For many physicians and practice owners, partnering with a hospital system, selling to a private equity-backed platform, or bringing in outside investors is the biggest financial decision of their career.
It’s also the point where financial due diligence stops being an abstract concept and becomes very real:
- Buyers are asking for detailed financials you’ve never had to produce before.
- They want to understand payer mix, coding practices, denial rates, and collections—not just top-line revenue.
- They’re testing not only your numbers, but the systems and controls behind those numbers.
If you’re not ready, the process drags, valuation gets negotiated down, and in the worst cases, the deal quietly dies.
This guide walks through 9 things you must get right to prepare your healthcare practice for financial due diligence—so you can move into a transaction with confidence instead of scrambling for reports and explanations.
9 Things Healthcare Practices Must Know About Financial Due Diligence
1. Understand Who’s Actually Diligencing You (and What They Care About)
Healthcare due diligence isn’t just about “the buyer.” It’s about the ecosystem of oversight that surrounds your practice.
Who’s at the table
Depending on the deal, your numbers may be reviewed by:
- Health system or PE buyers – Evaluating financial performance, scalability, and physician alignment.
- Lenders – Assessing debt capacity, coverage ratios, and stability of cash flows.
- Regulators and payers (indirectly) – Through audits, extrapolation of overpayments, and recoupments.
Each cares about different but overlapping things:
- Reliability of financial statements
- Billing and coding compliance (e.g., CMS, commercial payers)
- Physician productivity and compensation formulas
- Sustainability of margins and referral patterns
Why this matters
If you prepare as if you’re in a generic business sale, you’ll miss:
- Payer mix and reimbursement nuances
- Compliance risk (e.g., False Claims Act, Stark, Anti‑Kickback) that buyers will price into the deal
- Specific healthcare metrics (RVUs, payer mix, denial rates, days in AR) that underpin valuations in this space
Takeaway: Start by recognizing that healthcare due diligence is financial + regulatory + clinical alignment. Your prep should reflect that.
2. Clean Separation of Business and Personal Finances
Healthcare practices are notorious for blurred lines between personal and business spending—especially in smaller or physician‑owned groups.
What buyers look for
- Clearly separate practice operating accounts from personal accounts.
- No commingling of personal expenses (travel, vehicles, family benefits) in the practice P&L.
- Clean documentation for owner distributions, loans, and reimbursements.
What this looks like when it’s not ready
- “Owner draw” accounts full of mixed expenses with no clear explanation.
- Personal credit cards paying practice expenses (or vice versa).
- Disallowed or questionable deductions that spook buyers and their advisors.
How to clean this up
- Establish strict banking separation (practice vs personal).
- Implement a formal expense reimbursement policy for physicians and owners.
- Reclassify historical personal items and document normalized add‑backs clearly for buyers.
Outcome: Diligence teams see a professional enterprise, not a lifestyle practice wrapped in a legal entity.
3. Get Your Financial Statements Audit- and Bank-Grade
Buyers don’t just want “tax returns that got filed”—they want consistent, reconcilable financial statements.
Minimum expectations
- 3+ years of P&Ls, balance sheets, and cash flow statements
- Consistent use of accrual accounting (not pure cash basis)
- Clearly defined and documented chart of accounts (COGS vs operating costs vs physician comp)
- Monthly or at least quarterly closes with reconciliations
Common red flags
- Large, unexplained swings in margins with no supporting explanation.
- Inconsistent treatment of revenue and expenses from year to year.
- “Catch‑all” accounts (e.g., “miscellaneous” or “other”) with large balances.
How to prepare
- Upgrade from “tax‑only” books to GAAP‑informed financial reporting, even if you don’t go through a full audit.
- Perform a pre‑diligence clean‑up: reclassify, reconcile, and ensure prior‑period adjustments are well documented.
- Prepare a financial narrative explaining major trends (growth, payer changes, new providers, major contracts).
Outcome: Buyers can rely on your numbers instead of rebuilding them from scratch—which protects your valuation and speeds up the process.
4. Make Revenue, Payer Mix, and AR Aging Easy to Understand
In healthcare, how you earn revenue matters just as much as how much you earn.
What buyers drill into
- Payer mix – Medicare, Medicaid, commercial, self‑pay, capitated contracts.
- Service mix – Office visits, procedures, ancillaries, telehealth, ancillary service lines.
- Reimbursement trends – Rate changes, renegotiated contracts, value‑based components.
- AR aging – Days in AR, % of AR over 90/120 days, write‑off patterns.
- Denial and rework rates – Indicators of revenue cycle health and compliance risk.
What you need ready
- Revenue broken down by payer, service line, and location/provider.
- AR aging reports that tie to the GL and show recent collection performance.
- Historical trends: changes in payer mix, major contract renewals, and reimbursement shifts.
- Documentation of contracted rates and key payer agreements.
Outcome: You can prove your revenue is real, collectible, and sustainable, not just a top‑line number on a tax return.
5. Get Physician Compensation and Productivity on Paper
One of the biggest diligence questions in a practice deal is:
“How are physicians paid—and is it sustainable under new ownership?”
Elements buyers examine
- Compensation formulas (salary, bonuses, productivity, quality metrics).
- RVU or productivity data that matches reported compensation.
- Alignment with fair market value (FMV) and commercial reasonableness (CR) standards.
- Incentives that may drive coding, referral, or utilization practices.
Preparation steps
- Document current comp plans for each provider type (owners, employed physicians, APPs).
- Prepare productivity reports (RVUs, encounters, procedures) that tie back to comp.
- Flag any non‑standard arrangements and be ready to explain them.
- If relevant, obtain or update FMV opinions to mitigate regulatory risk.
