A physician buying a medical practice should review normalized earnings, revenue quality, staffing, contracts, working capital, debt capacity, purchase structure, and tax consequences before treating the asking price as affordable.
How should a physician test the seller’s earnings?
Reconcile tax returns, financial statements, billing reports, bank activity when within scope, and proposed add-backs. Normalize owner compensation, related-party expenses, temporary staffing, one-time costs, and changes in volume or reimbursement.
What does the buyer need beyond the purchase price?
A physician buyer may need cash for lender equity, transaction costs, payroll, rent, supplies, insurance, technology, credentialing delays, taxes, and personal living expenses. The post-close cash plan should cover realistic collection timing and downside cases.
| Review area | Question to answer |
|---|---|
| Revenue | Are volume, payer mix, procedures, and collections stable and transferable? |
| People | Which clinicians and staff are likely to stay, and at what cost? |
| Contracts | What must be assigned, renewed, or renegotiated? |
| Structure | How do asset or equity terms affect tax, basis, liability, and continuity? |
| Financing | Can cash flow support debt under a reasonable downside case? |
| Transition | What seller support, patient communication, and operational handoff are required? |
When should tax and legal review begin?
Tax and legal review should begin before the letter of intent fixes structure, allocation, restrictive covenants, employment terms, or other economic points. Early coordination preserves more options than a review after signing.
What is the buyer’s decision standard?
The buyer should understand the expected return, personal compensation, required cash, debt service, downside exposure, and nonfinancial tradeoffs. A model is useful only when assumptions are visible and independently tested where appropriate.
Primary source
IRS instructions for Form 8594: Asset Acquisition Statement Under Section 1060
Frequently asked questions
What financial records should a physician request before buying a practice?
A physician buyer commonly requests historical financial statements, tax returns, billing and collection reports, payroll records, debt schedules, key contracts, capital spending history, and support for proposed add-backs. The exact request depends on deal structure and scope.
Why does working capital matter in a medical practice purchase?
Working capital funds payroll, rent, supplies, insurance, and other costs while the buyer waits for post-close collections. Purchase financing may not cover the full operating need.
Should a physician prefer an asset purchase or equity purchase?
Neither form is universally better. Legal exposure, contract transfer, credentialing, tax basis, allocation, financing, and the seller’s objectives all affect the answer. Tax and legal advisors should review the structure together.