1. Define the financing question and the borrowing entity
Start with a short transaction brief that states the proposed borrower, the requested amount or range, the use of funds, the expected timing of draws; and the repayment source. For example, a facility expansion may require deposits and equipment payments before additional cases generate collections. A partner redemption may require a single closing payment, while a revolving line may cover normal timing gaps between payroll and payer receipts. These uses create different diligence questions. A lender funding equipment may focus on asset schedules and liens; a lender funding a redemption will examine the purchase price, cash available after closing; and the continuing economics of the departing partner's work.
Draw a simple entity map with legal names, tax classifications, ownership percentages; and roles. An anesthesiology group may operate through a professional entity, employ nonclinical staff in a management company; and may lease equipment through a separate entity. Identify which entity signs payer and facility agreements, hires clinicians, owns receivables, holds real estate or equipment; and would guarantee or receive the loan. Add a one sentence explanation for each intercompany payment. If a management entity invoices the practice for payroll administration, show the agreement and recurring amount with the agreement and recurring amount attached.
The proposed borrower should match the operational and financial evidence. If the practice entity earns the professional fees but a parent entity is the requested borrower, explain how cash moves to service the debt and what approvals govern that movement. If several entities have common owners, lenders may ask for combined statements, separate statements; or guarantees. Prepare all three possibilities without treating consolidated cash as automatically available to every entity. State which obligations are legally owed by each entity and which are informal owner arrangements.
Create a transaction assumptions page that records the planned loan amount, term concept if known, collateral expected to be offered, owner contributions; and any planned distributions or refinancing. Label estimates as estimates and distinguish them from executed commitments. This is a working document, not a sales pitch. It gives the lender and owners a shared baseline and makes later changes visible. A change from funding new equipment to paying a selling partner can materially change underwriting even if the requested amount stays the same.
2. Build financial statements that reconcile to cash
Collect three to five completed fiscal years of tax returns, year end financial statements; and monthly income statements and balance sheets. Include a current trailing twelve month period and the most recent closed month. If the practice uses cash basis accounting, say so and explain how receivables, accrued compensation; and deferred expenses are tracked outside the general ledger. If the practice uses accrual accounting, identify any material estimates or year end adjustments. A lender wants to understand both reported earnings and the timing of cash conversion.
Reconcile income statement revenue to bank deposits and the accounts receivable ledger. A useful bridge starts with billed charges, subtracts contractual adjustments, denials, refunds; and bad debt; and arrives at net patient service revenue or collections under the practice's stated method. Then reconcile collections by month to bank deposits, allowing for merchant fees, lockbox timing, transfers between accounts; and deposits from nonclinical sources. Keep the bridge consistent across periods. A one month unexplained difference often prompts a much wider review because it weakens confidence in all the schedules.
Prepare a debt and lease schedule with lender or vendor, legal borrower, original amount, current balance, monthly payment, interest rate, maturity, collateral, guarantors; and prepayment terms. Include equipment loans, lines, vehicles, real estate obligations; and leases with meaningful fixed payments. Tie balances to statements and the ledger. Show owner loans separately from third party debt, including whether interest accrues and whether repayment is subordinated. Reconcile cash across all operating and reserve accounts, including restricted funds or security deposits that should not be treated as free cash.
For quality of earnings adjustments, show the actual ledger account, period, amount, business rationale; and whether the item is genuinely nonrecurring. A one time recruiting fee might be a candidate for adjustment if it will not recur and is not part of normal replacement hiring. Ordinary legal fees for recurring contract disputes, owner travel; or compensation above market are not automatically add backs. Present reported results first, then a separate reconciliation with evidence such as invoices, settlement documents; or payroll records. Never include the same adjustment in both expenses and a separate normalization schedule.
3. Explain collections by facility, payer; and service line
Anesthesia revenue can depend on a combination of case volume, payer mix, contractual rates; documentation and coding processes; and facility arrangements. Build a monthly revenue schedule by facility and, where practical, by payer category and service line. Common categories include hospital anesthesia, ambulatory surgery center work, pain services; and other professional services. For each line, show cases or units when reliable, gross charges, adjustments, net revenue or collections; and outstanding receivables. Explain changes in coding, billing vendors, payer enrollment; or contract terms that affect comparisons.
Segment receivables by aging buckets and identify the responsible follow-up process. Separate submitted claims awaiting payer processing from claims needing correction, appeals; or patient balance work. Summarize denial rates and the largest denial reasons if data is available, but keep definitions stable between months. Identify old balances that have low recovery prospects and the reserve policy applied to them. A large receivables balance does not support borrowing in the same way as collectible, properly submitted claims, so aging and subsequent receipts matter as much as the headline balance.
