI allocation is further broken down as follows:

Total Allocable Consideration: The total preliminary allocable consideration of approximately $640,000,000 reflects the Base Purchase Price of $620,000,000 plus estimated assumed liabilities of approximately $20,000,000 (midpoint). This total does not include the NWC adjustment (estimated at +$1,200,000), which may modestly increase the total, or the contingent earnout (up to $45,000,000), which is addressed separately in Section VII.

Important Notes and Qualifications:

(i) All figures are preliminary estimates subject to refinement based on (a) the engagement and completion of a formal third-party valuation study, (b) finalization of the closing balance sheet, (c) the post-closing NWC true-up (due approximately 90 days post-c

PRIVILEGED & CONFIDENTIAL ATTORNEY WORK PRODUCT / ATTORNEY-CLIENT PRIVILEGE
INTERNAL TAX MEMORANDUM
Calderwood & Harkness LLP
FROM: Sylvia Hartwell, Partner, Tax Practice, Calderwood & Harkness LLP
TO: Beatrice Holloway, Partner, M&A Practice, Calderwood & Harkness LLP Derek Okonkwo, Associate, M&A Practice, Calderwood & Harkness LLP
CC: James Prentice, Billing Partner, M&A, Calderwood & Harkness LLP Gregory Nolan, Partner, Transaction Advisory Services, Ashford & Creighton LLP
DATE: March 18, 2024
RE: Proposed Purchase Price Allocation Under IRC § 1060 — Acquisition of Substantially All Assets of Cardinal Peak Industries, Inc. by Ardent Healthcare Acquisition Corp.
MATTER NO.: 2024-M&A-0142
CLIENT: Ardent Capital Partners III LP
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I. Executive Summary
The purpose of this memorandum is to set forth the proposed allocation of the $620,000,000 base purchase price — together with assumed liabilities treated as additional consideration under Internal Revenue Code ("IRC") § 1060 and Treasury Regulations ("Treas. Reg.") § 1.1060-1 — among the seven residual asset classes prescribed by IRC § 338(b)(5) and the regulations thereunder, as applicable to asset acquisitions governed by IRC § 1060. This allocation is a critical component of the transaction structure and will have significant and lasting tax consequences for both Buyer and Seller. Accordingly, the analysis set forth herein should be treated as the starting point for both internal planning and external negotiations with Seller's counsel.
Because the transaction is structured as a direct asset purchase by Ardent Healthcare Acquisition Corp. (a newly formed Delaware corporation, Delaware File No. 7129384, EIN 93-2184720, wholly owned by Ardent Capital Partners III LP), IRC § 1060 governs the allocation of the purchase price among the acquired assets. No election under IRC § 338(h)(10) is necessary or applicable, as the transaction does not involve the purchase of stock of a target. The residual method set forth in Treas. Reg. § 1.338-6 and § 1.338-7, as incorporated by reference in Treas. Reg. § 1.1060-1, requires that aggregate consideration be allocated first to the lower-numbered asset classes in order of priority, with any residual consideration allocated to Class VII (goodwill and going concern value).
This memorandum supplements the Tax Structure Memorandum dated February 8, 2024, previously circulated to the deal team, which analyzed the overall tax implications of the asset purchase structure. That earlier memorandum addressed, among other things, the comparison of the direct asset purchase to alternative structures, including a stock purchase and a stock purchase coupled with an election under IRC § 338(h)(10). The conclusion reached in the February 8, 2024 memorandum — that the direct asset purchase structure best serves the Client's interests given the specific facts and circumstances of this acquisition — remains unchanged. The present memorandum builds upon that foundation by addressing in detail the allocation of the purchase price among specific asset classes.
Several important qualifications apply to the analysis herein. First, the allocation set forth in this memorandum is preliminary and will be finalized following the closing net working capital true-up. The parties have agreed to a Net Working Capital Target ("NWC Target") of $28,000,000. Based on our preliminary review of the December 31, 2023 financial data, estimated closing NWC is approximately $29,200,000, though the final determination will not be made until the post-closing true-up process is completed. The Asset Purchase Agreement ("APA") currently under negotiation provides for a final NWC determination deadline of 90 days post-closing (i.e., approximately September 28, 2024, assuming a June 30, 2024 closing). Any dollar-for-dollar adjustment to the purchase price resulting from the NWC true-up will affect the aggregate consideration to be allocated and, consequently, the residual amount allocated to Class VII (goodwill).
Second, we recommend the engagement of a third-party valuation firm to prepare a formal purchase price allocation study, both for financial reporting purposes under ASC 805 (Business Combinations) and for tax reporting purposes under IRC § 1060. The preliminary estimates contained in this memorandum are based on our review of available financial information, discussions with Ashford & Creighton LLP (the Client's transaction advisory services provider), and our experience with comparable healthcare services transactions. A formal, independently prepared valuation study will be necessary to support the allocation in the event of an IRS examination.
Third, a draft IRS Form 8594 (Asset Acquisition Statement under Section 1060) will be prepared for both Buyer and Seller based on this allocation and will be updated following the closing and the completion of the NWC true-up. Both parties are required to file Form 8594 with their respective federal income tax returns for the taxable year in which the acquisition closes.
Finally, the contingent earnout provision of the transaction — which provides for up to $45,000,000 in aggregate additional consideration contingent upon the Acquired Business achieving specified Adjusted EBITDA targets — requires special treatment under the § 1060 allocation framework. As discussed in detail in Section VII below, contingent consideration is generally not included in the initial purchase price allocation. Instead, it is allocated when and as the contingency is resolved, typically resulting in an adjustment to the residual Class VII allocation and requiring supplemental Forms 8594 to be filed by both parties.
II. Transaction Overview
Parties
Purchaser. Ardent Healthcare Acquisition Corp. (the "Buyer" or "Acquisition Sub") is a Delaware corporation formed on January 22, 2024, for the sole purpose of consummating this acquisition. Buyer's Delaware File Number is 7129384 and its Employer Identification Number (EIN) is 93-2184720. Buyer is a wholly owned subsidiary of Ardent Capital Partners III LP (the "Fund"), a Delaware limited partnership managed by Ardent Capital Management LLC, the Fund's general partner. The Fund is a healthcare-focused private equity fund with approximately $1.8 billion in committed capital. The acquisition of Cardinal Peak Industries, Inc. will be the Fund's seventh platform investment.
Seller. Cardinal Peak Industries, Inc. ("CPI" or "Seller") is a Delaware corporation qualified to do business in Tennessee, Georgia, North Carolina, South Carolina, Alabama, Virginia, and Kentucky. CPI's EIN is 82-3947561 and its Delaware File Number is 5487231. CPI operates a multi-site outpatient rehabilitation and behavioral health services business through 37 clinic locations across the seven states in which it is qualified. CPI was founded in 2011 by Dr. Randall J. Whitfield (Founder and Chief Executive Officer, 52% equity holder) and Elaine Whitfield-Torres (Co-Founder and Chief Clinical Officer, 18% equity holder). Ridgeline Growth Equity Fund II LP holds a 22% equity interest in CPI, acquired through a growth equity investment in 2017. The remaining 8% is held by various members of CPI's management team.
Transaction Structure
The transaction is structured as an asset purchase of substantially all of the assets of CPI, to be consummated pursuant to an Asset Purchase Agreement currently in advanced negotiation. The first draft of the APA was circulated by Calderwood & Harkness on February 12, 2024, and the parties are working toward an expected signing date of April 2, 2024, with a target closing date of June 20, 2024 (subject to customary closing conditions, including regulatory approvals and healthcare change-of-ownership filings).
Because the transaction involves the purchase of assets constituting a trade or business — rather than the purchase of CPI's stock — the purchase price allocation is governed by IRC § 1060 and the regulations thereunder, which require the application of the residual method prescribed by IRC § 338(b)(5). This structure provides Buyer with a cost basis in all acquired assets equal to the allocated portion of the purchase price (plus any assumed liabilities treated as additional consideration), which in turn generates future depreciation and amortization deductions that would not be available in a straight stock purchase.
Purchase Price and Consideration
The components of the transaction consideration are as follows:
Base Purchase Price: $620,000,000 (Six Hundred Twenty Million Dollars).
Consideration Components:
(a) Cash at Closing (Net of Escrow). At closing, Buyer will pay to Seller (or to such persons as Seller may direct, including for the payoff of Seller's existing indebtedness) cash consideration of $558,000,000, representing the Base Purchase Price of $620,000,000 less the Escrow Holdback of $62,000,000.
(b) Escrow Holdback. $62,000,000 (representing 10% of the Base Purchase Price) will be deposited at closing with Commonwealth Trust & Escrow Company (the "Escrow Agent") pursuant to a separate Escrow Agreement to be executed concurrently with the APA. The escrowed funds will serve as security for Seller's indemnification obligations under the APA and will be released in two tranches: $31,000,000 on June 30, 2025, and $31,000,000 on December 30, 2025, in each case subject to reduction for any pending or resolved indemnification claims. For purposes of the § 1060 allocation, the full $62,000,000 escrow holdback is treated as consideration paid at closing, consistent with Treas. Reg. § 1.1060-1(c)(1), because the escrow is held for the benefit of Seller and subject only to contingent reduction for indemnification claims.
(c) Contingent Earnout Consideration. Up to $45,000,000 in additional consideration contingent upon the Acquired Business achieving specified Adjusted EBITDA targets over two measurement periods. Tranche 1 provides for up to $22,500,000, and Tranche 2 provides for up to $22,500,000. The treatment of the contingent earnout for § 1060 allocation purposes is addressed in detail in Section VII of this memorandum.
(d) Working Capital Adjustment. The Base Purchase Price is subject to a dollar-for-dollar adjustment based on the difference between actual closing Net Working Capital and the NWC Target of $28,000,000, subject to a $500,000 de minimis collar (i.e., no adjustment will be made if the difference between actual NWC and the NWC Target is less than or equal to $500,000 in either direction). Based on preliminary estimates, closing NWC is expected to be approximately $29,200,000, which would result in a positive adjustment to the purchase price of approximately $1,200,000 (assuming the final figure exceeds the collar threshold). This adjustment will affect the aggregate consideration to be allocated.
Assumed Liabilities Treated as Additional Consideration
In addition to the Base Purchase Price and any working capital adjustment, certain liabilities assumed by Buyer in connection with the acquisition are treated as additional consideration for purposes of the § 1060 allocation. Under Treas. Reg. § 1.1060-1(c)(1), the total consideration for allocation purposes includes "the amount of liabilities assumed or taken subject to by the purchaser" as part of the transaction. The assumed liabilities include:
(a) Trade Payables. Trade accounts payable arising in the ordinary course of business within 90 days of closing.
(b) Assumed Contract Obligations. Obligations arising after closing under contracts that are assumed by Buyer as part of the acquisition, including clinic lease obligations, vendor agreements, and managed-care contracts.
(c) Accrued Employee PTO. Accrued paid time off for employees of CPI who are offered and accept employment with Buyer (the "Transferred Employees"). Based on preliminary estimates, approximately 1,950 of CPI's 2,100 employees are expected to be offered employment with Buyer.
The aggregate amount of assumed liabilities treated as additional consideration will be quantified at closing and added to the Base Purchase Price (as adjusted for the NWC true-up) to determine total allocable consideration. Based on our preliminary analysis of CPI's balance sheet and discussions with Ashford & Creighton LLP, we estimate that assumed liabilities will be in the range of approximately $18,000,000 to $22,000,000, with a midpoint estimate of approximately $20,000,000.
Excluded Assets
The following assets are expressly excluded from the transaction and will be retained by Seller:
(a) All cash and cash equivalents of CPI.
(b) Tax refunds and credits attributable to pre-closing tax periods.
(c) Certain personal property of Dr. Randall J. Whitfield that is maintained at CPI's Nashville headquarters (as specifically identified on a schedule to the APA).
(d) The CPI corporate name "Cardinal Peak Industries" — this name is not being permanently transferred to Buyer. Instead, it will be licensed back to Buyer under a Transition Services Agreement for a period of 12 months post-closing, solely to permit an orderly rebranding.
(e) Equity interests in Cardinal Peak Labs, Inc., a dormant Delaware subsidiary of CPI that holds no material assets and conducts no operations.
Purchase Price Multiple and Financial Summary
The Base Purchase Price of $620,000,000 represents a multiple of approximately 8.36x CPI's last-twelve-months ("LTM") Adjusted EBITDA of $74,160,000, as determined by Ashford & Creighton LLP's quality of earnings analysis. This multiple is within the range of recent comparable healthcare services transactions, which have generally ranged from approximately 7.5x to 10.0x EBITDA depending on the sub-sector, growth profile, and payor mix.
