Direct answer
A physician buyer should verify that reported earnings convert to cash, key revenue and staff are likely to continue, liabilities are understood, and the post-close practice can fund operations and debt. Diligence should test the seller’s story with source records.
Reconcile the financial story
Compare tax returns, financial statements, billing reports, payroll, debt, and proposed add-backs. Investigate unexplained differences rather than averaging them away.
Test revenue durability
Review payer concentration, provider dependence, referral sources, procedure mix, adjustments, aging, denials, and recent trends. Historical revenue is valuable only to the extent it can continue under the buyer.
| Potential red flag | Follow-up evidence |
|---|---|
| Earnings rely on broad add-backs | Invoices, payroll, owner activity, and recurring replacement cost |
| Collections do not reconcile | Billing reports, deposits, write-offs, aging, and financial statements |
| One provider or payer drives performance | Contracts, retention plan, volume, and concentration trend |
| Working capital is excluded or unclear | Receivables, payables, payroll calendar, and post-close cash forecast |
| Recent growth lacks support | Monthly volume, reimbursement, staffing, and capacity data |
Understand people and commitments
Identify essential clinicians and staff, compensation arrangements, accrued obligations, restrictive terms, leases, vendor contracts, and change-of-control requirements with legal counsel.
Build the post-close downside case
Model delayed collections, staff turnover, seller departure, lower volume, unexpected capital needs, and debt service. Estimate the working capital needed before the practice stabilizes.
Illustrative scenario: a profitable practice with a cash gap after closing
This is an illustration, not a client transaction or valuation. A seller presents attractive annual earnings, but older receivables collect slowly, the buyer must replace the selling physician’s clinical work and payroll is due before new collections arrive. Reconcile the earnings claims, document replacement-clinician assumptions and model the cash needed during the transition. Accounting profit alone does not establish that the purchase or its debt is affordable.
What could a scoped financial diligence review deliver?
Agree on scope and available records first. A paid review may include an earnings reconciliation, an add-back evidence schedule, a working-capital forecast, debt-service scenarios and an unresolved-issues log naming the responsible adviser. Distinguish verified amounts from seller statements and buyer assumptions. This is not automatically an audit, assurance report, valuation or legal opinion.
What should be resolved before committing?
Set decision conditions with the advisory team: missing evidence, uncertain collection timing, replacement staffing, lender terms and items requiring legal or operational review. Healthcare counsel should address ownership, contracts and regulatory issues; lenders and valuation specialists address their respective scopes. Keep patient information out of the public questionnaire and agree on appropriate secure, limited data access before diligence begins.
Where should the buyer go next?
Use the working-capital-at-closing guide to organize transition cash needs and the asset-versus-equity guide to identify questions for coordinated tax and legal review.
Frequently asked questions
How many years of records should a buyer request?
The period depends on deal size, volatility, lender needs, scope, and available records. Monthly detail and current trends may matter as much as annual totals.
Does a valuation replace due diligence?
No. A valuation estimates value under defined assumptions. Diligence tests records, risks, transferability, and the buyer’s specific economics.
Should the buyer rely on the seller’s broker model?
Use it as a starting point, then rebuild key assumptions from source records and the buyer’s financing, compensation, tax, and operating plan.