The three questions behind every practice purchase
Diligence gets long, but it answers three questions:
- 01Are the earnings real? Can the reported numbers be reconciled to the practice-management system, the bank statements and the tax returns?
- 02Do the earnings transfer? How much depends on the seller personally, on one large referral relationship, or on a lease that ends at closing?
- 03Does the structure fit? What entity buys the practice, how is the price allocated, and what does the first year of taxes actually look like?
Buyers usually work hardest on the first, less on the second, and reach the third when the terms are already fixed. The order should be reversed.
Verifying the earnings
Ask for and reconcile:
- Three years of tax returns and matching financial statements
- Practice-management system revenue reports for the same periods
- Production by doctor, by month
- Payroll registers and staff tenure
- Equipment list with age and service history
- Inventory on hand and how it was valued
- The lease, in full, including assignment terms
Where the returns and the practice-management reports disagree, the difference has to be explained before it is priced.
Where the earnings might not follow you
| Dependency | The question to ask |
|---|---|
| Seller's own production | What share of revenue is theirs, and what happens the day they stop? |
| Key staff | Are the practice manager and lead technicians staying? Under what terms? |
| The lease | Is it assignable, at what rent, for how long? |
| Referral sources | Are they relationships with the practice or with the person? |
| Below-market costs | Which expenses reset upward after closing? |
The structure decision
Two structural choices set the tax outcome for years:
What is purchased. An asset purchase and an entity purchase produce different basis, different depreciation and different liability exposure. Sellers and buyers usually prefer opposite answers, which is why it is negotiated rather than assumed.
What buys it. The entity that acquires the practice, whether an S-Corp election is appropriate, and how owner pay will run through payroll afterward. This is the same Foundation the practice will operate on for the next decade — it is cheaper to establish it correctly at the purchase than to restructure later.
The first year
Model it before closing: debt service, the owner wage the work supports, working capital during the transition, and estimated taxes on the new profit. A purchase that works on paper and fails in month four almost always fails on cash timing, not on price.