Outcome: Buyers can see that physician comp is both financially and regulatory sound—not a ticking bomb in the deal.
6. Address Billing, Coding, and Compliance Risks Upfront
Financial due diligence in healthcare is inseparable from billing and coding compliance.
What buyers and their advisors look for
- Exposure to overbilling, upcoding, or unbundling.
- History of payer audits, recoupments, or settlements.
- Documentation supporting medical necessity and coding choices.
- Presence (or absence) of compliance programs, training, and internal audits.
How to prepare
- Conduct an internal or third‑party coding audit before buyers do.
- Document findings and remediation steps for any issues discovered.
- Compile a compliance binder:
- Policies and procedures
- Training logs
- HIPAA risk assessments and BAAs
- Any OIG, CMS, or payer audit correspondence
Outcome: Instead of hiding risk, you quantify and show how you’ve managed it, which builds buyer confidence and reduces the chance of punitive deal adjustments.
7. Normalize EBITDA and Spell Out Add-Backs Clearly
Like any other deal, healthcare buyers will focus on normalized EBITDA—not just reported net income.
Common healthcare add‑backs
- One‑time legal or consulting fees (e.g., EMR implementation, litigation).
- Non‑recurring repair, renovation, or relocation costs.
- Owner perks (travel, vehicles, club dues) that won’t continue post‑transaction.
- Excess compensation or under‑market rent to related parties.
How to handle them well
- Build a detailed EBITDA bridge from net income to adjusted EBITDA.
- For each add‑back, document:
- Description and rationale
- Dollar amount and time period
- Supporting invoices or contracts
- Align your add‑backs with your advisor so they’re credible, not aggressive.
Outcome: You present a clear, defensible picture of true earnings, making it easier for buyers to justify a strong multiple.
8. Get Your Working Capital, Cash, and Debt Story Straight
Healthcare cash flows are heavily influenced by payer cycles and AR, but buyers will still want a clean picture of working capital and obligations.
Key areas to prepare
- Cash flow patterns: timing of claims, collections, and payables.
- Standard working capital needs for the practice (not just a one‑month snapshot).
- Existing debt and lease obligations (including equipment and real estate).
- Any owner loans, related‑party arrangements, or off‑balance‑sheet commitments.
What to build
- A 13‑week cash flow forecast showing typical inflows and outflows.
- A working capital analysis (AR + inventory + prepaids – AP – accrued liabilities).
- A clean schedule of debt and leases with terms, covenants, and maturities.
Outcome: Buyers can understand the real cash demands of running the practice—and structure the deal accordingly instead of padding for unknowns.
9. Create a Healthcare-Ready Data Room and Diligence Narrative
Finally, all of this needs to be organized and explainable, not just “available if someone asks.”
What a healthcare-ready data room includes
- Financials:
- 3–5 years of statements and trial balances
- Monthly/quarterly management reports
- AR aging, payer mix, productivity reports
- Tax & Legal:
- Federal and state returns, notices, and settlements
- Entity chart, ownership records, and key contracts
- Clinical & Operational:
- Provider schedules, staffing models, and productivity data
- Key vendor and payer contracts
- Compliance:
- Coding audit reports and remediation plans
- HIPAA documentation and BAAs
- Policies around billing, collections, and write‑offs
Build a narrative, not just a folder tree
- Explain major business events (new locations, EMR changes, payer contract shifts).
- Summarize risks and mitigations instead of hoping they stay buried in the files.
- Assign a point person (often the CFO or practice administrator) for each major area.
Outcome: Diligence feels like a guided tour of your practice—not a scavenger hunt.
Due Diligence for Healthcare Practices With Northstar Finance
Preparing a healthcare practice for financial due diligence is not just about having more reports—it’s about having the right financial and compliance story ready before a buyer, lender, or partner ever asks.
When an LOI arrives or a hospital system expresses interest, that’s not the moment to:
- Rebuild your financials from tax returns
- Untangle years of mixed personal and practice spending
- Explain away coding patterns or AR spikes you’ve never deeply analyzed
Northstar Finance helps healthcare practices and medical groups turn complex, day‑to‑day operations into due diligence‑ready financials that stand up to scrutiny.
Bookkeeping and Accounting for Healthcare Practices
We help you move from “tax‑time bookkeeping” to transaction‑ready accounting:
- Rebuild or clean historical books so they’re consistent, accurate, and auditable.
- Implement a reliable monthly close that integrates payer, EMR, and practice management data.
- Structure your chart of accounts for clarity:
- By provider, location, service line, and payer—so buyers can see where value is created.
Revenue Cycle, Payer Mix, and Compliance Visibility
We align your numbers with the realities of your revenue cycle:
- Tie payer mix, AR aging, and denial data back to the financial statements.
- Help you quantify and document coding and compliance risk before buyers do.
- Turn your revenue reports into clear, digestible schedules for lenders and acquirers.
Fractional CFO & Transaction Support
We act as your financial counterpart throughout the diligence process:
- Normalize EBITDA and document healthcare‑specific add‑backs buyers will accept.
- Build and maintain your financial data room:
- Payer, productivity, and profitability packs
- Supporting schedules for QoE and buyer review
- Join calls with buyers, lenders, and their advisors to:
- Answer technical questions
- Protect your valuation narrative
- Keep diligence moving on your timeline, not theirs
The goal: when a serious partner shows up, your financials and revenue cycle are a strength, not a question mark.
If you’re considering a partnership, roll‑up, or sale in the next 1–3 years—or simply want to be ready when opportunity knocks—this is your prompt to start now, not later.
👉 Talk to Northstar Finance about a Healthcare Due Diligence Readiness Review so that when the right buyer or partner is at the table, your practice’s numbers and systems are ready to close the deal—not delay it.
