Dermatology Practice Due Diligence Checklist for Buyers
Dermatology practice due diligence is the period after a letter of intent when a buyer verifies what the seller has represented about the practice. It is the buyer’s chance to confirm earnings, understand risks and decide whether the price and structure still make sense.
Dermatology has features that call for specific attention, including the mix of medical and cosmetic revenue, in-house pathology, Mohs surgery and reliance on advanced practice providers. This checklist outlines the areas buyers typically review. Requirements vary by state and payer, and nothing here is legal, tax, billing or compliance advice. Buyers should work with healthcare counsel, accountants and qualified billing or compliance professionals.
Financial Records
Start by confirming that the practice’s earnings match what was presented. Buyers typically request:
- Several years of business tax returns and financial statements
- Year-to-date financials and monthly trends
- Bank statements to reconcile reported deposits
- Production and collections reports by provider and by service line
- Accounts receivable aging
- Payroll records and owner compensation details
- A schedule of proposed add-backs with support for each
Our guide to dermatology practice EBITDA explains how earnings and add-backs are typically evaluated. Lenders will review many of the same documents; see our list of documents needed to buy a dermatology practice.
Revenue Mix and Payers
Dermatology revenue often comes from several sources with different risks. Review:
- Revenue split between medical, surgical and cosmetic services
- Payer mix across commercial insurers, Medicare and Medicaid
- Concentration in any single payer, referral source or procedure
- Cosmetic revenue trends and how dependent they are on one provider
- Pricing, packages and any prepaid cosmetic services owed to patients
Our article on dermatology payer mix explains how lenders may view medical and cosmetic revenue.
Pathology and Laboratory Arrangements
Many dermatology practices perform or bill for pathology services. This area deserves careful review because the arrangements can be complex. Buyers should understand:
- Whether pathology is performed in-house, through an affiliated lab or by an outside lab
- How pathology services are billed and by whom
- Any agreements with pathologists, labs or related entities
- Laboratory certifications, inspection history and staffing
- What share of revenue depends on these arrangements
Healthcare counsel and qualified billing or compliance professionals should review these arrangements, since rules governing them can be detailed.
Mohs Surgery and Procedures
If the practice offers Mohs surgery, buyers should understand who performs it, whether that surgeon will stay after closing, the volume trend, lab staffing and equipment condition. Losing the Mohs surgeon could significantly change the practice’s revenue.
Providers and Staff
People drive value in dermatology. Review:
- Each physician’s and advanced practice provider’s production, tenure and compensation
- Employment agreements, including restrictive covenants, whose enforceability varies by state
- Supervision arrangements for physician assistants and nurse practitioners
- Key administrative staff, such as practice managers and billing personnel
- How workers are classified, which should be reviewed by qualified professionals
- Benefits, paid time off obligations and any pending employment claims
Understanding who plans to stay, and on what terms, is central to dermatology practice due diligence.
Billing, Coding and Compliance
Buyers generally want to understand whether the practice’s billing and documentation practices are consistent. A review by qualified billing or compliance professionals may include sampling of charts and claims, past audits or payer inquiries and any refunds or repayments. Findings can affect price, structure, indemnification terms or the decision to proceed.
Payer Contracts and Enrollments
Payer contracts, credentialing and Medicare and Medicaid enrollments should not be assumed to transfer to a new owner. Depending on the deal structure, the buyer may need new contracts or updated enrollments. Map out what will need to change, how long the process may take and how the practice will manage cash flow in the meantime.
Facility, Lease and Equipment
Review the physical side of the practice:
- Lease term, renewal options, rent escalations and assignment rights
- Landlord consent requirements for a change of ownership
- Condition and age of lasers, surgical equipment and lab equipment
- Existing equipment loans or leases and whether they can be assumed or paid off
- Space for future growth, such as a cosmetic suite or additional providers
Technology and Patient Records
Confirm how patient records are stored, how they will be transferred and who will be the custodian of records after closing. Review software licenses, data backup practices and any cybersecurity incidents. Healthcare counsel can advise on the legal requirements for records transfer.
Legal and Regulatory Items
Ask for corporate documents, licenses, malpractice history, pending litigation and any regulatory inquiries. Ownership rules for medical practices vary by state, so counsel should confirm the buyer can own the practice in the proposed structure.
How Dermatology Practice Due Diligence Affects Financing
Lenders rely on many of the same findings. Issues uncovered during dermatology practice due diligence can affect the loan amount, terms or approval. Sharing material findings with your lender early helps avoid surprises at closing. Our guide to the dermatology practice acquisition loan explains how lenders evaluate a purchase, and if you are still searching, our article on finding a dermatology practice for sale covers how to screen opportunities.
Final Thoughts
Careful dermatology practice due diligence helps a buyer understand exactly what they are purchasing. Reviewing financials, revenue mix, pathology arrangements, providers, payer contracts, facilities and legal matters with the right professionals can protect the investment and support a smoother closing.
US Medical Funding helps dermatologists finance the purchase of existing practices. Learn more about our dermatology practice acquisition financing.