Key financial metrics for CPI, based on the twelve-month period ended December 31, 2023, are as follows:
Seller's Existing Indebtedness
CPI has outstanding indebtedness of $87,400,000 in principal under its senior secured term loan facility with Velthorn Merchant Bank, N.A., pursuant to a Credit Agreement dated March 15, 2018, as amended. This indebtedness will be repaid in full at closing from the sale proceeds and is not being assumed by Buyer. Accordingly, this debt is not included in the total consideration for § 1060 allocation purposes. The payoff amount at closing may differ from the stated principal balance due to accrued interest, prepayment premiums, and breakage costs; however, none of those amounts are borne by Buyer and therefore have no effect on the allocation analysis.
III. Legal Framework — IRC § 1060 and the Residual Method
A. Overview of IRC § 1060
IRC § 1060 governs the allocation of consideration in any "applicable asset acquisition." An applicable asset acquisition is defined under § 1060(c) as any transfer of assets that constitutes a trade or business (within the meaning of § 1060(c)(2)) and with respect to which the transferee's basis in such assets is determined wholly by reference to the consideration paid for such assets. The statute does not require that literally all assets of the trade or business be transferred; rather, the threshold question is whether the transferred assets constitute a "trade or business," which is generally satisfied where goodwill or going concern value could, under any circumstances, attach to the transferred assets. See Treas. Reg. § 1.1060-1(b)(2).
The present transaction plainly qualifies as an applicable asset acquisition. Ardent Healthcare Acquisition Corp. is acquiring substantially all of the assets that comprise CPI's multi-site outpatient rehabilitation and behavioral health services business, including patient relationships, managed-care contracts, clinic equipment, leasehold improvements, proprietary software, trademarks, assembled workforce, and healthcare licenses and permits. These assets, in the aggregate, constitute a going concern, and goodwill indisputably attaches to the business being acquired.
Under § 1060(a), the consideration paid in an applicable asset acquisition must be allocated among the acquired assets using the "residual method" prescribed by § 338(b)(5). The residual method, as implemented by Treas. Reg. § 1.338-6 and § 1.338-7 (incorporated by reference in Treas. Reg. § 1.1060-1(a)(1)), requires that consideration be allocated among acquired assets based on their fair market values, proceeding through seven classes of assets in order of priority. Consideration is first allocated to assets in Class I (cash and cash equivalents) to the extent of their fair market values; then to Class II (actively traded personal property), and so on through Class VI (§ 197 intangibles other than goodwill and going concern value). Any remaining consideration — i.e., the residual — is allocated to Class VII (goodwill and going concern value).
The significance of this ordering is that the total consideration in excess of the aggregate fair market value of all identifiable assets (Classes I through VI) is, by definition, attributable to goodwill and going concern value. In a transaction such as the present one, where the purchase price substantially exceeds the fair market value of the identifiable tangible and intangible assets, a material portion of the purchase price will be allocated to Class VII.
B. The Seven Asset Classes
The seven asset classes prescribed by Treas. Reg. § 1.338-6(b) are as follows:
Class I — Cash and Cash Equivalents. This class includes cash, demand deposits, and similar items. In the present transaction, cash and cash equivalents are excluded assets retained by Seller. Accordingly, no consideration will be allocated to Class I. Allocation: $0.
Class II — Actively Traded Personal Property. This class includes actively traded personal property within the meaning of § 1092(d)(1) (i.e., property for which there is an established financial market), certificates of deposit, and foreign currency. Based on our review of CPI's asset portfolio, CPI does not hold material amounts of actively traded personal property, certificates of deposit, or foreign currency. Allocation: $0.
Class III — Accounts Receivable, Mortgages, and Credit Card Receivables. This class encompasses all accounts receivable (whether or not from the performance of services), mortgages, and credit card receivables. In the present transaction, CPI's trade accounts receivable and accrued revenue constitute the assets in this class. The fair market value of Class III assets may differ from face value due to collection risk, timing of collection, and the specific characteristics of the payor mix (government payors, commercial insurers, and patient self-pay).
Class IV — Inventory. This class includes stock in trade, inventory, and property held primarily for sale to customers in the ordinary course of business. CPI's operations as an outpatient healthcare services provider result in relatively modest inventory holdings, consisting primarily of medical supplies, therapeutic equipment consumables, and general office supplies.
Class V — All Assets Not in Classes I, II, III, IV, VI, or VII. This is a broad residual class that captures tangible personal property and any other assets not specifically enumerated in the other classes. For the present transaction, Class V includes all furniture, fixtures, and equipment ("FF&E") across CPI's 37 clinic locations, including rehabilitation and therapy equipment, diagnostic equipment, office furniture, computer hardware, servers, leasehold improvements, and vehicles.
Class VI — All § 197 Intangibles Except Goodwill and Going Concern Value. This class includes all intangible assets that are described in § 197(d) other than goodwill and going concern value. Specifically, Class VI encompasses: workforce in place; business books and records, operating systems, or any other information base; any patent, copyright, formula, process, design, pattern, know-how, format, or other similar item; any customer-based intangible (including customer lists, patient relationships, and referral relationships); any supplier-based intangible; any license, permit, or other right granted by a governmental unit; any covenant not to compete entered into in connection with an applicable asset acquisition; any franchise, trademark, or trade name; and any other similar item. This is the most analytically complex class in the present transaction and is discussed in detail in Section IV.F below.
Class VII — Goodwill and Going Concern Value. This class consists of goodwill and going concern value, and it receives any consideration remaining after allocation to Classes I through VI. Goodwill, for these purposes, is the value of a trade or business attributable to the expectation of continued customer patronage, whether due to the name or reputation of the business or any other factor. Going concern value is the additional value that attaches to property by reason of its existence as an integral part of an ongoing business activity, including the value attributable to the ability of a business to continue functioning and generating income without interruption.
C. Consistency Requirement
A critical aspect of the § 1060 framework is the consistency requirement. IRC § 1060(a) provides that, in the case of an applicable asset acquisition, the consideration transferred shall be allocated among the assets in the same manner as amounts are allocated under § 338(b)(5). Treas. Reg. § 1.1060-1(a)(1) further provides that both the transferor (Seller) and the transferee (Buyer) are bound by the allocation to which they agree, and each must use the agreed-upon allocation for purposes of determining the respective tax consequences of the transaction.
If the parties do not agree on an allocation, each party may adopt its own allocation, but each must disclose the other party's allocation (or the fact that the other party has adopted a different allocation) by attaching to its Form 8594 a statement identifying the items of disagreement. While such inconsistency is permissible as a legal matter, it invites IRS scrutiny and should be avoided if possible.
We strongly recommend that the APA include a mutual agreement on purchase price allocation methodology and that both Buyer and Seller commit to filing consistent IRS Forms 8594. The APA should include a specific provision requiring the parties to negotiate in good faith to reach agreement on the final allocation, with a dispute resolution mechanism (e.g., engagement of an independent valuation firm as arbiter) in the event agreement cannot be reached.
We note that Seller's counsel, Barrow, Kensington & Pratt LLP (Catherine "Kit" Barrow, lead partner), and Seller's auditor, Linden Hayes & Co., P.C. (Roberta Chen, engagement partner), will likely review and negotiate the allocation. We should anticipate pushback on certain allocation positions, particularly with respect to the allocation to non-competition agreements (which generate ordinary income to the individual covenantors) and the allocation to Class III accounts receivable (which may generate ordinary income to Seller to the extent the face value exceeds Seller's tax basis in such receivables). These negotiation dynamics are addressed in greater detail in Section VIII below.
D. Buyer's Incentive — Step-Up in Basis
One of the principal tax advantages of the asset purchase structure (as compared to a stock purchase) is that Buyer obtains a cost basis in all acquired assets equal to the allocated purchase price plus any assumed liabilities treated as additional consideration. This cost basis reflects the fair market value of the acquired assets at the time of the acquisition — typically significantly higher than Seller's historical (often fully depreciated) tax basis in those same assets. The resulting "step-up" in basis generates future depreciation and amortization deductions for Buyer that would not be available in a stock purchase (absent a § 338(h)(10) election).
The step-up in basis is particularly valuable in two respects:
Section 197 Intangibles (Classes VI and VII). All § 197 intangibles acquired in an applicable asset acquisition — including goodwill, going concern value, customer-based intangibles, workforce in place, trademarks, trade names, covenants not to compete, and other enumerated intangibles — are amortizable on a straight-line basis over a 15-year period beginning in the month the intangible is acquired. In the present transaction, the aggregate allocation to Classes VI and VII is expected to exceed $565,000,000, generating annual amortization deductions in excess of $37,000,000. Over the 15-year amortization period, these deductions will provide substantial tax savings to Buyer.
Tangible Personal Property (Class V). Tangible personal property acquired in the transaction is eligible for accelerated depreciation under IRC § 168 (the Modified Accelerated Cost Recovery System, or "MACRS"), with recovery periods of 5 years or 7 years depending on the specific asset type. In addition, certain tangible personal property may be eligible for immediate expensing under IRC § 179 and/or bonus depreciation under IRC § 168(k). Under the current phase-down schedule enacted by the Tax Cuts and Jobs Act of 2017, property placed in service in calendar year 2024 is eligible for 60% first-year bonus depreciation (down from 80% in 2023 and 100% in 2022 and prior years).
From Buyer's perspective, the ideal allocation would maximize the amounts allocated to shorter-lived tangible assets (Class V) and amortizable intangibles with separately identifiable value (Class VI), while minimizing the residual allocated to goodwill (Class VII). However, from Seller's perspective, the ideal allocation would maximize the amount allocated to goodwill (Class VII), because gain on the sale of goodwill is generally treated as long-term capital gain, while minimizing the amounts allocated to ordinary income assets such as accounts receivable (Class III, to the extent the allocated amount exceeds Seller's basis), depreciation recapture property (Class V, subject to ordinary income treatment under § 1245 to the extent of prior depreciation), and covenants not to compete (which are treated as ordinary income to the individual covenantor). These competing incentives are the source of the principal negotiation tension in any § 1060 allocation and are addressed in Section VIII.
It is worth noting that, from Buyer's perspective, the distinction between Class VI and Class VII is less significant than the distinction between Class V and either of the intangible classes, because both Class VI and Class VII assets are amortizable over the same 15-year period under § 197. The key Buyer incentive is therefore to maximize the allocation to Class V (where accelerated depreciation, including bonus depreciation, provides a faster cost recovery) relative to the intangible classes, while maintaining overall defensibility.
IV. Description of Acquired Assets by Class
A. Class I — Cash and Cash Equivalents
Cash and cash equivalents are expressly excluded from the transaction. CPI retains all cash, demand deposits, money market funds, and other cash equivalents held as of the closing date. Accordingly, no portion of the purchase price is allocated to Class I assets.
Proposed Allocation to Class I: $0.
B. Class II — Actively Traded Personal Property
Based on our review of the information provided in the data room and discussions with CPI's management during the due diligence process (which commenced on February 5, 2024), CPI does not hold any material actively traded personal property as defined in IRC § 1092(d)(1). CPI does not maintain certificates of deposit, positions in publicly traded securities, foreign currency accounts, or other financial instruments that would fall within Class II. Accordingly, no portion of the purchase price is allocated to Class II assets.
Proposed Allocation to Class II: $0.
C. Class III — Accounts Receivable and Similar Assets
CPI's trade accounts receivable represent amounts due from patients, commercial insurance payors, government payors (Medicare and Medicaid), and other third-party payors for outpatient rehabilitation and behavioral health services rendered by CPI prior to the closing date. These receivables are being acquired by Buyer as part of the transaction and constitute the principal Class III asset.
The fair market value of the accounts receivable will be determined as of the closing date. Based on our preliminary review of CPI's balance sheet as of December 31, 2023, net accounts receivable (after deducting the allowance for doubtful accounts of approximately $3,800,000) totaled approximately $40,200,000. We note, however, that the receivable balance fluctuates with patient volume, billing cycles, and payor reimbursement timing, and the closing date balance may differ from the year-end figure. Based on historical trends and seasonal patterns, we estimate that net accounts receivable at closing will be in the range of approximately $38,000,000 to $42,000,000.
