Due Diligence in the Medical and Healthcare Sector: Navigating an Essential Step for Successful Acquisitions and Investments

14 Jul 2023

Investing in a medical or healthcare business can be an attractive prospect, thanks to the industry’s defensive nature and constant demand for services. In the United Kingdom, the private healthcare market continues to see strong growth year on year, partly due to an ageing population and strain in the NHS. However, every investment carries some risks, and this sector is no exception. To mitigate these risks and ensure the business you are investing in or buying is sound, prospective buyers should carry out proper due diligence. This article aims to shed light on a few key areas of due diligence that anyone entering this market should pay particular attention to:

1. Services Provided, Technology, and Future Trends

The healthcare landscape is ever-changing, driven by rapid advancements in technology. Understanding these dynamics is crucial when assessing a potential healthcare investment.
When scrutinising a medical business, consider the services it provides and their relevance both now and in the future. For instance, services that are more advisory-based have already seen shifts from face-to-face consultations to remote appointments, and even AI support. It’s important to assess whether the business has adapted to these changes or, if not, what investments might be required to remain competitive.
Conversely, medical businesses that rely on in-person assessments or treatments may have more longevity under their current business models. For these, technological investments might act as differentiators and growth drivers rather than necessities.

2. Licences, Permits, and Compliance

Compliance with regulations is fundamental in the healthcare sector. As part of due diligence, understanding what licenses and permits are needed to continue delivering the current services is crucial. Consider whether a change of owner may jeopardise this, particularly if you are new to the sector and buying smaller businesses without a clinical leadership team in place.
Buying a business with accreditations, such as a Care Quality Commission (CQC) license, in place can be hugely advantageous and bypass a long and costly application process. However, it is important to understand what resources and costs will be required to maintain critical accreditations factor this into your investment considerations.

3. Premises

The location and quality of the premises can significantly impact a healthcare business, especially those offering face-to-face services. Be sure to check that the premises is fit for purpose and carefully consider the security of tenure and ease of relocation (if necessary). The impact of relocating healthcare business and associated fit-out costs can be substantial. Depending on the service provided, fit out costs for a new premises can be substantial due to the specialist nature of medical equipment and required amenities such as soundproofing, climate control, health and safety considerations, and housing for large diagnostic kit.

4. People

People are the heart of any service-based business, and the medical and healthcare sector is no exception. The quality, skills, and dedication of the staff can significantly influence the business’s performance and reputation. As part of the due diligence process, it’s essential to assess the organisational culture and the likelihood of staff remaining post-acquisition. If a key practitioner leaves, would their patients follow? This can significantly affect the continuity of service and the overall value of the business.

5. Contracts and Service Level Agreements (SLAs)

Contracts and SLAs, especially with health insurance companies, public bodies like the NHS, and other larger clients, are often the bedrock of a healthcare business’s revenue. However, these can also be complex and subject to changes in policies or regulatory frameworks.
Contracts with the NHS, for instance, can often maintain a ‘holding over’ position, renew for short periods at a time, and be subject to frequent policy changes. This can affect the long-term sustainability of the business and should be a key consideration during due diligence.

In conclusion, due diligence is a crucial step when investing in the medical and healthcare sector. By thoroughly examining the business’s services, technology, compliance, premises, people, and contracts, investors can gain a comprehensive understanding of their prospective investment and navigate this complex sector with confidence. Remember, a successful investment requires more than just capital; it also demands a deep understanding and careful examination of the investment landscape.

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