Healthcare Staffing Acquisition Due Diligence Checklist
Healthcare staffing acquisition due diligence is where buyers find out whether an agency’s earnings are as durable as they look. Because a staffing agency owns few hard assets, most of the risk sits in its clients, its people and its compliance history. Issues uncovered in those areas often lead to price changes, escrows, special indemnities or, in some cases, a buyer walking away.
This checklist is organized around the areas buyers and lenders tend to focus on. It is a general starting point, not a substitute for professional review. Worker classification, licensing, employment and tax rules vary by state, and nothing here is legal, tax, billing or compliance advice. Buyers should work with healthcare counsel, accountants and qualified professionals throughout the process.
Financial Due Diligence
Start by confirming that reported earnings are accurate and repeatable:
- Several years of tax returns, financial statements and interim results
- Bank statements reconciled to reported revenue
- Revenue, gross profit and bill rate to pay rate spread by client and service line
- Accounts receivable aging, bad debt history and any disputed invoices
- A detailed list of seller add-backs with supporting documents
- Existing debt, factoring agreements and liens on receivables
Earnings from crisis-era contracts or premium rates may need to be adjusted. Our guide to normalizing EBITDA in staffing deals explains how buyers and lenders approach that analysis. A quality of earnings review by an accounting firm may also be worth considering.
Client and Contract Review
The client base is the core asset. Review:
- All client agreements, including term, termination and assignment provisions
- Whether contracts require client consent to a change of ownership
- Participation in managed service provider and vendor management programs and their terms
- Revenue concentration by client, health system and program
- Pricing history and any recent rate reductions or lost accounts
Client contracts and vendor program memberships should not be assumed to transfer. Our article on staffing client concentration explains how lenders may view a concentrated book of business.
Worker Classification
How an agency engages its clinicians is one of the most significant diligence areas. If clinicians have been treated as independent contractors, buyers should understand how that decision was made and whether it is supported. Misclassification can create exposure for unpaid taxes, wages, benefits and penalties.
Worker classification should be reviewed by qualified employment counsel and tax professionals. Buyers should also review overtime practices, travel and stipend policies and how pay is calculated.
Workers’ Compensation and Insurance
Workers’ compensation is often a meaningful cost for healthcare staffing agencies, and claim history can affect future premiums. Review:
- Current policies, carriers and coverage types
- Loss runs and open claims
- Professional liability and employment practices coverage
- Insurance requirements in client contracts
Our guide to workers’ comp costs for healthcare staffing explains how these costs affect cash flow.
Licensing, Registration and Credentialing
Many states regulate healthcare staffing agencies through registration, licensing or operating requirements, and some have considered limits on rates or wages. Our overview of nurse staffing agency regulations explains why each state should be confirmed with counsel. Diligence should cover:
- Agency licenses and registrations in every state of operation
- Whether those licenses can transfer or require new applications
- How clinician licenses, certifications and health records are verified and tracked
- Any complaints, audits or client-reported incidents
Licenses and registrations should not be assumed to transfer to a new owner.
People and Operations
Relationships drive staffing revenue, so review the team carefully. Look at recruiter and account manager tenure, compensation plans, non-solicitation and confidentiality agreements, and how much of the business depends on the owner. Enforceability of restrictive covenants varies by state and should be reviewed by counsel.
Operational diligence may also cover payroll processes, timekeeping, billing, data security and the technology used to recruit and credential clinicians.
Red Flags That May Affect Financing
Some findings deserve extra attention because they can change how a lender views the deal:
- Payroll tax filings or payments that are behind
- Tax liens, judgments or unresolved claims
- Clinicians treated as contractors without clear support for that treatment
- A key client contract that cannot be assigned or is near expiration
- Lapsed agency registrations in states where the agency operates
How Healthcare Staffing Acquisition Due Diligence Affects Deal Terms
Findings in diligence can reshape a transaction. Buyers may negotiate a lower price, ask for escrows or holdbacks, request specific indemnities or adjust working capital targets. Lenders will also consider diligence findings when deciding how much to lend. Seller notes and earnouts may be used to share risk, but lenders and programs may limit earnouts, and seller notes are typically subordinate to the senior lender.
Working With Your Lender During Diligence
Sharing diligence results with your lender early can help avoid surprises late in the process. Lenders may request client concentration reports, receivables aging, insurance information and a payroll funding plan for after closing. For a broader view of the acquisition process, see our guide on how to buy a healthcare staffing agency. Every loan is subject to approval, and nothing here is a commitment to lend.
Final Thoughts
Thorough healthcare staffing acquisition due diligence helps buyers understand what they are really purchasing. Clients, worker classification, workers’ compensation and licensing tend to carry the most risk, and careful review of each can protect the buyer and support a financeable deal.
US Medical Funding helps buyers finance healthcare staffing agency acquisitions. Learn more about our healthcare staffing agency acquisition financing and our full range of healthcare staffing agency financing options.