The fair market value of the accounts receivable may differ from their face value for several reasons. First, the payor mix affects collection risk and timing. Government payors — primarily Medicare (Part B) and Medicaid — account for approximately 31% of CPI's net revenue. While government payor receivables generally have lower collection risk than commercial or self-pay receivables, they are subject to potential retroactive adjustments, recoupments, and regulatory audits. Second, the aging profile of the receivable portfolio affects collectibility: receivables aged beyond 90 days carry higher collection risk. Third, Buyer will need to assess whether there are any systematic billing or coding issues that could affect future collections of pre-closing receivables. Our preliminary assessment, informed by Ashford & Creighton's quality of earnings analysis, is that the fair market value of the receivable portfolio is approximately equal to its net book value, with a modest discount of approximately 1% to 3% to reflect collection risk and time value of money.
For purposes of this preliminary allocation, we propose allocating approximately $39,500,000 to Class III assets, representing the midpoint of our estimated range. This figure will be refined as part of the NWC calculation at closing, as accounts receivable is a significant component of Net Working Capital.
Proposed Preliminary Allocation to Class III: $39,500,000 (subject to adjustment based on closing balance sheet).
D. Class IV — Inventory
CPI operates as an outpatient rehabilitation and behavioral health services provider. Unlike a pharmaceutical manufacturer or medical device company, CPI does not maintain large inventories of finished goods or raw materials. CPI's inventory consists primarily of medical supplies (e.g., therapeutic tapes, braces, hot/cold packs, electrodes), therapeutic equipment consumables, and general office and clinic supplies. These items are consumed in the course of providing patient care and are replenished on a regular basis through purchase orders with medical supply distributors.
Based on CPI's December 31, 2023 balance sheet, inventory was stated at approximately $2,800,000, valued at the lower of cost or net realizable value. Given the nature of the inventory (relatively low-value consumable items with short shelf lives), we believe that the fair market value of the inventory approximates its book value. There is no material obsolescence risk, as the inventory turns over rapidly (approximately 18 to 20 times per year based on historical patterns).
Proposed Preliminary Allocation to Class IV: $2,800,000.
E. Class V — Tangible Personal Property and Other Assets
Class V encompasses all assets not falling within Classes I through IV, Class VI, or Class VII. In the present transaction, this class primarily consists of furniture, fixtures, and equipment ("FF&E") across CPI's 37 clinic locations, as well as certain corporate-level assets maintained at CPI's Nashville headquarters.
CPI's clinic footprint spans seven states, with the following distribution:
The tangible personal property being acquired includes the following categories of assets:
(a) Rehabilitation and Therapy Equipment. This includes treatment tables, exercise machines, parallel bars, balance equipment, ultrasound therapy units, electrical stimulation devices, traction equipment, isokinetic testing systems, and other specialized rehabilitation equipment.
(b) Diagnostic Equipment. This includes electrodiagnostic equipment (EMG/NCV), vital signs monitors, pulse oximeters, and related diagnostic devices.
(c) Office Furniture and Fixtures. This includes desks, chairs, reception area furnishings, filing cabinets, shelving, and clinic interior build-outs.
(d) Computer Hardware and Servers. This includes desktop and laptop computers, tablets used by clinicians for point-of-care documentation, printers, network switches, servers (both on-premises and co-located), and other IT infrastructure hardware.
(e) Leasehold Improvements. All 37 clinics operate under triple-net leases with third-party landlords. CPI does not own any real property. Leasehold improvements — including interior build-outs, specialized flooring (required for rehabilitation spaces), plumbing modifications, HVAC upgrades, signage, and ADA-compliant modifications — are included as Class V assets. The average remaining lease term across the portfolio is approximately 4.2 years, which affects the valuation of certain leasehold improvements whose useful life is limited by the lease term.
(f) Vehicles. CPI operates a small fleet of approximately 12 vehicles used for home health visits, inter-clinic transport of equipment, and administrative purposes.
Based on our preliminary review of CPI's fixed asset register — provided in the electronic data room on February 15, 2024 (Data Room Index No. 4.3.1) — and discussions with Gregory Nolan and his team at Ashford & Creighton LLP, the estimated aggregate fair market value of tangible personal property is approximately $31,000,000 to $35,000,000. CPI's net book value for these assets (i.e., original cost less accumulated depreciation) is approximately $22,500,000 as of December 31, 2023, but fair market value exceeds net book value because many assets with remaining useful life have been substantially depreciated on CPI's books under accelerated depreciation methods and because replacement costs for certain categories of medical equipment have increased in recent years.
The fair market value estimate is preliminary and subject to refinement. We recommend that the third-party valuation firm engaged for the formal purchase price allocation study perform a detailed asset-by-asset or asset-category appraisal of CPI's tangible personal property. In the interim, we are using a midpoint estimate of $33,000,000 for this preliminary allocation.
From a Buyer tax perspective, Class V assets are among the most valuable from a cost recovery standpoint. Rehabilitation equipment and computer hardware generally fall within the 5-year MACRS recovery class, while office furniture and fixtures fall within the 7-year class. Leasehold improvements have varying MACRS recovery periods. Importantly, all eligible Class V assets placed in service in 2024 will qualify for 60% first-year bonus depreciation under IRC § 168(k), providing an accelerated tax benefit to Buyer.
Proposed Preliminary Allocation to Class V: $33,000,000.
F. Class VI — Intangible Assets (Other Than Goodwill and Going Concern Value)
Class VI is the most analytically significant class in this allocation exercise. It encompasses all § 197 intangibles — i.e., all intangible assets described in IRC § 197(d) — other than goodwill and going concern value (which are allocated to Class VII). The distinction between Class VI and Class VII is important for several reasons, even though both classes are subject to the same 15-year amortization period under § 197: first, the allocation to specific Class VI intangibles must be defensible based on their independently determined fair market values (as opposed to the Class VII residual); second, Seller's tax treatment of certain Class VI intangibles (particularly non-competition agreements) differs from the treatment of goodwill; and third, a well-supported Class VI allocation demonstrates to the IRS that the parties conducted a rigorous, arm's-length valuation process.
We have identified the following categories of Class VI intangible assets in the present transaction:
1. PeakConnect Patient-Engagement Software Platform
CPI has developed and deployed a proprietary software platform known as "PeakConnect," which serves as the company's patient engagement, scheduling, outcomes tracking, and clinical documentation system. PeakConnect was developed internally by CPI's technology team beginning in approximately 2016, with significant enhancements deployed in 2019 and 2021. The platform integrates with electronic health records (EHR) systems and supports patient self-scheduling, telehealth capabilities, automated appointment reminders, outcomes measurement (using standardized functional assessment tools), and patient satisfaction surveys.
