Due Diligence Checklist for Acquiring a Medical Equipment Supplier

Confirm active DMEPOS accreditation from CMS-approved body (e.g., ACHC, The Joint Commission).

DMEPOS accreditation is required to bill Medicare and Medicaid; a lapse suspends revenue immediately.

Red flag: Accreditation expired, under review, or non-transferable without re-application upon change of ownership.

Review all state medical equipment dealer and supplier licenses for each operating jurisdiction.

State licensing gaps can trigger enforcement actions and prevent billing in key service territories.

Red flag: Unlicensed operations in any state where the business actively supplies equipment or processes claims.

Verify FDA establishment registration and device listing compliance for applicable product categories.

FDA registration is required for distributors of Class II and Class III medical devices.

Red flag: Missing FDA registrations or unresolved warning letters tied to distributed product categories.

Obtain copies of all CMS enrollment records and National Provider Identifier (NPI) documentation.

CMS enrollment status directly determines the business's ability to bill federal payers post-acquisition.

Red flag: CMS enrollment inactive, revoked, or flagged for re-enrollment review at time of sale.

Request three years of Medicare Remittance Advice reports and analyze claim denial and reversal rates.

Elevated denial rates signal billing errors or documentation gaps that trigger audit and recoupment risk.

Red flag: Denial rates materially above the 5–10% industry norm or patterns of repeated denied codes.

Confirm no open or pending Medicare or Medicaid audits, RAC reviews, or overpayment demands.

Unresolved audits can result in six-figure recoupments that transfer as successor liability post-close.

Red flag: Active RAC, ZPIC, or OIG audit with unresolved findings or outstanding repayment obligations.

Analyze payer mix breakdown — percentage of revenue from Medicare, Medicaid, private insurance, and self-pay.

Heavy Medicare concentration amplifies exposure to CMS competitive bidding and reimbursement rate cuts.

Red flag: More than 70% of revenue dependent on a single federal payer with declining reimbursement trends.

Review documentation protocols for proof of delivery, physician orders, and CMN records for DME categories billed.

Incomplete documentation is the leading cause of Medicare claim denials and post-payment audits.

Red flag: Absent or inconsistent Certificate of Medical Necessity and delivery confirmation records for billed claims.

Segment trailing 36 months of revenue into recurring rentals, service contracts, and one-time equipment sales.

Recurring revenue drives valuation multiples; episodic sales create volatile, less defensible cash flows.

Red flag: Less than 30% of revenue from rentals or service contracts with no visible path to improvement.

Review all active rental and service contract agreements for duration, renewal terms, and cancellation provisions.

Short-term or at-will contracts can evaporate post-close, eroding the recurring revenue premium paid.

Red flag: Majority of rental contracts month-to-month with no auto-renewal or minimum commitment provisions.

Assess customer concentration — identify top 10 customers and their share of total annual revenue.

A single hospital or clinic group exceeding 20–25% of revenue creates dangerous post-close dependency.

Red flag: One customer or physician group accounts for more than 25% of annual billings or referral volume.

Validate referral source relationships — document referring physicians, discharge planners, and clinic agreements.

Referral relationships tied to the departing owner represent revenue at risk immediately post-close.

Red flag: Top referral sources have no documented relationship with staff and exclusively contact the owner directly.

Obtain and review all supplier and manufacturer distribution agreements with key product line partners.

Distribution rights are often the core competitive moat; losing them post-close collapses product availability.

Red flag: Key distribution agreements include change-of-control clauses allowing termination upon acquisition.

Identify exclusive or preferred supplier arrangements and confirm their transferability to an acquirer.

Exclusive agreements in defined geographies create defensible barriers to entry and support margin stability.

Red flag: Exclusivity agreements terminate automatically on ownership change without supplier written consent.

Assess supplier concentration — identify vendors representing more than 20% of product cost or revenue.

Dependence on one manufacturer for critical product supply creates pricing and availability fragility.

Red flag: A single supplier accounts for more than 40% of COGS with no alternate sourcing documented.

Review contract renewal schedules and upcoming expiration dates across all supplier relationships.

Agreements expiring within 12 months of close create renegotiation risk under new ownership pressure.

Red flag: Multiple supplier agreements expiring within six months post-close with no renewal discussions initiated.

Request a full inventory aging report segmented by product category, SKU, and months on hand.

Aging inventory reflects capital tied up in unsellable assets that must be written down post-close.

Red flag: More than 20% of inventory aged beyond 12 months with no documented liquidation or refresh plan.

Compare current inventory to active manufacturer product lines to identify discontinued or superseded items.

Medical device innovation accelerates obsolescence; superseded products cannot be billed or sold at cost.

Red flag: Significant inventory consists of discontinued models with no reimbursement eligibility or resale market.

Verify inventory is valued at the lower of cost or net realizable value in financial statements.

Overstated inventory inflates EBITDA and working capital, directly distorting purchase price calculations.

Red flag: Inventory carried at original cost with no write-downs despite visible aging or discontinued product lines.

Confirm rental fleet condition through physical inspection and maintenance records for durable equipment.

Deferred maintenance on rental equipment creates immediate capital expenditure obligations post-acquisition.

Red flag: Rental fleet with no documented service records and visible deferred maintenance across core product lines.