Buyer/Seller Side Due Diligence Checklist

Buying or selling a home is complicated. Buying or selling a business is even more complicated. And buying or selling a medical practice may be one of the most complex types of business sales. While buying or selling a medical practice can be lucrative or necessary, these transactions should not be done without careful consideration of all of the moving parts. In other words, each side must do its due diligence. It can be overwhelming to know where to start. Here is what buyers and sellers considering a medical practice sale transaction should consider.

About Due Diligence 

Due diligence is the careful investigation and evaluation of a business, individual, or investment before entering into a transaction. The purpose of due diligence is to make informed decisions, minimize risks, and protect the interests of all parties involved in a purchase or sale. It is crucial to note that due diligence does not fully eliminate risk for buyers or sellers. However, it makes the business transaction much more likely to be fruitful. 

There are several types of due diligence that buyers and sellers should engage in:

Financial Due Diligence 

Financial due diligence is important because it helps determine the true value of a healthcare practice and identify potential risks. Both buyers and sellers should review:

• Financial Statements:
  • Review the last three to five years of profit and loss statements, balance sheets, and cash flow statements.
  • Identify trends in revenue, expenses, and profitability.
  • Assess any unusual or one-time transactions that may distort performance.
• Tax Returns:
  • Review federal and state income tax returns for the past three to five years.
  • Verify that there is consistency between tax filings and financial statements.
• Accounts Receivable and Payable:
  • Understand accounts receivable, collection rates, and historical write-offs.
  • Know about any pending obligations, vendor contracts, and outstanding debts.
• Revenue by Payer:
  • Get the breakdown of revenue from Medicare, Medicaid, private insurance, and self-pay patients.
• Insurance Reimbursements:
  • Know about claims denials, adjustments, and appeals.
  • Understand trends in reimbursement disputes or delayed payments.
• Financial Projections:
  • Review historical assumptions, patient growth trends, and projected revenue.
  • Identify any anticipated changes affecting revenue.

Legal Due Diligence

For buyers, especially, it is important to know what is on the horizon regarding legal issues. These are some things that should be understood before the transaction is initiated:

• Review the corporate structure by examining the incorporation documents, ownership details, equity distribution, and any restrictions on the transfer of ownership interests. 
• Verify that all medical licenses, DEA registrations, state permits, and specialty certifications are current and valid. 
• Carefully examine contracts and agreements. This includes employment contracts, independent contractor arrangements, shareholder agreements, office leases, vendor contracts, and managed care agreements.
• Investigate and understand the full scope of any pending or past litigation. You should be aware of any malpractice claims, compliance violations, regulatory investigations, or insurance disputes. 

Technology Due Diligence

Healthcare practices depend heavily on technology to support daily operations, billing, and clinical care. Proper due diligence ensures systems are secure and compliant.

• Check all electronic health record (EHR) and practice management systems for valid licenses and clear data ownership. 
• Confirm active vendor support and interoperability with labs, pharmacies, and imaging centers. 
• Review workflow, reporting, and staff training. 
• Examine data security, including HIPAA compliance, encryption, access controls, backups, and disaster recovery. 
• Verify employee security training. 
• For telehealth, ensure compliance with state and federal rules. 
• Check platform reliability, security, patient usability, reimbursement, and adoption rates to confirm effectiveness.

Compliance and Risk Management

Ensuring regulatory and legal compliance is essential in protecting both the healthcare organization and its patients. Here is what parties should consider:

• Review internal audits, risk assessments, and corrective actions to ensure policies and procedures are up to date and effectively enforced. 
• Check compliance with federal regulations, including the Anti-Kickback Statute, Stark Law, and False Claims Act. 
• Assess systems for detecting and preventing fraud, waste, and abuse in billing, referrals, and financial arrangements. 
• Confirm HIPAA compliance, examine data breach history, and review staff training on privacy and security. 
• Evaluate incident reporting, patient safety initiatives, and risk management protocols. 
• Verify insurance coverage for malpractice, liability, and cyber risks to ensure the organization is protected.

Real Estate and Equipment Due Diligence

Physical assets are often a major component of a practice sale. Here is what buyers and sellers should keep in mind: 

• Review office leases, including terms, renewals, and repair obligations. 
• If the property is owned, confirm a clear title, zoning compliance, and environmental assessments. 
• Verify medical equipment ownership, maintenance, warranties, and calibration, and determine if leases or vendor contracts transfer to the buyer. 

How Healthcare Business Lawyers Can Help

While this guide is pretty comprehensive, the process of conducting due diligence can be overwhelming, particularly for busy professionals. This is where a healthcare business lawyer can come in, conducting due diligence for you and ensuring this transaction is the best move for you. They understand the complexities of these sorts of transactions and know to ask the tough questions that might not otherwise be asked. This is because they have been involved in these transactions on both sides, so they can speak to the nuances of this type of transaction. 

Healthcare transaction attorneys ensure that all aspects of the organization’s operations are properly reviewed and that potential risks are identified before the deal is finalized. The risks and upside of the transaction will be presented to the buyer or seller, who will then have the final say on whether to proceed. Healthcare transaction lawyers take the stress out of due diligence and will help buyers and sellers make informed decisions. This will help them to avoid unforeseen liabilities and have a smoother, more secure transaction.

Contact a Healthcare Transaction Attorney

Working through all the due diligence required before medical practice sales is time-consuming. The end of medical practice ownership is rewarding. Contact a healthcare transaction attorney to walk you through the process.