What is Included in Due Diligence Reporting?
First of all, it is important to note that non-disclosure agreements (NDAs) are standard. If you are a potential seller and you are not offered an NDA by the potential buyer (this includes with a broker if you have chosen to hire one), then a red flag should be alerted right from the start.
Every detail matters, from patient volumes and catchment areas, to existing relationships with referring physicians, to the workforce itself and what the competitive environment for that medical practice looks like. Good due diligence may validate your assumptions, but maybe more importantly, it can help alert you to any irregularities or possible issues in a business (or any aspect that may bring the value of a “target” medical practice down). Ideally, any issues would be surfaced before the due diligence stage, but sometimes things slip through the cracks, or may not be fully considered in the right context.
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Here are a few key categories of due diligence reporting:
- Financial Information – Most buyers spend the majority of their due diligence looking at and confirming financial reporting. All documentation and accounting information should be up to date and accurately portray numbers that were disclosed during the deal-making stage.
- Legal – Understanding if the business being acquired has any potential liabilities is another important consideration in due diligence. This includes looking into current partnerships and contracts in place to ensure there are no irregularities before moving forward.
- Business Sustainability – Cash flow management and long-term business sustainability are important aspects to due diligence. Careful analysis and previous years of data (e.g. patient volumes, procedures, billings and collections, etc.) will help potential buyers diagnose trends and decide if their investment is worthwhile.
- Assets – Buyers will want to ensure what assets are in place and if they are in good working order, because if not, they will have to make investments after closing. Service agreements will be reviewed as well as any lease arrangements. Additionally, real estate (owned or leased) will need to be evaluated and discussed strategically with the seller.
- Human Resources – Contracts on physicians and any other employees may need to be redone and thus the buyer will often have sensitive discussions with the seller during due diligence as it relates to those. All other employee-related items (e.g. benefits plans, 401(k), COBRA continuations, etc.) should be readily accessible as these can take time to review and make determinations on post-transaction changes.
Having said all that, it is important to note that not all due diligence investigations are the same, and surprises are to be expected. This can greatly impact the length of the due diligence process as well as the time invested by all parties. And, if due diligence drags on for too long, one or both parties can lose interest in the potential transaction at stake.
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The due diligence process is a must, but it's inherently filled with conflict. This conflict usually arises with a first-time seller who is hesitant to turn over sensitive information and who may be untrusting of the buyer, especially if the buyer is a competitor or if the transaction was unsolicited by the potential seller. These are keen reasons why it may be of interest for the seller to engage the services of an independent consultant.
Due diligence will always be an important part of mergers and acquisitions, especially as deal stages come to a close. By knowing what to expect when preparing for a successful business transition, you'll be able to provide accurate and timely reporting that increases the value of your medical practice while helping you address irregularities if and when they arise.
Nick Hernandez, MBA, FACHE, is the CEO and founder of ABISA, a consultancy specializing in strategic healthcare initiatives for physician practices. His firm helps devise and implement strategies that will allow practices to remain competitive and solvent. E-mail him here.