Protect your investment by uncovering physician retention risks, payer contract vulnerabilities, malpractice exposure, and compliance gaps before you close.
Acquiring a dermatology practice in the $1M–$5M revenue range requires disciplined due diligence across clinical, financial, legal, and regulatory dimensions. Unlike many lower middle market businesses, dermatology practices carry unique risks: heavy dependence on a single physician, state-specific corporate practice of medicine laws, reimbursement rate compression from Medicare and commercial payers, and dual revenue streams (medical vs. cosmetic) that must be evaluated separately. This checklist is structured to help buyers — whether PE-backed roll-up platforms, physician entrepreneurs, or strategic acquirers — systematically validate every material assumption before signing. Work through each category in priority order, and engage a healthcare M&A attorney and a healthcare-focused CPA early in the process.
Evaluate all clinical staffing arrangements, employment contracts, non-competes, and key-person dependency before committing to any deal structure.
Review all physician, PA, and NP employment agreements including term, compensation, and termination provisions.
Provider contracts define post-close obligations and directly impact your ability to retain revenue-generating staff.
Red flag: Employment agreements are month-to-month or missing entirely for key revenue-producing providers.
Assess enforceability and scope of all physician non-compete and non-solicitation agreements.
Unenforceable non-competes expose you to total revenue loss if the founding physician departs post-close.
Red flag: Non-competes lack geographic specificity, are expired, or are governed by states with weak enforceability.
Quantify revenue attributable to the founding physician versus mid-level providers and associate dermatologists.
Key-person concentration above 70% of revenue is a significant valuation and continuity risk.
Red flag: One physician drives more than 80% of total practice revenue with no succession plan.
Confirm board certifications, state medical licenses, and DEA registrations are current for all providers.
Lapsed credentials can trigger payer contract terminations and disrupt billing operations immediately post-close.
Red flag: Any provider has a lapsed license, pending disciplinary action, or DEA registration issue.
Validate the accuracy and sustainability of reported revenues, EBITDA, and margins across both medical and cosmetic service lines.
Obtain and analyze three years of reviewed or audited financial statements, including monthly P&Ls.
Multi-year financials reveal revenue trends, seasonality, and owner add-backs that affect true EBITDA.
Red flag: Financials are tax-return only, unreviewed, or show unexplained revenue spikes in the trailing 12 months.
Segment and separately analyze medical dermatology versus cosmetic revenue, margins, and growth rates.
Cosmetic revenue (Botox, fillers, laser) carries higher margins but is discretionary and more volatile than medical.
Red flag: Cosmetic revenue is commingled with medical billing and cannot be isolated or independently verified.
Review accounts receivable aging, collections rate, and days-in-AR for the past 24 months.
Deteriorating collections efficiency often signals billing staff turnover or payer contract disputes.
Red flag: AR aging shows more than 25% of balances over 90 days or collections rate below 90% of net charges.
Identify and normalize all owner discretionary expenses, personal perks, and one-time items in EBITDA.
Accurate adjusted EBITDA is the foundation of your valuation at a 4x–7x multiple.
Red flag: Seller cannot substantiate add-backs or personal expenses are deeply embedded across multiple cost lines.
Assess the quality, transferability, and concentration risk of all insurance payer relationships and billing operations.
Request and review all commercial and government payer contracts, fee schedules, and reimbursement rates.
Payer contracts are the financial backbone of medical dermatology revenue and may not be automatically assignable.
Red flag: Key payer contracts have change-of-control clauses requiring renegotiation or re-credentialing post-acquisition.
Calculate Medicare and Medicaid as a percentage of total payer mix and project reimbursement risk.
High government payer concentration creates exposure to rate cuts and billing compliance scrutiny.
Red flag: Medicare and Medicaid together exceed 40% of total revenue with no offsetting commercial or cash-pay volume.
Evaluate the revenue cycle management process, billing software, denial rates, and claims rework volume.
Poor RCM processes mask true revenue potential and require costly remediation after close.
Red flag: Denial rates exceed 10%, claims rework is manual, or billing is handled by an underperforming third party.
Confirm no outstanding Medicare or Medicaid audits, RAC reviews, or overpayment demands.
Government audit findings can result in recoupment demands that reduce post-close cash flow materially.
