Due Diligence Checklist for Acquiring a Behavioral Health Residential Facility

Obtain all current state licenses, permits, and certificates of need for the facility.

Operating without valid licensure exposes the buyer to immediate shutdown risk post-close.

Red flag: Any lapsed, conditional, or provisional license status within the past 36 months.

Review full regulatory inspection history including all citations and corrective action plans.

Patterns of repeat citations signal systemic compliance failures that survive ownership transfer.

Red flag: Open corrective action plans or unresolved citations at time of diligence.

Confirm current CARF or Joint Commission accreditation status and next survey date.

Accreditation supports payer contracting, premium pricing, and referral source credibility.

Red flag: Accreditation expired, on probation, or withdrawn in the past two years.

Assess license transferability requirements under applicable state regulations.

Some states require new licensure applications upon change of ownership, delaying revenue.

Red flag: State requires full re-licensure survey prior to transfer with no interim operating permission.

Request a payer mix breakdown showing commercial insurance, Medicaid, Medicare, and private pay percentages.

Heavy Medicaid concentration limits EBITDA margins and increases regulatory reimbursement risk.

Red flag: Single payer represents more than 50% of total revenue.

Review all managed care and commercial insurance contracts for assignment and change-of-control provisions.

Contracts that cannot be assigned may require lengthy re-credentialing that disrupts cash flow.

Red flag: Key contracts contain termination-upon-change-of-ownership clauses without assignment rights.

Obtain three years of reimbursement rate history and any managed care audit activity.

Rate compression or active audits indicate future revenue risk not reflected in historical EBITDA.

Red flag: Ongoing insurance audit, clawback demand, or rate reduction notice outstanding at close.

Confirm provider credentialing files are complete and up to date for all billing clinicians.

Incomplete credentialing leads to claim denials and potential recoupment of prior payments.

Red flag: Credentialing gaps for clinicians generating more than 20% of billed revenue.

Review credentials, licensure status, and employment agreements for all licensed clinical staff.

Staff must meet state-mandated ratios and credential requirements to maintain licensure.

Red flag: Unfilled licensed therapist or psychiatrist positions creating ratio compliance violations.

Assess whether the founder or clinical director is the primary admissions decision-maker and referral contact.

Founder dependency on clinical relationships creates severe value transfer risk post-acquisition.

Red flag: Founder personally controls more than 40% of inbound referral volume with no transition plan.

Review staff turnover rates for licensed clinicians over the past 24 months.

High turnover increases compliance risk, reduces care quality, and signals cultural or compensation problems.

Red flag: Annual licensed staff turnover exceeding 40% in either of the past two years.

Confirm employment agreements include non-solicitation clauses and review any restrictive covenant exposure.

Departing clinical staff can take clients and referral relationships without enforceable agreements.

Red flag: No enforceable non-solicitation agreements exist for clinical directors or admissions staff.

Request 24 months of monthly census and occupancy data by program type and bed capacity.

Occupancy below 70% or high volatility signals referral instability or clinical program weakness.

Red flag: Average occupancy below 70% or more than two months below 60% in the trailing 24 months.

Obtain a referral source database showing volume, referral type, and relationship ownership by staff member.

Referral concentration in one source or one relationship represents material revenue risk.

Red flag: Top three referral sources represent more than 60% of admissions volume.

Interview key referral partners including hospital discharge planners, courts, and EAP contacts.

Third-party validation of referral relationships confirms durability beyond the current owner.

Red flag: Key referral partners indicate their relationship is personal to the founder and non-transferable.

Analyze average length of stay, discharge reasons, and readmission rates by program.

Low length of stay or high readmissions may indicate payer pressure or poor clinical outcomes.

Red flag: Average length of stay declining more than 15% year-over-year due to payer authorization denials.

Review three years of accrual-based financial statements and reconcile to tax returns and bank statements.

Discrepancies between financials and tax returns often reveal undisclosed income or expense manipulation.

Red flag: Material variance between reported EBITDA and tax return net income without documented explanation.

Analyze accounts receivable aging by payer with specific attention to balances over 90 and 180 days.

Aged receivables from insurers often reflect billing errors, disputes, or uncollectible claims.

Red flag: More than 25% of total AR balance is aged beyond 120 days across commercial payers.

Review billing and coding practices, claim denial rates, and collections as a percentage of gross charges.

Improper coding in behavioral health carries False Claims Act exposure that survives asset purchases.

Red flag: Denial rates above 20% or evidence of upcoding, unbundling, or unsupported clinical documentation.

Identify all owner add-backs, related-party transactions, and personal expenses run through the business.

Normalized EBITDA must reflect true operational economics to support accurate valuation and debt service.

Red flag: Undocumented related-party real estate payments or management fees without arms-length justification.