What does a buyer's accountant want to see in a practice's books during due diligence?

A buyer's accountant is answering one question: do the books support the earnings the seller says this practice generates, and will those earnings continue after the seller leaves? Everything they ask for serves that question. They run a Quality of Earnings review to normalize the profit, and for a medical or dental practice they go further and test the revenue cycle, because a practice that bills insurance can look far larger on gross charges than it is on what it actually collects. This page lists what they ask for, leads with the medical-specific tests a generic checklist skips, and shows the one issue, gross versus net collectible revenue, that most often moves the price.

The one issue that moves the price: gross versus net collectible revenue

Start here, because it is where deals get re-traded. A buyer pays for what the practice collects, not what it bills. If the seller's books record gross charges as revenue, the practice looks bigger and more profitable than it is, and the first thing the buyer's accountant does is strip revenue back to net collectible revenue after contractual adjustments. Here is the same month seen two ways, with illustrative figures in US dollars.

A practice whose books already record revenue net of contractual adjustments, with a steady net collection rate, shows the same earnings before and after the buyer's review. A practice on gross-charge books hands the buyer a reason to lower the price. The single most valuable thing a seller can do is close that gap in the books before diligence, not during it.

The medical-specific tests a generic checklist skips

A buyer's accountant reviewing a healthcare practice tests the revenue cycle, not just the financial statements. These are the requests that catch sellers off guard.

The last one deserves emphasis, because it is where the second half of the buyer's question bites. If most of the production runs through the owner who is about to walk out the door, the earnings that continue after the sale are smaller than the earnings on the books. Provider-level reporting is how the buyer measures that, and how a seller demonstrates the practice does not depend on any one person.

The standard Quality of Earnings requests

On top of the revenue-cycle tests, the buyer's accountant runs the same Quality of Earnings review any business faces. Expect requests for these, and expect every add-back to be challenged.

• Monthly profit and loss statements and balance sheets for two to three years, plus tax returns, reconciled to the bank statements.

• The detailed general ledger, to find personal, discretionary or one-time expenses run through the practice.

• Owner compensation, normalized to what it would cost to replace the owner as an employed provider.

• Add-backs, every claimed one-time or discretionary item, each of which the buyer will test for whether it is genuinely non-recurring.

• Payroll and provider compensation structures, including any independent-contractor clinicians.

• Debt, leases and working capital, to set how much working capital must stay in the practice at closing.

• Related-party items, rent to an owner-affiliated entity, family payroll and shareholder loans.

• Regulatory and liability records, payroll-tax compliance, any tax liens or audits, and malpractice claims history.

What re-trades a deal. The recurring triggers are the same handful: revenue recorded gross rather than net collectible, so the practice is smaller than it looked; accounts receivable that turns out to be old insurance balances; heavy reliance on one payer or on Medicare and Medicaid; and earnings that rest on the selling provider's own production. Every one is cheaper to fix in the books over the year before a sale than to concede across the table.

Preparation, then evidence

This page is the evidence half of a pair. Getting a practice's books ready to sell is the preparation half: clean net collectible revenue, split and aged receivables, provider-level production and a stable net collection rate, all in place well before a buyer looks. When the buyer's accountant then asks the questions on this page, the answers are already sitting in the monthly reports rather than being reconstructed under deal pressure. Books built that way tend to close at the seller's number; books reconstructed during diligence tend to close lower.

Where Numetix fits

Numetix keeps the books in the shape a buyer's accountant tests for, as part of the normal monthly close rather than a scramble before a sale. Revenue is recorded net of contractual adjustments, the net collection rate is tracked, accounts receivable is split into patient and insurance and aged, and production and collections are reported by provider. When a practice decides to sell, the diligence answers are already there. Numetix is a bookkeeping and reporting provider, not an M&A advisor, business broker, valuation firm or attorney; a sale still needs those specialists. What Numetix provides is books that survive their review.

The example figures are illustrative and do not represent a specific practice or a valuation. Numetix provides bookkeeping and monthly reporting; it is not an M&A advisor, broker, valuation firm, tax, legal or investment advisor. A practice sale involves professional advisors beyond bookkeeping. This page is general information, not accounting, tax, legal or investment advice.

Related reading: preparing your books for a sale, gross versus net collectible revenue, profitability by provider, the monthly reports to review and why healthcare-specific books matter.