What is stage one and two surgery center due diligence?

The phrase due diligence is actually a misnomer. It was originally used in connection with public underwriting. The principal liability section of the Securities Act section 11 establishes a defense in securities lawsuits for misleading prospectuses for certain persons, like underwrites, if they exercise due diligence in investigating the company before selling its securities. The term is now more broadly used to mean the investigation that an investor or a buyer undertakes of a prospective seller. The due diligence process is extremely important as it affects the buyer’s decision whether to invest or acquire the company, what terms and for what prices. Additionally, this allows you to get a very deep and wide understanding of your business because you must be able to present your business in the most favorable light.

The goals of the prepare to sell my ASC stage is to prepare your surgery center so it looks as appealing as possible to a potential buyer. Additionally, the speed of the process, the efficiency of the process and overall buyer perception are three big components that you want to manage. Here is how we get a handle on that. Being organized and proactive vs reactive helps those three things happen. This also allows you to get in front of any potential weaknesses that you might have or see and allow you to craft the message around the options you see around how these could be strengthened.

Stage one and stage two data are essentially the paperwork stages and can be exchanged remotely and easily.  We use a virtual data room with folders and give different levels of access. Some of the buyers will argue that doing due diligence is a costly process for them and want some sort of no shop or standstill agreement in place. This is not real in our experience and we are against standstill agreements in most situations without a break-up fee, but that is another topic for another day. Proactively providing the paperwork will help rebut the notion that this process is expensive for the buyers.

As we have stated there are two stages here, sometime depending on the size and scope of the business we are selling and the buyers we will actually combine the stage one and two but with them broken out you can wait to give more information as you get more comfortable with knowing that the potential buyer is a real buyer.

Stage one

  1. Physician Information:
    1. Curriculum vitae with D.O.B.
  1. Corporate Entity Structure:
    1. List of all shareholders.
    2. Percentage ownership by type of security.
    3. Description of corporate parent and subsidiary ownership structure.

(This information will help us prepare an ownership and corporate structure chart that will enable us to begin to formulate ideas on transaction structure, credentialing, billing, etc.)

  1. Financial Statements:
    1. Annual statements (P&L and balance sheet) for 2006, 2007, 2008, and 2009.
    2. Monthly financial statements (P&L only) 2009 and YTD 2010.

(This information will help us determine historical and current financial run-rate of the business and formulate a preliminary valuation range.)

  1. Monthly Production & CPT Billing Reports for 2006, 2007, 2008, 2009 and YTD 2010:
    1. Monthly charges and utilization by CPT code, consolidated by physician.
    2. Monthly charges and utilization by CPT code, consolidated by practice.
    3. Total charges, collections, and adjustments by payor type (i.e. Medicare, HMO/PPO commercial carrier, and all others).

(This information will help us prepare detailed graphs to illustrate the operational profile of business, cyclicality, trends etc.)

  1. Description of Case Referrals – Breakdown for last 12 months of:
    1. Number of cases sent by each referring physician indicating physician zip code.
    2. Number of cases sorted by patient zip code origin.

(This information helps us understand who is sending patients and where they are coming from.  Such information will enable us to begin to forecast patient volumes for its projections model and to formulate ideas on physician marketing.)

  1. Fixed Asset Detail:
    1. Description of each piece of equipment including manufacturer, model, serial number, manufacture year, year acquired, purchase price, depreciable life, depreciation methodology and book value.
    2. Description of maintenance contracts for equipment including name of service provider, term of agreement and monthly cost.
  1. Personnel Headcount:
    1. List of employees indicating position, salary, and hours worked per week.
  1. Real Assets and Lease Terms:
    1. Description lease commencement date, term, monthly lease obligation, gross or triple net, square footage, leasehold improvement, if any.

Description of building, if owned, with construction year associated debt.

Stage 2

  1. General Corporate Materials
    1. Schedule of all shareholders with percentage ownership by type of security.  Summary of any agreements relating to voting of securities.
    2. Schedule of all legal entities (including parent, subsidiary and affiliated entities).
    3. Schedule and description (specifying among other things, any voting or economic rights) of all equity or equity-linked securities issued by the Company.
    4. All organizational documents: PPM/s, subscription agreements, articles of incorporation, certificate of incorporation, charter, bylaws, articles of formation, operating agreement, certificate of limited partnership, partnership agreement, and all other similar documents, instruments or certificates executed, adopted, or filed in connection with the creation, formation, or organization of each Seller, including any amendments thereto.
    5. Names under which each Seller does business or has done business within the past five years.
  1. Financial Information                                               [Note: MS Excel format is preferred]
    1. Annual financial statements for the last three full fiscal years.
    2. Monthly interim financial statements for the last three full fiscal years and year-to-date period (“YTD”) for the current year.
    3. Schedule of monthly cash collections for the last three full fiscal years and YTD period by payer type supported by bank statements showing funds flows.
    4. List of the Company’s top 10 payors with both gross and net revenues generated by each for the last three fiscal years and YTD period.
    5. Accounts receivable analysis and aging by payor for the past two years.
    6. Detailed fixed asset ledger, with cost, life, annual depreciation expense, accumulated depreciation, and net book value.
    7. Schedule of all debt instruments (bank debt, capital and operating leases, notes payable, etc.) with description of terms (principal at issue, current balance, term, interest rate, and any significant covenants).
    8. Reports, studies and plans prepared by management or consultants on the Company’s business or financial condition.
    9. Budgets, forecasts and three-year financial projections, including any current or past business plans prepared by or at the request of the Company, or relating to the proposed business of the Company.
    10. All analyses of the Company or its products prepared during the last 3 years by investment bankers, valuation professionals, management consultants, accountants, customers or others, including marketing studies, credit reports and other types of reports, financial or otherwise.
  1. Operating Data                                              [Note: MS Excel format is preferred]
    1. Monthly patient volume data by modality or CPT code for the last 24 months.
    2. Patient referrals by zip code for last 24 months.
    3. Patient referrals by referring physician for last 24 months.
  1. Competition, Marketing and Sales
    1. Market segmentation studies and analyses, including measurement/description of market share, competitor’s share, available market opportunity by segment, and projections of opportunity by segment.  Please include overview of analyses conducted for other market opportunities.
    2. Marketing plans describing company strategy, marketing and selling strategies, positioning objectives, competition, market share, physician referral base and prospect base.
    3. Copies of descriptive literature concerning business and products, including catalogs, brochures, marketing presentations, flyers, etc.
  1. Physician Relationships
    1. Description of any and all contracts or arrangements with physicians regarding employment, consulting, compensation or other agreements or arrangements with physicians including supervisory and medical director arrangements.
    2. Any and all physician supervisory agreements including medical director agreements and/or agreements with physicians to serve as the supervising physician.
    3. Any and all interpretation (professional reading) agreements between the Company and any other physician, physician organization or hospitals.
  1. Agreements
    1. Summary of contracts with hospitals or other providers including rates for services, date of execution, date of expiration, language regarding automatic renewal of contracts, and language regarding early termination of contracts.
    2. Commercial space leases, ground leases, option agreements.
    3. Credit and term loan agreements, indentures, bonds and other debt, financing or factoring agreements or instruments, any guaranty associated with such loans and any agreements purporting to create liens or encumbrances on any property of each Seller.
    4. Employment contracts/personal service.
    5. List of all (and copies of) union contracts and collective bargaining agreements, the number of employees covered under such agreements, and the anticipated date of expiration.
    6. Management agreements.
    7. Medical director agreements.
    8. Billing services agreements.
    9. Service and maintenance agreements where the annual service charge is in excess of $5,000.
    10. Purchasing contracts and/or supplier agreements.
    11. Listing of all contracts with commercial payors, managed care and other private insurance carriers including information on reimbursement rates for high volume procedures and contact information (names, phone numbers and addresses) for each payer.
    12. Managed care and other private insurance contracts with a list of List of purchase, supply and sale agreements, including a list of all contracts relating to the purchase of equipment, fixtures, supplies, saleable merchandise or other materials having a price under any such contract in excess of $5,000 annually.
    13. Confidentiality agreements.
    14. List and description of all significant oral contracts and commitments.
    15. [if wholesale] Summary of client contracts with hospitals or other providers including rates for services, date of execution, date of expiration, language regarding automatic renewal of contracts, and language regarding termination of contracts.
  1. Staffing
    1. Management structure and organizational chart.
    2. Current employee roster including name, position/title, pay rate, date of hire, full-time/part-time/temporary status, exempt/non-exempt status, and union/non‑union status.
    3. Job descriptions for all personnel.
    4. Employee handbooks, guidelines and bulletins.
  1. Medical Equipment
    1. Summary of equipment purchases and leases, upgrades and divestiture history including dates and capital expenditures.
    2. Summary of equipment leases, including name of lessor, asset description, interest rate, payment schedule, buyout price, expiration date, termination rights and costs, and restrictions on transfer or change of control.
    3. Summary of equipment sale-leaseback arrangements, including name of purchaser/lessor, purchase price of equipment from seller, sale price to lessor, interest rate, buyout price, expiration date, termination rights and costs, and restrictions on transfer or change of control
    4. Summary of equipment seller and third party purchase financing agreements, including name of lender, interest rate, amortization schedule, prepayment options and penalties, and restrictions on transfer or change in control.
    5. Copies of the service records of all equipment.
    6. List of locations of equipment.
  1. Insurance
    1. A schedule of all insurance coverage (including general business and professional liability).
  1. Real Property
    1. Summary of major properties owned or leased.
  1. Regulatory & Licenses
    1. Summary of all permits, licenses, approvals, determinations and other qualifications issued by any federal, state, or local governmental authority necessary for the operation of Company’s business including, but not limited to, any certificate of need (CON) or similar reviews or letters of non-reviewability
      • Certificate of need (CON) or similar reviews
      • Letters of non-reviewability
      • State health licenses or certifications
      • Radioactive materials licenses
      • CMS/Medicare certification
      • Business licenses (county and city)
      • Permits, licenses, authorizations, registrations, approvals, and notifications, required under or issued pursuant to any environmental statutes
    1. Good standing certificates, for state of incorporation and every state and foreign country in which the Company is qualified to do business.
    2. Copies of any quality assurance accreditations from JCAHO, ACR, ACRO, ACOS, etc. 
  1. Legal & Compliance
    1. A list and description of all pending and threatened litigation, claims, arbitration, administrative proceedings or governmental investigations involving the Company or an officer, director, manager, or partner of the Company.
    2. Description of any audits or investigations of the Seller, pending or threatened, by any federal, state, local, or foreign regulatory bodies or authorities, or having occurred within the last five years.
    3. Company’s compliance plan or program and copies of compliance meeting minutes for the past twelve (12) months.  Please identify the person(s) performing the functions of:  Compliance Officer; Privacy Officer; Risk Manager; Quality Assurance Officer; and Quality Improvement Officer.
    4. Copies of all documents, correspondence, surveys, or other information relating to any alleged violations, orders, deficiencies, or investigations with respect to the Company, including the billing and reimbursement practices of the Company (whether with governmental programs, private third-party payors, or self-payors).
  1. Joint Venture, Partnership and Minority Interest Information
    1. Summary of joint venture or partnership agreements and contract terms, including termination dates.
    2. Summary of management services, billing services and technical assistance, maintenance or support agreements.

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