The Business of Healthcare

Why Diligence is Due Way Before Due Diligence

February 15, 2016

If you’ve ever purchased or sold a house, you’re already familiar with the concept of “due diligence” in the sale of a medical group, ASC, or other healthcare business, just on a smaller scale. You know that the true condition of the property, once discovered by the buyer, can result in a demand for a reduction in the price or even in the termination of the deal.

The situation is the same in connection with the sale of a medical group or ASC. What’s often called the “inspection period” in the process of selling a house is referred to as “due diligence” in the context of a medical group or other healthcare business acquisition deal.

I’m sure it’s no shock to you that some home buyers use the inspection period as a strategy, decided from the outset, to reduce the price. You, as the seller, agreed to the buyer’s offer of $X. But the buyer’s plan, hatched well in advance of even knowing about your house, was to harp on defects and to use time and your fear of blowing the deal to get a reduction to $X-Y.

Sure, not all buyers have that mindset coming into the transaction. Nonetheless, they later discover defects that result in an unwillingness to proceed at the initially agreed-upon price.

That same tactic, on a much more aggressive level, is common in business acquisitions. In that context, due diligence is a much more invasive procedure than a home inspection. In essence, it’s putting your business under a microscope, looking for defects and risks.

For example, the risk resulting from the lack of records evidencing the payment for shares in your medical corporation. Or the risk resulting from the fact that a partner left the group 5 years ago yet never signed a document relinquishing her interest in the group. Or the risk resulting from the fact that your group’s major contracts are all terminable upon 60 days’ notice without cause. Or, on another level, the risk that your group won’t be able to close the deal because your organizational documents give each owner what amounts to veto power.

Just as in the context of a home sale, the time to correct any potential defect is before putting it up for sale. In fact, as you probably know too well, the best time to address potential defects is on an ongoing basis: preventive maintenance is always cheaper than correcting the resulting major defect.

In a medical group or other healthcare business, that means running your own “due diligence” process on your business upfront and on an ongoing basis. Issues with your employment agreements? Fix them now. Issues with the governance structure? Fix them now. And so on.

There are three outcomes of a due diligence process in the context of a sale of your medical group or other healthcare business. The negotiated purchase price stands and the deal closes. The buyer uses the process to identify defects and risks and demands a reduction in price or a significant change in terms. They buyer decides that there are too many defects or too much risk and terminates the deal.

What outcome do you think you’ll want?

Then take the steps now, proactively, to correct the defects in your group or business and its structure, organization and documentation to preserve its value.

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