PeakConnect is a material intangible asset being acquired in this transaction. The APA includes all source code, object code, technical documentation, user manuals, update logs, and related intellectual property associated with PeakConnect. CPI's management has represented that the platform is a significant competitive differentiator and a key driver of patient retention and clinical efficiency.
For purposes of valuing PeakConnect, we recommend that the valuation firm employ both the replacement cost approach (estimating the cost to recreate the software from scratch, including developer labor, overhead, and opportunity cost) and the income approach (estimating the incremental revenue and cost savings attributable to the platform over its expected useful life, discounted to present value). Based on our preliminary assessment and discussions with CPI's Chief Technology Officer during management presentations on February 22, 2024, we estimate the fair market value of PeakConnect at approximately $28,000,000 to $35,000,000. For purposes of this preliminary allocation, we are using a midpoint estimate of approximately $31,000,000.
We note that software developed internally and held by the developer for use in its business is generally not a § 197 intangible in the hands of the developer. However, when such software is acquired as part of an applicable asset acquisition under § 1060, it is treated as a § 197 intangible in the hands of the acquirer and is amortizable on a straight-line basis over 15 years. See IRC § 197(c)(1); Treas. Reg. § 1.197-2(b)(1). Accordingly, the full amount allocated to PeakConnect will be recoverable by Buyer through 15-year amortization commencing in the month of closing.
2. Trademarks and Trade Names
The following trademark and trade name assets are being acquired in the transaction:
(a) PeakConnect Registered Trademark. CPI holds a registered trademark for "PeakConnect" with the United States Patent and Trademark Office, Registration No. 5,412,887. The registration is in good standing and covers goods and services related to healthcare software platforms and patient engagement tools.
(b) Service Marks and Branding. CPI utilizes various service marks and branding elements in connection with its clinic operations, including clinic-specific logos, taglines, and marketing materials. To the extent these branding elements are being transferred as part of the transaction (as opposed to elements tied exclusively to the CPI corporate name, which is an excluded asset), they constitute Class VI intangible assets.
It is important to note that the CPI corporate name "Cardinal Peak Industries" is not being permanently transferred to Buyer. Instead, the APA provides for a 12-month license-back arrangement under the Transition Services Agreement, permitting Buyer to continue operating under the CPI name during the rebranding period. Because the CPI name is an excluded asset, it receives no allocation. Only the PeakConnect mark and associated service marks that are being permanently transferred receive an allocation.
We estimate the preliminary fair market value of the PeakConnect trademark and related transferred service marks at approximately $5,000,000 to $8,000,000. For this preliminary allocation, we use a midpoint of approximately $6,500,000. The valuation firm should apply the relief-from-royalty method, which estimates the value of the trademark by reference to the royalty payments that Buyer would hypothetically have to pay to license the mark from a third party, discounted to present value.
3. Patient Lists and Patient Relationships
CPI's patient base across its 37 clinics represents a substantial intangible asset. CPI served approximately 187,000 unique patients in the twelve-month period ended December 31, 2023, with a significant portion of revenue derived from recurring patients (patients returning for multiple episodes of care, follow-up visits, or treatment across multiple clinical disciplines). CPI's business model benefits from established referral patterns: referring physicians and hospital systems in the seven-state operating territory routinely direct patients to CPI's clinics based on longstanding relationships, clinical reputation, and geographic convenience.
In valuing patient relationships and lists, we recommend that the valuation firm employ the multi-period excess earnings method ("MEEM") under the income approach. This method isolates the portion of the Acquired Business's projected cash flows that is attributable to existing patient relationships (as distinguished from cash flows attributable to new patients acquired after closing, workforce, tangible assets, and other contributory assets) and discounts those cash flows to present value over the expected attrition period of the patient base. An alternative approach, the distributor method (also known as the "with-and-without" method), may be considered as a reasonableness check.
Key factors bearing on the value of the patient relationships include:
(a) Payor Mix. CPI's revenue is derived from a diverse mix of payors: commercial insurance (~60% of net revenue), Medicare/Medicaid (~31% of net revenue combined), workers' compensation (~5%), and patient self-pay (~4%). The managed-care agreements with 12 major commercial payors are a significant component of the patient relationship value. SummitCare Health Plans, Inc. alone represents approximately 22% of CPI's net revenue.
(b) Patient Retention and Attrition. Outpatient rehabilitation services tend to have moderate-to-high patient attrition rates, as individual episodes of care are finite (a typical course of physical therapy lasts 6 to 12 weeks). However, CPI benefits from a "replenishing" patient base driven by physician referrals and community reputation, which mitigates the effect of individual patient attrition on total revenue.
(c) Managed-Care Contracts. The 12 major managed-care contracts are valuable intangibles in their own right, as they define reimbursement rates, covered services, and network participation terms. The loss or renegotiation of a major managed-care contract could have a material adverse effect on revenue. These contracts are being assigned to Buyer (with payor consent, where required) and are included within the patient relationship / customer-based intangible category.
(d) Medicare/Medicaid Provider Enrollments. CPI's Medicare and Medicaid provider enrollment numbers are discussed separately below in Section IV.F.7.
Based on our preliminary analysis and analogous transactions in the healthcare services sector, we estimate the fair market value of patient relationships and patient lists at approximately $55,000,000 to $65,000,000, with a midpoint estimate of approximately $60,000,000. This is the largest single component of the Class VI allocation and will be the focus of the formal valuation study.
4. Assembled Workforce
CPI employs approximately 2,100 individuals across its 37 clinic locations and its Nashville headquarters. The workforce includes approximately 1,450 licensed clinicians (physical therapists, occupational therapists, speech-language pathologists, licensed clinical social workers, licensed professional counselors, and behavioral health technicians) and approximately 650 administrative, support, and management personnel (including clinic directors, billing specialists, scheduling coordinators, IT staff, and corporate overhead functions).
The assembled workforce represents a significant intangible asset because it reflects the cost that Buyer would avoid by acquiring an already-functioning employee base rather than having to recruit, hire, train, and credential each employee individually. For licensed clinicians in particular, the cost of recruitment (including recruiter fees, signing bonuses, and relocation assistance) and credentialing (including state licensure verification, payor enrollment, and background checks) is substantial. CPI's workforce has a relatively low voluntary turnover rate for the healthcare services industry — approximately 14% annually for clinical staff and 18% for administrative staff — reflecting a stable and experienced employee base.
