Practice Due Diligence Before You Sign the Contract

Practice due diligence isn’t just a legal step your attorney handles after you sign a letter of intent — it’s the same set of questions a lender is going to ask once your file lands on an underwriter’s desk. The smart move is to verify collections trends, payer mix, valuation support, transition risk, and the real estate situation before you’re under contract, not after. I’ve watched buyers fall in love with a practice, sign at an aggressive price, and then spend six stressful weeks trying to explain a revenue dip to a lender who’s reading the same P&L with fresh eyes. Do the digging early and you’ll either walk into underwriting with a clean story or walk away from a deal that was never going to finance the way you hoped.

Why practice due diligence should mirror lender underwriting

Here’s what I tell clients starting a search: whatever a lender is going to verify, verify it yourself first, on your own timeline, with your own advisors. Lenders underwriting a practice acquisition aren’t just checking that the business exists — they’re testing whether cash flow will hold up under new ownership, whether the price is defensible, and whether the transition itself creates risk. If you run that same analysis during practice due diligence, you show up to underwriting with answers instead of surprises. It also gives you real leverage in negotiations, because a seller who knows you’ve already stress-tested their numbers is less likely to push back hard on price or terms.

Collections and revenue trends

Pull at least three years of collections, not just production. Production is what was billed; collections is what actually came in the door, and the gap between the two tells you a lot about how a practice manages its billing office. Look for:

• Month-to-month volatility tied to a single high-producing associate or a departing partner
• A revenue bump in the final year that doesn’t match longer-term trends (sometimes it’s real growth, sometimes it’s a seller padding the numbers before a sale)
• Adjustments and write-offs as a percentage of production, which should stay reasonably consistent year over year

This is also where you’ll run into add-backs — the seller’s discretionary expenses that get added back to normalize cash flow. Some are legitimate, some are a stretch, and getting this wrong is one of the most common ways a deal’s projected debt service ends up looking better on paper than it will in real life. I’d rather you sort this out during diligence than have how lenders handle practice cash flow underwriting come as a surprise mid-file, and it’s worth reading through what actually qualifies as a legitimate add-back before you accept the seller’s version.

Payer mix and referral concentration

Payer mix matters because it tells a lender — and it should tell you — how much of that revenue is durable. A practice heavily weighted toward one insurance contract, one large employer group, or one referral source carries more risk than one with a broad, diversified base, even if the collections figures look identical. Ask for a payer mix breakdown going back several years, not just a snapshot, so you can see whether concentration is increasing or decreasing. If the practice leans on outside referrals for a meaningful share of its patients, find out how much of that relationship is tied to the seller personally rather than to the practice itself — that distinction can matter a great deal once the seller is gone.

Valuation support, not just a number

A valuation report is only as good as what backs it up. During practice due diligence, ask what methodology was used, what comparable transactions or multiples were referenced, and whether the appraiser adjusted for the specific add-backs and payer risk you’ve already identified. If the number the seller wants and the number a lender’s own review supports don’t line up, you’re not necessarily out of options — a seller note can help close a valuation gap between what a seller wants and what a lender is comfortable financing, but it’s much easier to negotiate that structure before you’re emotionally committed to a purchase price than after.

Transition risk: staff, patients, and the seller’s role

A practice’s value often walks out the door with its people, at least partially. Ask how many staff members are staying, whether key clinical or front-office roles have any planned turnover, and how the seller intends to handle the transition period — are they staying on for a few months to introduce patients, or gone the day after closing? A longer, well-structured handoff generally reduces risk for everyone, including your lender. This is also the point where I recommend mapping out the whole calendar, because the practice acquisition timeline from letter of intent to close has more moving pieces than most first-time buyers expect, and transition planning needs to happen in parallel with financing, not after it.

Practice real estate: rent, ownership, or something in between

If the practice occupies leased space, pull the lease and check the remaining term, renewal options, and any assignment or change-of-control clauses that could complicate a sale. If the seller owns the building and it’s part of the deal, that’s a different underwriting conversation entirely — financing the real estate alongside the practice often means structuring two loans against two different assets, and it’s worth understanding that structure before you assume the numbers will simply combine into one payment. Either way, don’t treat the space as an afterthought during practice due diligence; a short lease with no renewal option can be a bigger risk to a lender than a soft payer mix.

One more note that applies across all of this: purchase price allocation between goodwill, equipment, and other assets has real tax consequences for both buyer and seller, and it’s something your CPA should weigh in on early. The IRS provides guidance on how that allocation gets reported — see the instructions for Form 8594, Asset Acquisition Statement — and getting ahead of it during diligence avoids a scramble at closing.

Depending on how the deal is structured, an SBA loan may end up being the right fit for financing the acquisition — if that’s the direction you’re headed, our SBA 504 & 7(a) loan overview is a good next stop.

FAQ

How long should practice due diligence take?
It varies by practice size and complexity, but most buyers need several weeks to properly review financials, payer mix, staffing, and lease or real estate documents before finalizing an offer. Rushing this stage to hit a seller’s preferred timeline is rarely worth it.

Do I need my own advisors, or can I rely on the seller’s numbers?
This isn’t legal, tax, or accounting advice, but in my experience buyers who rely solely on seller-provided reports without an independent CPA or attorney review tend to discover problems later, not earlier. Bring your own team into practice due diligence from the start.

Does thorough due diligence guarantee my loan gets approved?
No. Approval decisions weigh credit history, cash flow, collateral, reserves, and several other factors together, and no single step in due diligence removes that. What good diligence does is give you and your lender a clearer, more accurate picture to underwrite against, all subject to credit approval.

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This article is general education, not financial advice or a commitment to lend. Loan programs, terms, and availability are subject to credit approval and may change. Loanatik LLC is an Equal Housing Lender. See our licensing & disclosures.