7 Questions to Ask Before Buying a New ABA Practice
Before buying an ABA practice, ask these 7 critical questions about finances, clients, staff, and taxes to avoid costly mistakes.
Buying an existing ABA practice can be a smart way to enter the market or expand, but it comes with hidden risks, especially around taxes and financial liabilities. Before you sign anything, you need to ask the right questions. Here are seven that every buyer should ask, with concrete steps you can take this week.
1. What Is the Practice’s True Revenue and Profit?
The seller’s stated revenue may not reflect reality. Ask for at least three years of profit and loss statements, balance sheets, and tax returns (Form 1120 or Schedule C). Look for trends: Are revenues growing or declining? Are there one-time gains that inflate profit? Also, review the practice’s billing records to verify that claims match actual collections.
This week: Request these documents and have a CPA or accountant review them. Ask for a breakdown of revenue by payer (Medicaid, commercial insurance, private pay) to see concentration risk.
2. Are There Any Outstanding Tax Liabilities?
Unpaid payroll taxes, sales tax, or income tax can become your problem after the purchase. Ask for a tax clearance certificate from the IRS and state tax agency. Also, check if the practice has any tax liens or pending audits.
This week: Run a lien search on the practice’s EIN and the owner’s name. Ask the seller to provide proof of all tax payments for the last three years.
3. What Is the Payer Mix and Reimbursement History?
ABA practices often rely heavily on Medicaid or commercial insurance. If the practice has a high percentage of one payer, a rate cut could devastate cash flow. Ask for a payer mix report and the average reimbursement per hour for each payer. Also, check the claims denial rate and how long it takes to get paid.
This week: Create a simple spreadsheet listing each payer, the percentage of revenue, and the average days to payment. Identify any payer that represents more than 30% of revenue.
4. How Are the Clients and Their Contracts Structured?
Are clients on long-term contracts or month-to-month? What is the client churn rate? Ask for a list of current clients and their authorization end dates. Also, review sample contracts to see if they are assignable to a new owner. Some contracts may require re-credentialing with insurance companies, which can take months.
This week: Ask the seller for a client list with authorization dates. Check with your state’s Medicaid agency about the process for transferring provider agreements.
5. What Is the Staff Situation and Their Compensation?
ABA practices are labor-intensive. Ask for a staff roster with salaries, benefits, and tenure. Are any key employees under non-compete or non-solicit agreements? What is the turnover rate? Also, review how staff are classified: are they employees or independent contractors? Misclassification can lead to tax penalties.
This week: Ask for W-2s and 1099s for the last two years. Identify any staff who are critical to operations and consider meeting them before you close.
6. What Are the Lease and Equipment Obligations?
If the practice rents its space, review the lease terms. Is it assignable? How long is the remaining term? What are the monthly payments and any escalation clauses? Also, inventory all equipment (computers, therapy materials, furniture) and ask for a list of any leased equipment with monthly costs.
This week: Get a copy of the lease and any equipment leases. Have a real estate attorney review the assignment clause.
7. What Is the Tax Structure of the Sale?
The way the sale is structured (asset purchase vs. stock purchase) has huge tax implications. In an asset purchase, you can allocate the purchase price to depreciable assets, which can save taxes. In a stock purchase, you inherit all liabilities, including tax liabilities. Ask the seller what structure they prefer, but consult with a tax advisor to determine what is best for you.
This week: Meet with a CPA who specializes in practice acquisitions. Ask them to model the tax impact of both structures.
FAQ
Q: Can I negotiate a lower price if I find tax liabilities?
A: Yes. Use any discovered liabilities as leverage. You can ask the seller to pay them off before closing or reduce the purchase price to cover the cost.
Q: How long does it take to get credentialed with insurance companies?
A: It varies, but typically 60 to 120 days. Factor this into your cash flow projections.
Q: Should I buy the practice’s assets or its stock?
A: For most buyers, an asset purchase is safer because you avoid inheriting unknown liabilities. However, a stock purchase may be simpler if the practice is an S-corp. Discuss with your advisor.
Q: What if the seller won’t provide tax returns?
A: That is a red flag. Walk away unless they provide full financial documentation. No exceptions.
The Bottom Line
Buying an ABA practice can be a profitable move, but only if you do your due diligence. The seven questions above will help you uncover hidden financial and tax issues. Start by requesting the documents listed and meeting with a CPA. The cost of professional advice is small compared to the risk of buying a practice with unpaid taxes or a shrinking client base. Take action this week to protect your investment.