Assembled workforce in place is expressly identified as a § 197 intangible under IRC § 197(d)(1)(C)(i) and is amortizable over 15 years when acquired as part of an applicable asset acquisition. The valuation firm should apply the cost approach to value the assembled workforce, estimating the costs that would be incurred to recruit, hire, train, and bring to equivalent productivity a workforce comparable to CPI's existing employee base.
We estimate the preliminary fair market value of the assembled workforce at approximately $8,000,000 to $12,000,000, with a midpoint estimate of approximately $10,000,000.
5. Favorable Lease Terms
CPI operates all 37 of its clinics under triple-net lease arrangements with third-party landlords. CPI does not own any real property. To the extent that any of these leases have rental rates that are below current market rates — i.e., the contractual rent is less than the rent that would be payable under a lease negotiated at arm's length as of the closing date — the present value of the below-market differential over the remaining lease term represents a Class VI intangible asset.
Favorable lease terms are a § 197 intangible when acquired as part of an applicable asset acquisition. See IRC § 197(d)(1)(C)(iv); Treas. Reg. § 1.197-2(b)(9). The value of the favorable lease intangible is amortized over the 15-year § 197 period (not the remaining lease term), consistent with the anti-churning and simplification principles underlying § 197.
Our preliminary analysis of CPI's lease portfolio — informed by Tiffany Rosenthal's lease review workstream, which is being conducted as part of the real estate due diligence — suggests that several of CPI's leases, particularly those executed prior to 2020, carry rental rates modestly below current market rates in their respective metropolitan areas. This is consistent with the general trend of rising commercial rental rates for medical office space in the Southeast United States over the past several years. However, the favorable differential is not dramatic in most cases, and several leases are at or above current market rates.
In the aggregate, we estimate the fair market value of favorable lease terms at approximately $2,000,000 to $4,000,000, with a midpoint of approximately $3,000,000. This estimate is preliminary and will be refined based on a lease-by-lease comparison of contractual rents to market rents, to be completed by the valuation firm in coordination with Ms. Rosenthal's workstream.
6. Non-Competition Agreements
As a condition to closing, two key individuals — Dr. Randall J. Whitfield (Founder and CEO, 52% equity holder) and Elaine Whitfield-Torres (Co-Founder and CCO, 18% equity holder) — will each enter into non-competition and non-solicitation agreements with Buyer. The material terms of the non-compete agreements, as currently contemplated, are as follows:
(a) Restrictive Period: Three (3) years from the closing date.
(b) Geographic Scope: The seven states in which CPI currently operates (Tennessee, Georgia, North Carolina, South Carolina, Alabama, Virginia, and Kentucky).
(c) Restricted Activities: Ownership, management, operation, or employment by any business that provides outpatient rehabilitation services, behavioral health services, or healthcare-related software and technology services competitive with the Acquired Business.
(d) Non-Solicitation: Prohibition on soliciting or hiring CPI employees or soliciting CPI patients during the restrictive period.
(e) Governing Law: Tennessee.
Non-competition agreements entered into in connection with an applicable asset acquisition are § 197 intangibles under IRC § 197(d)(1)(E) and are amortizable over the 15-year § 197 period — not the contractual term of the covenant (which in this case is only 3 years). This mismatch between the economic life of the covenant (3 years) and the tax amortization period (15 years) is a well-known feature of § 197 and generally works to the disadvantage of the buyer.
For Seller, the allocation to non-competition agreements is a point of particular sensitivity. Under IRC § 1060 and the regulations thereunder, amounts allocated to non-compete covenants are treated as ordinary income to the individual covenantor. See IRC § 1234A (as applicable); Rev. Rul. 69-643. Both Dr. Whitfield and Whitfield-Torres will therefore report their respective shares of the non-compete allocation as ordinary income, taxed at rates of up to 37% (plus the 3.8% net investment income tax, if applicable), rather than at the preferential long-term capital gains rate of 20% (plus 3.8% NIIT) that would apply to amounts allocated to goodwill. For this reason, Seller and its counsel will likely resist any significant allocation to the non-competition agreements.
From Buyer's perspective, the allocation to non-competes provides a 15-year amortization deduction — the same as goodwill. There is therefore no marginal Buyer benefit to allocating additional amounts to non-competes rather than goodwill. However, there is an important compliance reason to allocate a reasonable amount to the non-competes: the IRS may challenge an allocation that assigns zero value (or only nominal value) to restrictive covenants entered into with the former owner and key executive of a $620 million healthcare services business. The failure to allocate an appropriate amount to the non-competes could expose Buyer (and Seller) to the risk of an IRS reallocation, potentially resulting in adverse tax consequences to one or both parties.
Based on the income approach (estimating the incremental value protected by the covenants during the three-year restrictive period) and considering the significance of Dr. Whitfield's and Whitfield-Torres's roles in CPI's business operations and referral relationships, we estimate the combined fair market value of the non-competition agreements at approximately $6,000,000 to $10,000,000, allocated as follows:
• Dr. Randall J. Whitfield: approximately $4,000,000 to $7,000,000 (reflecting his role as Founder, CEO, and primary physician referral relationship holder, and his 52% ownership interest).
• Elaine Whitfield-Torres: approximately $2,000,000 to $3,000,000 (reflecting her role as Co-Founder and CCO, her 18% ownership interest, and her involvement in clinical program development and payor relationships).
For purposes of this preliminary allocation, we are using a combined midpoint estimate of approximately $6,500,000 ($4,500,000 to Dr. Whitfield; $2,000,000 to Whitfield-Torres). This level of allocation is moderate and defensible — it represents approximately 1% of the total purchase price and is consistent with non-compete allocations in comparable healthcare services transactions. We believe this figure strikes an appropriate balance between (a) ensuring that the allocation is supportable in the event of an IRS examination and (b) minimizing the adverse ordinary income treatment for Seller's principals, thereby facilitating agreement on the overall allocation.
We anticipate that Seller's counsel will seek to reduce the non-compete allocation, potentially to zero or a nominal amount. The APA should include a specific provision addressing the agreed-upon non-compete allocation to avoid post-closing disputes. We are prepared to support the proposed allocation with a valuation analysis if necessary.
