We’ve recently come across several acquisition deals that had real potential when reading the basic description of the practice (who writes those? Most of them are fantastic). But at some point in the process, red flags got thrown up that caused us to pack up our bags and head in the other direction.
Here are some of the things that we’ve seen recently and over the years that should immediately sound warning alarms all throughout your head. Please note that not all of these are necessarily deal-killers, but they should cause you to give extra thought and do extra homework before making a deal.
The seller does not want to provide key pieces of due diligence
With a potential deal about to move forward in the negotiation process, we began to make requests for basic due diligence information. The seller informed our side that he would not be providing us with an income statement because he was tired of giving information to potential buyers for deals that didn’t go anywhere.
While I fully understand that doing paperwork is not fun, the income statement is a basic document that should probably be on hand and ready to distribute during a practice sale. If the selling doctor does not wish to part with it, you are missing a large part of the practice picture. You certainly don’t want to assume that someone is hiding something, but someone may be hiding something. In those cases, take a pass and let someone else enjoy a potential surprise.
The seller is unable to produce key practice data
In one situation, we got through the financial due diligence part and asked the seller for an active patient list. Now, any doctor would probably consider this to be pretty important. If you have 250 active patients with an average of 19 months of treatment remaining or 150 patients with an average of 3 months remaining, that would make a huge difference in the assessment of practice value. Here, the doctor was simply unable to generate that information.
Unlike the case above where the seller had the information and refused to provide it, this was a case not of skullduggery, but lack of quality data. The problem is that without key information, the seller is not really able to provide you with a clear estimate of value when you negotiate. If the seller doesn’t know the full story on the patient base, you may walk in to an unexpected situation – despite your best efforts to value the practice independently.
Here, you may have some alternative means to get to the data you need. You may be able to rely on outstanding, unpaid contract balances (a report that virtually any practice management software should be able to produce). You may be able to audit the patient records on your own to get a feel for the makeup of the patient base. Just know that if basic data like this does not exist or is not easily produced, you need to take extra steps to get comfortable with the arrangement.
You are the 5th, 7th, 10th person to look at this acquisition
If a number of people have taken a pass on this deal, you need to know why. Maybe they noticed something that could seriously affect the value of the practice like a problem with the practice’s reputation in the community or a potential deterioration in the neighborhood. Whatever the case, if the deal is great, why hasn’t someone pushed some money forward and made a purchase already?
Again, this isn’t always a deal breaker. You may simply value the practice more than those before you. The location could be a perfect fit for your existing one(s) or you have the perfect marketing plan all teed up to implement once you get in. But be especially wary if you are the last buyer approached (e.g. “I’ve talked to 15 other people and you are my last, best chance”). Desperation is never a good way to approach a deal on either side.
The seller is way too eager to close
This runs along the same lines as the point made earlier. We’ve seen this a number of times before. You need time to review all of the data you’ve received to ensure that you are making the best deal possible. The seller absolutely cannot wait and repeatedly inquiries as to when the deal can be wrapped up. Sometimes, this even involves threats of legal action if a deal isn’t done by a certain time.
All the histrionics and threats should have no impact on the buyer. If the buyer needs more time to consider an arrangement, take that time. Obviously, you do not want to take forever because that’s unfair to both parties, but if you haven’t had a chance to plow through all of the information, there’s no need to rush to sign anything. And there’s nothing illegal about expressing interest in taking a closer look at an acquisition and then stepping away from it. That’s the point of due diligence and acquisition process. Yes, there may be some frustration if things take longer than expected, but life is filled with little disappointments.
If the pushing and threatening becomes overbearing, strongly consider walking away. In a lot of cases, there’s something that the seller wants to dump on you that you don’t want to have dumped on you.
The practice has been on the market for a long time
Here’s the scenario we see a lot: a retiring doctor puts his practice up for sale. While the practice is up for sale, he or she stops seeing new patients to reduce his or her workload and reduce costs. The due diligence provided is what was available at the time the practice got put up for sale. So, if the practice has been up for sale for 6 months, you’re dealing with old, inaccurate data. In a regular ongoing practice, old data may not be a big deal. If the practice started 30 patients every month for 6 months, you may initially conclude that things haven’t changed. But if the practice has stopped seeing new patients, the picture could look vastly different when you compare the date the practice was put up for sale and the date at which you are reviewing the information.
You’ll always want to get updated data before finalizing anything, but if a practice hasn’t seen new patients for 2 years, you’re not looking at the same practice you will end up buying. Don’t waste your time on reviewing data from a nonexistent opportunity.
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