When financial institutions fail to conduct the right kind of due diligence prior to financing the purchase of a health care entity, bad things can happen. Too often, banks focus their due diligence too narrowly, missing red flags that may result in over-estimation of value.

Here are some key points to think about when planning and doing due diligence.

Know the Business

Health care entities are special creatures in the market. They are highly regulated delivery systems, dependent on government, private and/or third party payers. They expose lenders to layers of risk that can go undetected when due diligence is conducted superficially. Due diligence of a health care entity should dig into a company to find out how it works, where its strengths lie, and what weaknesses it has. Inquire about and understand the nature of the health care services delivered. Ask that the services be specifically described. Identify the local labor pool available and quantify labor resources and costs – key elements for a health care provider.  Understand the payer mix to determine how the business is reimbursed, what the reimbursement and payment sources are, and how reliant the business is upon each source.  Understand the market economy and the up or downward trends that are …