Healthcare businesses are a hot commodity in the market today. A buyer may even be interested in your healthcare practice right now. Whether or not you’ve gone down the road of selling your practice before, the process can be stressful and time consuming. A lot of the time and stress centers around one aspect of a transaction—due diligence. Due diligence can certainly feel like a roadblock to both sides of a transaction, but it doesn’t have to be.
What Is Due Diligence?
Due diligence is a prospective buyer’s opportunity to look under the hood of the business they are interested in purchasing. Once a letter of intent is signed, the buyer will ask for a detailed list of documents and information to evaluate before finalizing the deal. Due diligence can encompass a wide range of information, including financial statements, copies of licenses or permits, corporate formation documents, employee information, policies, procedures, lists of services provided, leases, vendor and payer contracts, asset lists, litigation information and anything else a buyer may need to evaluate the business.
If the buyer in front of you is your best option, you cannot risk the transaction because of a lack of preparation. By turning in inadequate, inscrutable or incorrect records for due diligence requests, you could scare a buyer away—perhaps your best, or only, buyer.
Preparation
With an almost endless number of documents a buyer could request during due diligence, it is difficult to know where to start on preparing your business for an eventual transaction. If you do not have a due diligence request list in front of you, look to other parties that are also evaluating you. If you are being accredited, inspected, audited or surveyed by a third party, use their evaluation process as an opportunity to stress test your practice to see where the gaps are.
Your practice may make perfect sense to you, but in a transaction, it needs to make sense to someone else. So take notes during these third-party interactions. How easy was it for you to assemble the information they asked for? Did you find yourself having to find creative ways to present the information the way they wanted, or was it straightforward? Did the third party need to ask a lot of additional questions to get the answer they needed? At the end of the evaluation, you may receive your updated license or certificate from them, but you also received your marching orders for improvements you can make to ensure any future transactions go smoothly.
When all is said and done with the third-party evaluation, sit down with stakeholders in your practice to discuss how to make the next evaluation better. If certain files were disorganized, create a system that allows you to find the necessary file quickly. If certain information was missing entirely, make a plan to remedy that, and memorialize any changes you make to your processes.
Running a Practice Like It’s Always Up for Sale
Maybe your plan is to sell your practice in a couple of years or not until you retire years from now. You may think your practice is doing just fine. Everyone gets their work done, the money comes in and the bills get paid. So why worry about making disruptive changes for a hypothetical sale in the future?
First, due diligence requests often reach several years back. In the healthcare industry, it is not uncommon for information requests to encompass the previous six years because that is the look-back period for many federal healthcare laws. Depending on the structure of the transaction, the buyer may be inheriting issues your practice has had in the past, so they’ll want to know everything they’re taking on.
The sooner you start the better. For example, if you recently made a change to fix an issue, a diligence request asking for six years of information will still reveal that the fix was not in place for many years.
Second, the actual process of due diligence is expensive. Your lawyers must review your diligence materials for any issues they may need to address with opposing counsel. You and your employees also have to spend valuable time compiling materials for diligence requests. If your records are orderly and accessible, this can significantly decrease the hours spent on these requests. Additionally, if records are kept and presented to buyers in an organized manner, that will result in fewer issues for attorneys to sort through, and fewer additional requests from the buyers.
Finally, by always running your practice like it’s up for sale, you create efficiencies, produce better output and hone expertise. Sellers aim to get the best price for their practices and if you build preparation into your culture, you will reap the rewards well before you ever put your practice up for sale.
The prospect of preparing for due diligence can be overwhelming, but you don’t have to do it alone. In addition to key stakeholders within your business, involving an attorney can assist with preparation. Attorneys will be able to identify the types of materials that are frequently requested as part of due diligence and can help identify high-risk areas within your specific practice area. Armed with a plan and some partners, you will be well on your way to a successful sale.
Emily Johnson, JD, is a nationally recognized attorney, author and speaker with McDonald Hopkins LLC. Email her at [email protected].