7. Healthcare Licenses, Permits, and Provider Enrollments
CPI holds various state healthcare licenses and permits across its seven states of operation, including facility licenses, clinical practice registrations, and other regulatory authorizations required for the operation of outpatient rehabilitation and behavioral health clinics. In addition, CPI holds Medicare and Medicaid provider enrollment numbers — known as Provider Transaction Access Numbers ("PTANs") for Medicare and Medicaid provider identification numbers — that are essential for billing and receiving reimbursement from government payors.
These licenses and permits present a somewhat unique valuation challenge. Many state healthcare licenses are not freely transferable; instead, the change of ownership of a licensed healthcare facility typically requires a new license application or a change-of-ownership filing with the applicable state regulatory authority. CPI has already filed change-of-ownership applications in Tennessee, Georgia, and North Carolina as of March 4, 2024, with filings in the remaining states expected to be made prior to closing. For Medicare and Medicaid, a CMS-855B (Medicare enrollment application) and corresponding state Medicaid change-of-ownership forms will need to be filed.
To the extent that the change-of-ownership filings result in the continuation of CPI's existing provider enrollment numbers under Buyer's ownership — which is the expected outcome in most jurisdictions for a properly structured asset acquisition — there is some value attributable to the avoidance of the time, cost, and revenue disruption associated with obtaining entirely new provider enrollments. However, because these licenses and enrollments are not freely alienable (they are granted by governmental authorities and subject to regulatory approval), their separable fair market value is limited.
We estimate a nominal allocation of approximately $1,000,000 to $2,000,000 for the aggregate value of healthcare licenses, permits, and provider enrollments, using a midpoint of approximately $1,000,000. The valuation firm may adjust this figure based on a more detailed analysis of the specific regulatory landscape in each state.
8. Total Proposed Class VI Allocation
Based on the foregoing analysis, the aggregate preliminary allocation to Class VI intangible assets is as follows:
The midpoint estimate of $118,000,000 is used for purposes of this preliminary allocation. All Class VI intangibles are amortizable on a straight-line basis over 15 years under IRC § 197, commencing in the month of closing. At $118,000,000, the annual amortization deduction attributable to Class VI intangibles is approximately $7,867,000.
G. Class VII — Goodwill and Going Concern Value
Class VII consists of goodwill and going concern value and receives the residual consideration after allocation to Classes I through VI. Goodwill, for tax purposes, is the value of a trade or business attributable to the expectation of continued customer patronage, whether due to the name or reputation of the business or any other factor. Going concern value is the additional value that attaches to property by reason of its existence as an integral part of an ongoing business activity.
The residual allocation to Class VII is calculated as follows:
Step 1: Determine Total Allocable Consideration.
Total allocable consideration equals the Base Purchase Price, as adjusted for the Net Working Capital adjustment, plus assumed liabilities treated as additional consideration.
• Base Purchase Price: $620,000,000
• Estimated NWC Adjustment: +$1,200,000 (estimated closing NWC of $29,200,000 vs. NWC Target of $28,000,000; assumes the adjustment exceeds the $500,000 de minimis collar)
• Estimated Assumed Liabilities: +$20,000,000 (midpoint estimate of $18,000,000 to $22,000,000)
• Total Estimated Allocable Consideration: approximately $641,200,000 (for illustrative purposes, we use a rounded figure of approximately $640,000,000)
Note: the contingent earnout of up to $45,000,000 is not included in the initial allocable consideration. As discussed in Section VII below, earnout payments will be allocated when and as paid.
Step 2: Subtract Preliminary Allocations to Classes I through VI.
Step 3: Calculate Class VII Residual.
Total Estimated Allocable Consideration: ~$640,000,000 Less: Total Classes I–VI: ~$193,300,000 Residual to Class VII (Goodwill and Going Concern Value): approximately $446,700,000
For purposes of this preliminary allocation, we use a rounded figure of approximately $447,000,000 for the Class VII allocation. This figure will vary depending on the final determination of assumed liabilities, the NWC true-up, and any adjustments to the Class I through Class VI allocations resulting from the formal valuation study.
Goodwill as a Percentage of Total Consideration. At approximately $447,000,000, goodwill represents approximately 69.8% of total allocable consideration (~$640,000,000). This is consistent with healthcare services acquisitions at premium EBITDA multiples. At a purchase price of approximately 8.36x LTM Adjusted EBITDA, a significant portion of the enterprise value being acquired reflects the going concern value of CPI's business — including its reputation in the outpatient rehabilitation and behavioral health markets, its geographic footprint across seven Southeastern states, its established referral network with physicians and hospital systems, its clinical expertise and outcomes track record, and its competitive position — that is not separately identifiable as a Class VI intangible. A goodwill allocation in the range of 65% to 75% of total consideration is typical for healthcare services platform acquisitions in this EBITDA multiple range.
Goodwill is a § 197 intangible and is amortizable on a straight-line basis over 15 years. At $447,000,000, the annual goodwill amortization deduction is approximately $29,800,000.
Proposed Preliminary Allocation to Class VII: approximately $447,000,000 (residual; subject to adjustment based on final consideration and Class I–VI allocations).
V. Proposed Preliminary Allocation Summary Table
The following table summarizes the proposed preliminary purchase price allocation across all seven asset classes. All figures are estimates and are subject to the qualifications set forth throughout this memorandum.
The Class VI allocation is further broken down as follows:
Total Allocable Consideration: The total preliminary allocable consideration of approximately $640,000,000 reflects the Base Purchase Price of $620,000,000 plus estimated assumed liabilities of approximately $20,000,000 (midpoint). This total does not include the NWC adjustment (estimated at +$1,200,000), which may modestly increase the total, or the contingent earnout (up to $45,000,000), which is addressed separately in Section VII.
Important Notes and Qualifications:
(i) All figures are preliminary estimates subject to refinement based on (a) the engagement and completion of a formal third-party valuation study, (b) finalization of the closing balance sheet, (c) the post-closing NWC true-up (due approximately 90 days post-c

PRIVILEGED & CONFIDENTIAL ATTORNEY WORK PRODUCT / ATTORNEY-CLIENT PRIVILEGE

INTERNAL TAX MEMORANDUM

MATTER NO.: 2024-M&A-0142

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