Key Takeaways
- Start diligence early. Performing limited-scope diligence before signing a Letter of Intent (“LOI”) may reduce the chance of unforeseen complications, strengthen valuation discipline, and protect deal momentum.
- Look beyond financial statements. Early review of financial, operational, cultural, and compliance factors may prevent post-LOI re-trades and integration challenges.
- Tax structure drives value. Early collaboration between financial and tax advisors may allow buyers to model cash tax impacts, structure the deal strategically, and negotiate from an informed position.
The Market Reality: Discipline Has Replaced Urgency
As of late 2025, the healthcare transaction landscape remains active but disciplined. Higher interest rates, tighter credit availability, margin pressure from labor inflation, and payor rate stagnation have reshaped deal dynamics. Buyers are focusing on quality and durability of earnings rather than purely on growth potential.
In this environment, buyers are increasingly re-evaluating when diligence begins. The traditional approach of signing an LOI and then performing diligence has given way to a new model: conducting targeted, high-impact diligence before exclusivity. This early review may avoid inflated valuations, identify risks that affect deal feasibility, and strengthen negotiating confidence.
What Pre-LOI Diligence Actually Means
Pre-LOI diligence is not a full deep dive. It is a focused assessment designed to answer one key question: “Should we sign the LOI at this valuation and with these assumptions?”
A pre-LOI review typically includes:
- High-level financial analysis. Validate revenue mix, margin trends, seasonality, and potential add-backs that may not be recurring.
- Revenue integrity and reimbursement review. Evaluate how the business earns revenue, its payor relationships or customer contracts, and whether historical results reflect normalized operations.
- Operational assessment. Consider staffing stability, leadership depth, scalability, and reliance on key relationships or individuals.
- Preliminary tax and structure modeling. Identify whether an asset or stock transaction is more beneficial and assess the potential for a tax basis step-up and post-close cash flow impacts.
Why It Matters
Performing diligence before exclusivity benefits both buyers and sellers. It may help buyers:
- Avoid re-trades that can damage reputation and relationships.
- Set realistic valuation parameters based on verified information.
- Enter exclusivity with clear priorities and reduced uncertainty.
- Increase the probability of closing by confirming early that the deal is viable.
It also helps sellers by minimizing disruptions later in the process and demonstrating that the buyer is credible and prepared.
In today’s environment, early diligence is not a cost; it is risk protection.
Sector-Wide Healthcare Implications
Healthcare transactions continue to evolve across an increasingly diverse set of subsectors. Today’s most active areas include life sciences and pharmaceuticals, digital health, medical device, physician practices, behavioral health, and home care & hospice. Each subsector presents unique operational, reimbursement, and compliance considerations that drive financial performance beyond what the financial statements alone can reveal.
Pre-LOI diligence helps buyers identify where and how revenue is truly generated, which entities hold the critical payor or customer contracts, and whether reported margins are sustainable under current reimbursement and staffing models. It also provides an early opportunity to evaluate compliance exposure, referral dependencies, and scalability within existing operational infrastructure.
Buyers who invest in early diligence can better distinguish between temporary performance improvements and durable, recurring cash flow. This distinction is increasingly critical as the market places a premium on earnings quality.
Tax Structure and Compliance Considerations
The chosen transaction structure, whether asset purchase, stock purchase or a purchase of a business subject to Corporate Practice of Medicine (“CPOM”) restrictions (e.g., management services agreement), has direct implications for tax efficiency, regulatory compliance, and long-term integration.
In healthcare, structure can also determine whether the deal can legally close. State-specific CPOM restrictions, anti-kickback statutes, and value-based reimbursement programs all shape how ownership and control must be organized.
Engaging tax and regulatory advisors early in the process helps buyers model multiple structures, understand the effect on step-up and amortization benefits, and ensure compliance with applicable healthcare regulations before the LOI limits flexibility. Additionally, if a buyer is contemplating paying a premium to secure a step-up in basis, it may be prudent to model the financial impact. Depending on the expected holding period, the additional investment may or may not be justified.
The Role of Technology and Data
Modern diligence is increasingly technology-enabled. Buyers now have access to AI-assisted analytics that can extract and test financial and operational data from electronic medical records, practice management systems, and general ledgers within days.
Pre-LOI diligence can be used to validate revenue recognition patterns, assess coding consistency or identify payor or customer concentration issues before exclusivity. This allows buyers to enter LOI negotiations with quantifiable insights rather than assumptions, improving both valuation accuracy and credibility with sellers.
Culture Still Counts
Data alone does not tell the full story. Culture, leadership alignment, and management transition plans remain critical factors in transaction success.
Pre-LOI meetings and site visits provide valuable context on workforce engagement, leadership style, and the seller’s post-transaction intentions. Buyers should assess whether management is motivated and capable of leading the business through integration and growth. In healthcare especially, continuity of leadership and clinical relationships can have a direct impact on patient retention and revenue stability.
The Takeaway
Pre-LOI diligence is now a competitive advantage. It allows buyers to validate performance, structure transactions intelligently, and reduce post-LOI friction. In a higher-cost, lower-tolerance deal environment, early diligence saves both time and value erosion.
Buyers who integrate financial, operational and tax perspectives before signing an LOI enter exclusivity with a stronger foundation and a clearer understanding of risk. That discipline consistently separates successful acquirers from those who struggle to close.
Authors:
Jessica Fernandez-Davila, CPA – Senior Manager, Transaction Advisory Services, LBMC
Brian Davis, CPA – Managing Director, Tax Services, LBMC
LBMC’s Transaction Advisory practice supports private equity and strategic buyers with financial, tax, and operational diligence across all healthcare sectors.
To learn more about how to approach transactions with clarity and confidence, review LBMC’s Private Equity Roadmap — your guide to navigating the deal process from initial interest to successful close.