Due Diligence Before Joining a Practice

Copyright 2023

Thinking about joining a medical practice? You obviously need to perform a due diligence investigation to help obtain basic financial information.

It's important to understand the data and assess your compatibility with the practice. Here are some key items that need to be examined:

Profit and loss statements, as well as the balance sheet, for the preceding three -- but preferably five -- years. If you're likely to be assigned to a satellite office, an experienced accountant can extract the revenues and expenses for each location. Calculate the ratio of expenses to revenues for each profit center. It's a sign of how well the practice is managed.

Off-balance sheet liabilities - These include lease obligations, bank debts, and existing or potential litigation, as well as physician personal guarantees and the possibility of Medicare or malpractice audits. This is a tricky area, but an accountant can help determine how these elements affect the financial health of the practice.

Accounts receivable - How well a practice collects outstanding bills is another indicator of the organization's financial efficiency. Some medical practices make this a low priority because the physicians involved don't feel it is the reason why they signed up to practice medicine. However, an inefficient collection process is an important consideration because it means less profit.

Separately owned assets - The real estate a practice uses may be owned by one of the senior doctors. An expert can review the lease agreements and assess their financial impact.

Income distribution - To get a sense of how you will share in profits, look at the allocation of revenue and expenses among the doctors. Has it changed over time? Ask about the terms of the last few buy-ins and buy-outs.

Retirement policy - Many practices don't have a retirement policy, but the lack of one may determine whether senior physicians can ease up on their duties. Gradual retirement can be a problem if the retiring physician takes up the same amount of space and staff while producing less revenue. And as the newest member of the staff, you may be expected to take over the weekend calls for the retiring doctor. In addition, retirement policies are obviously something you want to take advantage of in the future.

Financial due diligence is complicated and technical. Make sure you have a firm grip on a practice before you join. Your financial future depends on it.