Preparing for lender diligence

Lender diligence is the process through which a bank or other financing source checks whether an OB-GYN practice can support the requested debt and whether its ownership, cash flows, contracts, and assets are understandable enough to lend against. Owners can make that review faster by assembling a consistent record before the first formal request arrives. The work is not simply collecting tax returns: it is explaining how the practice earns, spends, distributes, and transfers money, and how those mechanics fit the proposed borrowing. This guide focuses on business and financing preparation for practice owners and partners. It does not provide clinical or patient advice.

Start with the transaction and the lender's questions

Define the financing purpose before building a data room. A term loan to refinance equipment, a line of credit to smooth collections, a real estate loan, an acquisition facility, and a partner buy-in loan each raise different questions. Write a short transaction brief with the requested amount, intended uses, desired timing, borrower entity, proposed guarantors, collateral available, and repayment source. Separate the amount needed to close from any working capital cushion. A lender can assess a $1.2 million acquisition differently from a request for $1.2 million that combines purchase price, renovations, old debt repayment, and unrestricted cash.

Translate the brief into a funds flow. Show each source and use, including owner cash, seller financing, lender proceeds, transaction costs, and any cash retained in the business. State which entity receives each dollar and which entity pays each obligation. If the practice is acquiring another location, show whether the buyer is the operating company, a real estate affiliate, or a new holding company. That distinction affects underwriting, lien documentation, and the lender's view of cash available for repayment.

Ask for the lender's request list and reporting format early, then map each requested item to a responsible person and source system. One person can own the document index while the bookkeeper, accountant, attorney, practice administrator, and partners supply their respective records. Record the period covered, the date extracted, and whether a file is final or preliminary. A list with owners and due dates prevents duplicate requests and makes gaps visible without implying that an absent document does not exist.

Build a controlled folder structure with read-only copies of source documents and a separate working area for reconciliations and explanations. Use clear names such as “2025 business tax return, filed” or “March accounts receivable aging, export,” rather than “latest.” Keep sensitive business records access limited to the deal team. Avoid placing unrelated personal material in the folder. If the lender provides a secure portal, follow its upload conventions and preserve your own index so you can track what was delivered and when.

Assemble a coherent financial record

Prepare at least three years of business tax returns, year-end financial statements, and monthly or quarterly profit and loss statements and balance sheets for the periods the lender requests. Add the current year-to-date statements and the matching period from the prior year. Include general ledger detail for material or unusual accounts. The basic objective is to let a reviewer move from filed results to current operations and understand what changed. A polished summary is useful, but it cannot replace underlying statements that tie to the accounting system and tax filings.

Reconcile accounting statements to filed returns and explain differences in a concise schedule. For example, book depreciation may differ from tax depreciation, owner compensation may be classified differently, or a tax return may include an entity-level adjustment. Identify the amount, period, account, and treatment. Do not silently revise a filed return number in a lender presentation. If the books were adjusted after a preliminary statement was distributed, label the earlier version and identify the final version so the lender does not compare unlike numbers.

Provide bank statements for business operating, payroll, reserve, and debt service accounts for the period requested. Reconcile ending balances to the balance sheet and describe material transfers among related entities. If the operating account routinely sweeps funds to a management company or real estate affiliate, show the sweep entries and the corresponding receipts. Unexplained transfers can look like missing revenue or unrecorded debt even when they represent an ordinary internal process.

Prepare an EBITDA or cash flow bridge only where it helps explain repayment capacity. Start with net income, then show interest, taxes, depreciation, and amortization, followed by each proposed adjustment in its own row. Label recurring costs separately from one-time items and show the invoice, ledger detail, or other support for material adjustments. A partner's personal expense run through the practice is not automatically an acceptable add-back. Explain the business treatment and whether the cost will actually disappear after closing. Keep owner distributions and debt principal payments visible as cash uses rather than treating them as operating expenses.

Explain revenue, collections, and working capital

Provide monthly revenue by location and major service or payer category at a level the practice can produce consistently. State whether the figures are charges, contractual adjustments, collections, or net revenue. Mixing those measures creates a misleading trend. Include the accounting basis and a brief description of how deposits, refunds, recoupments, and credit balances are recorded. Reconcile the total to the financial statements so the lender can follow the bridge rather than infer it from several exports.

Create a receivables aging with standard buckets and a separate view of unapplied cash, credit balances, and material denials or disputes. State the date and source of the report. Compare aging totals to the balance sheet and explain any differences, such as an allowance for doubtful accounts or a timing difference in posting. A high balance in older buckets deserves an explanation tied to actual collection experience, contractual timing, or a known billing backlog. Avoid describing all aged receivables as collectible without a basis.

