When selling or buying a practice, due diligence plays a pivotal role in ensuring a smooth and successful transaction. It involves a comprehensive examination of the practice's financial, legal, operational, and commercial aspects during negotiations and, predominantly, before finalizing the practice sale agreement (PSA). In this blog, we will explore the importance of due diligence in the practice sale process and how it directly impacts the terms of the PSA.

Understanding Due Diligence or “DD”:

Due diligence is the process of conducting a thorough investigation into a practice before making an informed decision about its purchase or sale.
It involves examining financial records, legal contracts, intellectual property, operational processes, patient/client/supplier relationships, and more.
Due diligence provides crucial insights into the practice's strengths, weaknesses, risks, and potential for future growth.
Importance of Due Diligence in the Sale Process:
Minimising Risks: Conducting due diligence helps identify potential risks and issues associated with the practice, such as undisclosed liabilities, pending lawsuits (for example employee or patient claims), or statutory non-compliance.
Negotiating Terms: The findings from due diligence inform the negotiation process, allowing purchasers to adjust the purchase price, payment terms, or other conditions based on the identified risks or opportunities. Therefore, as a vendor, it is critical to disclose due diligence early to your purchaser as it allows your purchaser’s lawyer to review the PSA clauses contemporaneously with the due diligence – for example, without a list of the practice’s employee entitlements, the purchaser’s lawyer is hamstrung when reviewing the PSA clauses related to employee entitlements.
Ensuring Value: Vendors benefit from due diligence by showcasing the practice's strengths and value, instilling confidence in purchasers and justifying the asking price.
Legal Due Diligence:

Reviewing Legal Contracts: Examining contracts, agreements, leases, and licenses helps identify any potential legal issues or obligations that may affect the sale.
Intellectual Property Evaluation: Assessing the protection and ownership of intellectual property rights ensures the purchaser is acquiring valuable assets without legal encumbrances.
Compliance Check: Verifying compliance with laws, statutory, and industry standards ensures that the practice operates legally and minimises potential legal risks.
Impact on PSA terms:

Accurate Disclosure: Due diligence findings guide the disclosure process, ensuring that all material information is accurately and completely provided to the purchaser.
Purchase Price Adjustment: Identified risks or opportunities uncovered during due diligence can impact the purchase price and payment terms, allowing for fair negotiations.
Representations and Warranties: The PSA may include specific representations and warranties based on the due diligence findings, ensuring that the purchaser is protected from any misrepresentation or undisclosed issues.

Due diligence plays a critical role in the practice sale process, providing valuable insights into the practice's financial, legal, and operational aspects. It helps purchasers and vendors make informed decisions, negotiate fair terms, and mitigate risks. By conducting comprehensive due diligence, both parties can enter into a PSA with confidence, knowing that the terms are based on a thorough understanding of the practice's opportunities and challenges.