Show concentration directly. Calculate each facility's share of annual net revenue or collections; and show the largest payer shares if data can be trusted. For a facility with several locations, explain whether they share a single contract or could make independent decisions. Identify contracts that are up for renewal, subject to termination rights; or dependent on a particular staffing arrangement. Do not hide concentration by combining unrelated facilities into a single category. If one hospital represents half of revenue, the appropriate explanation is how the relationship is supported and what operational alternatives exist, not a broad assertion that the practice is diversified.
4. Document contracts, facilities; and referral dependence
Build a contract register with counterparty, legal entity, scope; effective and renewal mechanics, notice period, termination rights, compensation method, exclusivity, insurance requirements; and assignment or change of control provisions. Include professional services agreements, coverage agreements, management arrangements, leases, billing contracts; and material vendor agreements. Link each register row to the signed document and amendments. A summary is useful for navigation, but it should not replace the contract itself. Note any side letters or oral understandings that affect compensation or staffing and describe how the practice has treated them in its books.
For facility work, explain the practical operating relationship: who sets coverage expectations, how schedules are developed, how the practice handles absences; and what happens when volume changes. The lender is not assessing clinical quality; it is assessing whether the contracted work and related revenue are likely to continue. Describe renewal history, service expansions or reductions; and any unresolved commercial dispute. If a contract permits termination without cause, show the notice period and explain the group's response plan, such as redeployment to other contracted sites, subject to actual available capacity and agreements.
Pay particular attention to change of control, assignment; and consent clauses. A sale of ownership interests, addition of a lender lien; or transfer of assets can trigger different provisions. Prepare a matrix showing the relevant clause, the contemplated transaction step, the party whose consent may be required; and the in-house owner responsible for coordinating it. Avoid stating that consent is unnecessary unless the contract supports that conclusion. The lender needs to know whether the financing can close and whether key contracts remain available after closing.
5. Make clinician capacity and compensation understandable
Prepare a roster of owners and employed or contracted clinicians with role, employment status, start date, clinical effort or coverage pattern, compensation structure, benefits; and any notice or termination provisions. Show open positions, departures, recruiting commitments; and locum or staffing agency use. Connect staffing costs to coverage and revenue where possible. The purpose is to show the capacity required to fulfill contracts and the cost of maintaining that capacity, not to evaluate individual clinical practice.
Explain compensation in terms that can be reconciled to payroll and the general ledger. If owners receive salary, distributions, call stipends, administrative fees; or separate payments through another entity, display each component and its business purpose. Provide executed employment or shareholder agreements where they govern compensation; and show how production or call formulas are calculated. If the formula changed during the historical period, identify the effective period so a lender can distinguish true margin change from a compensation allocation change.
For a partner transition, include the governing agreement, buy-sell formula, valuation inputs, payment terms; and a post-transaction ownership and management chart. Model the departing partner's clinical work separately from their ownership interest. If the seller is expected to remain for a transition period, document the expected term, compensation; and scope. If coverage depends on replacing the seller, quantify recruiting costs, onboarding time; and interim staffing costs using actual practice experience where available. Do not assume that the departing owner's distributions simply become debt service capacity; some portion may be needed to replace work or leadership.
A lender may request personal financial statements or guarantees from owners, depending on loan type and structure. Set a secure process for sharing individual materials and clarify which partners are expected to participate. Explain how guarantees are allocated and whether the partnership agreement addresses contribution among guarantors. If owners have different liquidity or risk tolerance, address that early among themselves. A proposed loan can be affordable at the practice level but difficult to approve if required guarantees are not available on consistent terms.
6. Show debt service capacity and the downside case
Prepare a base case forecast with monthly revenue, compensation, operating expenses, capital expenditures, working capital movement, existing debt service, proposed debt service; and ending cash. State the operating assumptions: facility volumes, payer rates, staffing levels, compensation, collection timing; and owner distributions. Tie the base case to historical performance and identify each material step up or cost reduction. A forecast that simply extends recent growth without explaining why it continues is hard to underwrite.
Then prepare at least one downside case that is specific to the practice. It could assume a key facility reduces coverage, collections slow, a payer contract rate declines, an owner exits; or recruiting costs rise. Change assumptions one at a time where possible, then show a combined stress case that is still plausible. For each case, show monthly minimum cash, debt service coverage, line usage; and any covenant headroom if applicable. The point is to reveal when a cash shortfall could occur, not to manufacture a reassuring ratio.
