In today’s highly competitive healthcare environment, investors may find themselves in an auction process where they must conduct due diligence pre-exclusivity. With limited time and mounting pressure, it can be difficult to know what issues to prioritize. Here are some practical tips for focusing your due diligence efforts strategically in a pre-exclusivity setting:
- Quality of Earnings: Against the backdrop of high valuations, quality of earnings should be a key diligence focus, particularly in the context of high-complexity transactions such as corporate carve-outs, partnerships with corporates and public-private pairings. For example, it is critical to examine the pro forma EBITDA to see if it excludes costs or includes questionable adjustments or add-backs.
- Timeline: How competitive is the auction process and when are bids due? Does the buyer plan to conduct a full due diligence review pre-exclusivity, or instead look for big ticket liabilities that have a potential to impact valuation or derail the transaction?
- Legal Showstoppers: Keep an eye out for legal showstoppers—issues that go to the core of the business, are not isolated incidents and are not fixable through purchase price adjustments, indemnification, escrow or enhanced compliance measures. For example, referral relationships that are based on illegal arrangements, systemic upcoding, quality of care issues, tenuous relationships with hospital partners, untenable and promised salary increases, a culture of non-compliance, or a retiring physician workforce without adequate succession planning.
As you plan your due diligence, keep in mind these additional factors that can inform how you structure your efforts: