When Buying a Healthcare Agency, One Must Perform an Adequate Due Diligence: CAVEAT EMPTOR

Many times when the sale of an agency is contemplated, the buyer will give a cursory look at the clinical records, and then look over only the balance sheets, or the last few months of the company checking account. That is not adequate in order to get a good idea of what has gone on with the agency.

It is a good idea to have an accountant look over the company books AND the company cost reports for the last few years for Medicare, and Medicaid if the agency participates in Medicaid and has to submit cost reports. Remember, last year’s cost report isn’t typically completed until half way through the next year. It is also a good idea to have a clinical consultant look over the clinical records to see that they are proper and completed to regulatory specifications, as a future audit might assess overpayments.

Further, the company should keep corporate books with annual meeting minutes and resolutions. If the agency is accredited, call and check on the accreditation of the agency to make certain the accreditation is accurately reflected in the certificate on the wall. 

A written agreement for confidentiality will usually give the Seller enough protection that they will open their books to the buyer. If the Seller doesn’t want to allow the buyer to look over the books and clinical records, beware. If the seller will not turn over the books or records because of a concern about confidentiality, you can enlist an attorney to attempt to convince the seller to loosen its grip on the books by providing adequate protections as agreed by the parties.

In a stock sale, the purchaser typically purchases stock with assets and liabilities intact without other agreements and other assurances. LLC membership purchases are similar to stock purchases.
If one purchases just the “operation” as an asset, for Medicare (whatever kind of sale it is), the enrollment number is actually transferred to the new owner (unless specified the enrollment does not transfer), and any liability that Medicare imposes on the agency will be the responsibility of the current ownership, whether there is an indemnity agreement or not. Medicare will look to the current operators to handle the issue, as will the state in the contracts it assigns and Medicaid when it assigns contracts.  If you assume the operations, you may very well assume future liability.