Preliminary Diligence
Preliminary diligence for healthcare services deals
What an acquirer must establish before an LOI on a med spa, hormone or wellness clinic, physician specialty practice, dental lab, medical equipment repair or healthcare back-office business: provider dependence, payer mix, MSO structure, compliance, referral sources and add-backs. BizNexus matches you with a diligence provider sized to the deal.
Preliminary diligence on a healthcare services business must establish how much revenue sits with individual providers and whether they will stay, the split between cash pay and reimbursement, whether ownership complies with state corporate practice of medicine rules, and whether coding, licensure and privacy practices would survive an audit. BizNexus matches you with a diligence provider sized to the deal.
Before the LOI
What to establish before the LOI
Five areas a preliminary review covers in healthcare services, and the specific questions inside each. Answer these before the LOI and the quality of earnings work starts with a scope instead of a blank page.
Provider dependence and retention
- Revenue and collections by rendering provider for three years, including the selling owner
- Employment agreements, non-competes and non-solicits by provider, and whether they are enforceable under applicable state law
- Compensation model: base, production and bonus, and how it changes for the seller after close
- Provider age, tenure and any stated retirement plans
- Credentialing status with each payer and how long re-credentialing takes after an ownership change
Payer mix and revenue quality
- Collections by payer class: cash pay, commercial, government and workers' compensation
- Cash-pay share by service line, and the package, membership or financing terms behind it
- Fee schedule and contracted rates by payer, with renewal dates
- Net collection rate, days in accounts receivable and write-off history
- Refund liabilities on prepaid packages and memberships
- Product and retail revenue separated from services
Structure and corporate practice of medicine
- Who owns the clinical entity, who owns the management entity, and how the two contract with each other
- Management services agreement: fee basis, term, and whether it has been reviewed against state corporate practice of medicine rules
- Medical director arrangements and whether supervision requirements are met for each service
- Delegation and supervision of mid-level providers, injectors and aestheticians against state scope-of-practice rules
- Any relationship that touches anti-kickback or self-referral rules, including lab, imaging and pharmacy
Compliance and licensure
- Facility, professional and controlled-substance licenses, with expiry dates and the named holder
- HIPAA risk assessment, breach log and business associate agreements
- Coding and documentation audit sample: whether billed levels are supported by the chart
- Government payer audit history, overpayment demands and any corporate integrity obligations
- Advertising and consent practices for elective and aesthetic services
- Malpractice coverage, claims history and tail policy terms
Referral sources and add-backs
- Referral volume by source over three years, and how many of those relationships sit with the seller personally
- Marketing spend and patient acquisition cost by channel, with lead-to-consult conversion
- Add-backs itemized: owner compensation normalized to a market replacement, family payroll and personal expenses
- Physician compensation add-backs tested against what a replacement provider would cost
- Related-party leases and equipment held outside the practice
- Equipment age, service contracts and the lease or financing behind each device
Red Flags
Red flags in this sector
None of these ends a deal on its own. Each one changes the price, the structure or the scope of the diligence that follows.
- The selling physician or lead injector generates most of the revenue and the non-compete is unsigned or unenforceable
- A management entity that owns the clinical practice in substance, in a state that does not permit it
- Cash-pay growth built on prepaid packages with no refund liability on the balance sheet
- Billed procedure codes that the chart documentation does not support
- Referral concentration in one or two sources tied to the seller by relationship, not contract
- Owner compensation added back to zero rather than normalized to a replacement provider
Data Room
First data room request
The documents to ask for first. A seller who can produce these inside a week is organized; one who cannot has told you something too.
- Monthly financial statements for the trailing thirty-six months
- Collections by provider, by service line and by payer class for three years
- Provider employment agreements, non-competes, compensation plans and credentialing status
- Entity charts, operating agreements and the management services agreement
- Medical director and supervision agreements for each service line
- Facility, professional and controlled-substance licenses with expiry dates
- HIPAA risk assessment, policies, breach log and business associate agreements
- Payer contracts and fee schedules, with recent audit correspondence
- Prepaid package and membership ledger with unearned balances
- Add-back schedule with supporting documents for each item
Where the Buyers Are
Acquirer demand in healthcare services
Active acquirer demand in healthcare services, pooled and anonymized across current mandates, is on the healthcare services buyers hub.
Sourcing in This Sector
Diligence starts with a target
OmniSource sources healthcare services deals across Off-Market, Pre-Market and On-Market channels and matches them against an active mandate, so the targets that reach preliminary diligence already fit the thesis they are being checked against.
FAQ
Healthcare services diligence, answered
- What should I check before buying a med spa?
- Start with who performs the revenue. If one injector or the selling owner drives most of it, the deal depends on a signed, enforceable retention agreement. Then confirm the medical director and supervision arrangements meet state scope-of-practice rules for every service offered, and that the ownership structure complies with corporate practice of medicine rules. Finally, read prepaid packages and memberships as liabilities, not revenue.
- How does corporate practice of medicine affect a healthcare acquisition?
- In many states a non-physician entity cannot own a medical practice or employ physicians directly, so acquirers use a management services organization that owns the non-clinical assets and contracts with a physician-owned professional entity. Preliminary diligence establishes whether the target's existing structure already complies, what a compliant structure would take to put in place, and whether the management fee is defensible as fair market value.
- How do I evaluate payer mix in a physician practice acquisition?
- Pull collections by payer class for three years and read the trend, not the snapshot. A practice shifting toward government reimbursement carries different rate and audit risk than one growing cash-pay services. Check contracted rates and renewal dates for each commercial payer, the net collection rate, and how long re-credentialing takes after an ownership change, since a gap in credentialing is a gap in cash.
- What is a quality of earnings report and do I need one for a $2M EBITDA deal?
- A quality of earnings report is an independent review of whether reported earnings are real, recurring and correctly stated: revenue recognition on collections, add-backs, working capital and one-time items. In healthcare services the add-back schedule is where deals move, since owner-provider compensation must be normalized to what a replacement costs. At $2 million of EBITDA most lenders expect a QoE, and preliminary diligence sets its scope.
- Who pays for preliminary diligence?
- The acquirer engages and pays the diligence provider directly, on terms the two of them agree. BizNexus makes the introduction and does not sit inside the engagement. The provider scopes the work to the deal: a preliminary review on a single-site clinic focuses on the questions above and is scoped accordingly, rather than priced as a full-scope engagement on a multi-site platform.
- What does the BizNexus preliminary diligence network do, and what does it not do?
- BizNexus maintains a network of diligence providers, including quality of earnings firms, valuation professionals and market analysts, and matches an acquirer with one sized to the deal. BizNexus does not perform the diligence, issue findings, give legal or regulatory advice, negotiate or structure the transaction, hold funds, or appear on the engagement letter or closing documents. The provider engages and delivers directly with you.
Book a diligence consultation
Tell us the target, the stage and the size, and we will match you with a diligence provider from the network sized to the deal. The provider engages and delivers directly with you.