An illustrative worked example: assume a practice reports $12.0 million of annual net collections and $1.4 million of normalized cash flow available before debt service. These figures are illustrative. It has $250,000 of annual existing principal and interest payments and is considering a $1.2 million loan with annual debt service of $240,000. After both payments, the illustrative remaining cash flow is $910,000; or $75,833 per month before taxes, owner distributions; and capital needs. If one facility generating 35 percent of collections reduces volume by 20 percent; and the lost volume carries a 30 percent contribution margin, the illustrative annual cash flow reduction is $252,000: $12.0 million × 35 percent × 20 percent × 30 percent. Remaining cash flow before debt service becomes $1.148 million. After $490,000 combined annual debt service, $658,000 remains, about $54,833 monthly. This simplified result does not include tax, working capital, covenant definitions; or replacement costs. A complete model would add those items and show whether the facility change also creates staffing savings or transition expense.
Use the lender's requested debt service coverage definition when available and provide the underlying calculation and only the ratio. Clarify whether owner distributions, taxes, leases; and capital expenditures are included in its denominator or numerator. A ratio can look strong while cash availability is weak if receivables are growing or large equipment purchases are imminent. Separately show unrestricted cash, undrawn line availability; and restricted balances. Avoid counting the same cash both as a liquidity reserve and as a source for a closing payment.
7. Organize the data room and the response process
Create a structured, permission-controlled data room. A practical folder set includes corporate and ownership records; financials and tax returns; revenue and receivables, facility and payer contracts; workforce and compensation, debt and leases, insurance; litigation and disputes, transaction documents; and forecasts. Use consistent filenames that state entity, document type; and period. Keep signed documents in a final folder and drafts in a clearly separate location. Restrict access to sensitive payroll, personal financial statements; and any legally privileged material; coordinate disclosure of privileged documents with counsel.
Maintain a diligence request log with request number, exact item, owner, status, file link, date delivered; and follow-up questions. Assign a single coordinator to check that the supplied file answers the question and that the numbers match related schedules. Maintain a separate issue log for exceptions such as missing amendments, inconsistent entity names, stale insurance certificates; or unexplained historical adjustments. Each issue should have an owner, factual description; and next step. Do not silently replace files after delivery; preserve versions so a reviewer can tell what changed.
For recurring questions, provide a concise written response with a source reference. For instance, if asked why payroll rose, connect the increase to clinician start dates, call coverage, bonus payments; or staffing agency usage and identify the payroll periods supporting the explanation. Keep answers factual and avoid speculation. When the answer is not known, state the in-house process and expected evidence source. A transparent unresolved item is easier to manage than inconsistent explanations from several partners.
8. Avoid preventable mistakes and close with a clear package
Common mistakes include sending raw exports without definitions, mixing entity financials; and presenting a forecast without tying it to source data. Another frequent problem is describing collections as revenue without clarifying whether the number is billed, allowed; or deposited cash. Owners may also treat historical add backs as recurring entitlement, omit owner loans; or overlook lease obligations because they do not appear as bank loans. Each of these can make an otherwise stable practice appear less reliable than it is.
Avoid overpromising around contract renewals, case growth, recruiting; or replacement coverage. A lender can work with a risk that is visible and measured. It is harder to work with an assertion that no problem exists when contract language or operating history points in another direction. Correct errors promptly and explain the correction, including the affected schedules. Do not send multiple partners to answer the same question independently; coordinate a single response and keep the supporting records available.
Before the first full submission, review a compact lender package: transaction brief, entity chart, historical financial statements, monthly trend schedules; revenue and receivables bridge, debt schedule, contract register, workforce roster; forecast and downside case; and an index to supporting documents. The package should let a lender trace a material figure from summary to source. It should also let owners see the assumptions that determine whether the proposed borrowing remains manageable after payroll, existing debt, necessary investment; and reasonable distributions.
The diligence process is complete only when open questions have a named owner and a recorded resolution or accepted treatment. Keep a closing checklist for final conditions such as entity approvals, lien releases, contract consents, insurance evidence, updated financials; and funding instructions. Align the financing documents with the actual transaction and the practice's governance approvals. A disciplined file and response process reduces repeated requests, supports realistic loan sizing; and helps partners make a decision based on the cash flows and obligations their practice can actually sustain.
Action checklist
- Write the transaction brief and map every borrower, operating entity; and cash transfer.
- Reconcile financial statements, collections, receivables, cash, debt; and leases to source records.
- Summarize revenue concentration, contract terms, clinician capacity; and partner transition effects.
- Build a base forecast and practice-specific downside cases that show cash and debt service monthly.
- Create a controlled data room, request log, issue log; and coordinated response process.
- Review the complete package with the partners and their accounting and legal advisers before submission.
Questions about your own practice? Contact richard@doctorsinvestorclub.com.
