Mergers and acquisitions can be an exciting part of physician practice transformations, especially if you're a physician owner who's received an attractive offer from a prospective buyer. Similarly, you may be the buyer of a physician practice who is eager to get the transaction behind you. However, while the future is without a doubt filled with promise, it's important not to get too ahead of yourself, as the next step in the process can be a lengthy one—due diligence.
I have assisted many entities (including physicians themselves, private equity firms, and management services organizations) with due diligence of physician practices, and can attest to the highly structured process of due diligence. There are myriad of items to review and question, which go beyond having a mere rough idea of what equipment is in the practice and whether there are any malpractice claims.
What is Due Diligence?
Due diligence is an important part of the acquisition process and represents the orderly investigation of any matter pertaining to business dealings. Essentially, it’s about understanding how a business really works. Since no two medical practices are the same, it's important that a diligent effort is made in order to obtain any information that would be relevant in the sale or purchase of a physician practice and its assets. A key aspect of due diligence is to examine the strategic positioning of the “target” medical practice. In mergers and acquisitions, due diligence helps clients recognize any financial, legal, or operational risks that may not be noticeable from outside perspectives.
Why Should Due Diligence Matter to You?
While due diligence may seem like it only benefits one party, the fact is that due diligence helps both the buyer and the seller in the acquisition of a physician practice. It is the seller's responsibility to provide buyers, investors, and potential business partners with the information needed to make an informed decision. Yes, it means turning over extremely sensitive corporate documents such as profit and loss statements, business plans, payroll records, payer contracts, lease agreements, and so on.
From a buyer's perspective, due diligence gives them peace of mind that they're making the right deal and have all the information they need to make a good purchasing decision. This information can include learning more about the practice's existing patient base and referral relationships and either validates positive assumptions or alerts them about potential irregularities.
From a seller's perspective, due diligence helps physician owners take a deeper dive into the financial integrity of their business and can also help them uncover the fair market value of their practice. As valuations and acquisition prices are intertwined, it's essential that physician owners, private equity firms, and management services organizations invest in quality due diligence reporting and services.
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