What Actually Happens During Healthcare M&A Due Diligence
- 1 day ago
- 6 min read
By Cory Mertz, M&AMI, Managing Partner, Mertz Taggart
At a Glance Due diligence is the buyer’s detailed review of your business after you sign a letter of intent. Over roughly 60 to 90 days, their team verifies your financials, compliance, and operations before the deal closes. Most of it is predictable, and owners who are organized and prepared tend to move through it faster and hold on to the value they negotiated. |
By the time you reach due diligence in the M&A process, the hardest decisions are mostly behind you. You have run a process, weighed your offers, and signed a letter of intent with the buyer you chose. What comes next is the buyer’s turn to look closely at the business before the deal becomes final.
Due diligence is that close look, the most intensive phase of a sale, and for many owners the least familiar, because selling a business happens once and most of diligence stays out of view until you are in the middle of it. Knowing what to expect, and preparing for it, is most of what makes it go smoothly.
When diligence starts, and what the buyer is doing
Due diligence begins once you sign the letter of intent, and it runs on an exclusive basis, which means you have agreed to work only with that buyer while it is underway.
Diligence is a confirmatory process: during the sale, the buyer formed a view of your business from the materials and conversations you provided, and this is where they verify that view before signing a definitive purchase agreement.
That review runs on two tracks: confirming that the business is what you represented, and identifying material liabilities that were not apparent in the materials you provided, particularly exposure with payers and government agencies such as CMS, the IRS, and the Department of Labor. Most reviews run roughly 60 to 90 days, though larger or more complex businesses can take longer.
The shared goal is a clean close, with the buyer confident in what they are buying and you holding the terms you agreed to.
What buyers actually examine
Diligence covers far more than the financials.
The buyer’s team reviews the business across several areas at the same time, usually through a secure online data room where you post documents as they are requested.
The main areas include:
Financial. Validating your reported earnings, anchored by the quality of earnings review covered in the next section.
Legal and corporate. Contracts, leases, ownership records, and any past or pending litigation.
Regulatory and compliance. Licenses, Medicare and Medicaid provider numbers, accreditation, and billing and HIPAA compliance. This is where healthcare diligence runs deeper than most industries.
Operational. How the business runs day to day, including staffing, referral sources, and payer mix.
Clinical. In care-delivery businesses, a review of a sample of patient charts, typically 30 to 200 depending on the size of the business.
People. Payroll, employee classification, key staff, and employment agreements.
These run in parallel rather than one after another, which is why the volume of requests early on can feel heavy, though it eases as you work through it.
The quality of earnings review is the center of it
Of all the workstreams, the financial review draws the most attention, and at its center is the quality of earnings review, usually called a QoE.
In a QoE, the buyer hires a third-party accounting firm to confirm that your reported earnings are accurate and sustainable. The firm works through the detail behind the numbers, transaction by transaction, including your add-backs. Add-backs are expenses you remove from earnings because they will not carry over to the new owner, such as a one-time legal cost or an owner expense the business will no longer have. The QoE tests whether each one holds up, because those adjustments feed directly into the value.
If the review supports your earnings, it confirms the basis for the price. If it raises questions, the buyer may revisit the number. Much of how a QoE goes is settled long before it starts. We prepare our clients for these questions before they go to market, so that by the time the buyer’s accountants dig in, there are rarely surprises.
It is not only documents: site visits and interviews
Diligence is not entirely a paper exercise. At some point the buyer will want to see the business in person and meet the people who run it.
Expect one or more site visits, where the buyer assesses the operation firsthand, and interviews with you and sometimes a few key members of your team. These are not interrogations. The buyer is trying to understand how the business actually works and who makes it run, which is part of what they are paying for.
This is also where confidentiality gets sensitive, because staff often do not know the business is for sale. A well-run process manages who is told and when, so the people you rely on hear it the right way.
The harder challenge is less visible: diligence runs while you are still operating the business, and letting performance slip during it is one of the costlier mistakes an owner can make, because the buyer is watching current results the whole time.
How problems surface, and how the agreed price can change
Diligence is also where surprises come to light, and where the number you agreed to can move if they do.
When the review turns up something material, the buyer may ask to revise the price or the terms. That could be overstated earnings, a compliance gap, or more customer concentration than they expected. Reducing the offer after the LOI is common enough to have a name, re-trading, and it is most likely when something in diligence does not match what the buyer was told.
Most re-trades trace back to something that could have been found and fixed earlier. Clean financials, current licenses, organized records, and a management team ready for the questions all reduce the chance of a late price reduction, and most of that work is done before diligence ever starts.
Your job during diligence is to respond to requests quickly and accurately, and to keep the business performing. Consistent file naming and timely responses sound minor, but delays slow the deal and can wear down a buyer's confidence.
Your attorney handles the purchase agreement and legal risk, your accountant works through the QoE and working capital, and your advisor coordinates across everyone to keep the deal moving
A lot of advisors step back once the LOI is signed. We stay closely involved through diligence, because pushing the deal to closing efficiently is a large part of what we are there for.
Key Takeaways
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Due diligence rewards preparation more than almost any other part of a sale, and the owners who move through it cleanly are usually the ones who got ready long before a buyer was at the table. Mertz Taggart is a healthcare M&A advisory firm that has represented owners across home health, home care, hospice, behavioral health, and infusion therapy for over twenty years. We prepare our clients before they go to market and stay closely involved through diligence and closing, so the value you negotiated is the value you keep.
If you are getting ready to sell, or want to understand what diligence will ask of you before you start, it is worth a confidential conversation.
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