Red flag: Practice has received a RAC audit notice, CMS prepayment review, or unresolved overpayment demand.
Investigate all malpractice claims history, state medical board actions, and healthcare regulatory compliance gaps.
Obtain a full five-year malpractice claims history for all current and former providers at the practice.
Unresolved or recurring claims indicate clinical risk patterns that will affect insurability and deal terms.
Red flag: Multiple open malpractice claims, a pattern of settled claims, or any state medical board disciplinary actions.
Clarify whether malpractice coverage is occurrence-based or claims-made, and confirm tail coverage obligations.
Claims-made policies without tail coverage create uncapped post-close liability for pre-acquisition incidents.
Red flag: Seller has claims-made coverage with no tail policy budgeted, or refuses to fund tail at closing.
Confirm compliance with HIPAA, OSHA, and applicable state healthcare privacy and facility regulations.
Regulatory violations can trigger fines, corrective action plans, and reputational damage post-close.
Red flag: No documented HIPAA compliance program, privacy officer, or evidence of staff compliance training.
Engage a healthcare M&A attorney to assess corporate practice of medicine compliance in the target state.
CPOM laws restrict lay ownership of medical practices and directly dictate whether an MSO structure is required.
Red flag: Current ownership structure violates CPOM statutes or requires restructuring that extends deal timeline significantly.
Evaluate the physical infrastructure, lease terms, EMR systems, and operational scalability of the practice.
Review the facility lease terms, remaining tenure, renewal options, and landlord assignment consent requirements.
A short or non-assignable lease creates location continuity risk and leverage for landlord renegotiation.
Red flag: Lease expires within 18 months, lacks renewal options, or requires landlord consent that has not been secured.
Audit the EMR and practice management system, including data portability, vendor contracts, and integration capability.
Legacy or proprietary EMR systems create costly migration barriers and slow post-close operational integration.
Red flag: EMR system is end-of-life, highly customized, or vendor contract includes restrictive data export provisions.
Inspect all dermatology equipment including lasers, phototherapy units, and surgical tools for age and maintenance status.
Aging or poorly maintained equipment creates near-term capital expenditure requirements that reduce net purchase price.
Red flag: Multiple equipment items are past useful life, under-maintained, or require immediate replacement post-close.
Analyze patient volume trends, no-show rates, appointment mix, and new patient acquisition by month.
Declining new patient volume is a leading indicator of future revenue deterioration not visible in trailing financials.
Red flag: New patient appointments have declined more than 15% year-over-year with no identifiable or correctable cause.
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Dermatology practices in the lower middle market typically trade at 4x–7x adjusted EBITDA. Practices with multiple licensed providers, strong cosmetic revenue, diversified payer mix, and clean malpractice history command the higher end. Single-physician practices with Medicare concentration or key-person risk will price closer to 4x–5x. PE-backed roll-up platforms often pay premium multiples for practices that add geographic density to an existing portfolio.
It depends on the state. Most states have corporate practice of medicine (CPOM) laws that prohibit non-physician entities from directly owning a medical practice. In those states, buyers use a Management Services Organization (MSO) structure where a physician-owned professional corporation retains clinical ownership, and the MSO entity (which you own) provides all non-clinical management services under a long-term agreement. A healthcare M&A attorney licensed in the target state must assess the specific CPOM requirements before you finalize your deal structure.
Request a full service-line revenue breakdown separating medical dermatology (insurance-billed) from cosmetic procedures (Botox, fillers, laser treatments, chemical peels). Analyze each segment's margin, growth rate, provider dependency, and patient retention separately. Cosmetic revenue is typically higher margin and cash-pay, but it is also more discretionary and provider-dependent — meaning it can walk out the door with the selling physician. Validate that cosmetic revenue is supported by multiple providers and recurring patients, not a single physician's personal following.
Yes, dermatology practice acquisitions are SBA-eligible. SBA 7(a) loans can finance up to $5 million and are commonly used by physician entrepreneurs acquiring established practices with a proven track record. Lenders will require at least two to three years of clean financials, demonstrated EBITDA sufficient to service the debt, and often a seller note of 10–15% of the purchase price with a standby period. The buyer typically needs relevant healthcare management experience and a 10% equity injection. Note that SBA lenders will scrutinize payer mix concentration and physician retention risk closely during underwriting.
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