Due diligence on a healthcare practice

Due diligence on a healthcare practice covers the same financial and operational ground as due diligence on any small business, plus a set of checks specific to a regulated, patient-facing practice. Skipping the practice-specific items because the financials look clean is one of the more common ways buyers end up disappointed after closing, once patients they expected to retain do not follow the change of ownership.

Financial due diligence

Start with normalized financial statements covering several years, checked for consistency and reconciled to bank records rather than taken at face value, and confirm what has been added back to reported profit and why each add-back is legitimate. Look for how revenue breaks down by practitioner, by service type, and by payer, since a practice that looks strong in aggregate can be carrying a shrinking core if one segment is propping up the rest.

Patient base and referral concentration

Ask how the patient base is distributed: whether a small number of referral sources or a single high-volume relationship accounts for a disproportionate share of activity, and what happens to that relationship if the practice changes hands. A practice heavily dependent on one referring physician, one insurer relationship, or one long-standing patient group carries real risk that a clean set of financial statements will not show on its own — this needs to be asked about directly, not assumed away.

Compliance and standing with the regulatory college

Confirm the practice and the selling practitioner are in good standing with the applicable provincial college, with no unresolved complaints, conditions or restrictions that would affect the practice’s operation or the buyer’s own ability to take over — the specific inquiries needed differ by profession and province, so confirm the applicable process directly with the college rather than relying on the seller’s representation alone. This is one of the areas where getting it wrong is expensive: a practice under an active regulatory issue is a very different asset than the one the buyer thought they were purchasing.

Employment and workplace obligations

Review employment agreements, wage and hour records, and confirm the practice’s standing on workplace safety and insurance obligations — including whether a clearance certificate is available confirming no outstanding assessments — since a buyer purchasing assets can, depending on the province and structure, inherit certain liabilities tied to the workforce. Clinical and administrative staff continuity also matters to patients, so understand who is likely to stay through a change of ownership and who is not.

Facilities, equipment and lease review

Confirm the condition and remaining useful life of clinical equipment, whether any of it is leased or financed and on what terms, and review the lease itself for its remaining term, any assignment or landlord-consent requirements, and renewal options — a practice with a strong patient base but a lease about to expire on unfavourable terms is a different opportunity than one with several stable years left.

How long this takes and who should be involved

Practice due diligence typically takes longer than diligence on a comparable non-regulated small business, mainly because of the college-standing and patient-concentration checks, and it should involve an accountant, a lawyer familiar with the profession, and where relevant a valuation professional rather than being handled solely by the buyer. Build that time into your offer and closing timeline from the start rather than treating diligence as a formality once the price is agreed.

Insurance, liability and past incidents

A buyer should review the practice’s professional liability and general insurance coverage, ask about any past claims or complaints and how they were resolved, and confirm coverage is adequate and in good standing going into the transition. A practice with a history of claims, even ones that were resolved without a finding against the practitioner, is worth understanding in detail, since it can point to underlying workflow or documentation issues a new owner would inherit along with the patient base. Ask whether coverage is claims-made or occurrence-based, because that distinction affects what protection, if any, carries forward after the sale and what tail coverage might be needed for care provided before the transition. This is an area where insurance advisors, not just lawyers and accountants, add real value, and it is worth involving one directly rather than treating insurance as a line item to sort out after the deal is otherwise done. Ask, too, whether any incident is still open or under review, since an unresolved matter can affect both the practice’s value and how quickly a lender or the college is willing to move.