Show how working capital moves through a normal month. Outline the timing of collections, payroll, rent, supplies, taxes, debt service, and partner distributions. If the practice has seasonal volume, show monthly history rather than annual totals alone. Identify minimum cash requirements and distinguish them from excess cash that owners might distribute. This helps frame whether a requested line is meant for routine timing gaps, growth costs, or a continuing operating deficit, each of which carries a different repayment story.

Prepare a short narrative for material variations: a new site opening, a provider departure, a billing vendor change, a payer rate change, a temporary interruption in operations, or a one-time expense. Include the month the event began, the affected location or account, and the measurable financial effect where available. If performance has recovered, show the subsequent data. If an effect remains, include it in the forecast instead of describing it as finished. A specific explanation helps the lender test the numbers without relying on general assurances.

Map ownership, entities, and obligations

Provide an organization chart showing legal entity names, jurisdictions, ownership percentages, managers, and the function of each entity. Include operating practices, management companies, real estate entities, equipment owners, and any holding company that receives or pays material cash flows. Attach formation documents, operating agreements, shareholder agreements, amendments, and current certificates or good-standing records if requested. The chart should match the names on tax returns, bank accounts, leases, and contracts or identify why they differ.

Prepare a complete debt schedule by borrower and guarantor. For each obligation, list lender, original and current balance, interest rate, payment, maturity, collateral, guarantees, covenant requirements, and whether the obligation is current. Include equipment leases, credit cards with carried balances, seller notes, partner loans, and related-party advances where they function as financing. Reconcile balances to statements or payoff letters. If an obligation will be repaid from loan proceeds, show it in the funds flow and obtain a payoff amount for the expected closing mechanics.

Create a related-party schedule for rent, management fees, shared staff, equipment, and intercompany advances. State the written terms, payment pattern, balance due, and whether the arrangement will continue after the transaction. The lender needs to understand what cash leaves the borrower and whether an affiliate could change those terms. Where a practice leases its premises from a partner-owned entity, include the lease and show rent separately from real estate debt service; this makes both the operating cost and the collateral structure clear.

Document partner economics with the governing agreement and a plain schedule of compensation, guaranteed payments or salaries, distributions, capital contributions, and buyout obligations. Distinguish compensation for work from return on ownership. Identify any redemption, buy-sell, or transfer provisions that could require cash during the loan term. A lender may ask whether distributions are discretionary, whether one partner can bind the borrower, and how a departing partner's interest is funded. Do not rely on an informal understanding when the signed agreement says something else; disclose amendments and actual practice together.

Prepare contracts, assets, and legal records

Inventory contracts that materially affect revenue, expenses, occupancy, or continuity. Typical records include major payer and billing arrangements, management or service agreements, leases, equipment leases, software contracts, referral or marketing arrangements, and vendor agreements. Record counterparty, term, renewal, termination rights, assignment restrictions, consent requirements, and fees. Provide the complete agreement and amendments for material contracts. A summary helps navigation, while the executed document establishes the actual terms.

Prepare a real estate and equipment schedule. For each property, identify the owner, address, use, lease or ownership status, mortgage balance, payment, and relevant renewal or option rights. For material equipment, identify owner, location, acquisition cost, book value, lien or lease status, and any planned replacement. Tie fixed asset listings to the ledger and debt schedule. If an asset is held by a partner or affiliate, say so clearly; an asset used by the practice is not necessarily owned by the borrower or available as collateral.

Collect business insurance certificates and declarations, professional and general liability coverage information, property coverage, cyber coverage, and claims summaries if requested by the lender. Provide business licenses and entity registrations relevant to the borrower, along with material pending or threatened litigation disclosures prepared with counsel. The aim is to identify business continuity and legal obligations that could affect repayment or collateral. Keep the submission business-focused and do not place patient records or patient-level data in a general diligence folder.

Review consent and confidentiality requirements before sharing contract material. If a contract limits disclosure, coordinate with counsel and the lender on an appropriate method, such as a permitted summary, redacted copy, or controlled review. Do not remove terms that determine payment or termination rights while presenting a document as complete. Keep a log of any redactions and the reason for each, so the lender can distinguish a missing page from a deliberate protection of unrelated confidential information.

Build a supportable forecast and repayment case

Prepare a monthly forecast for at least the lender's requested projection period. Start from actual results and identify explicit assumptions for collections, provider capacity, staffing expense, rent, supplies, benefits, debt payments, capital expenditures, and distributions. Explain new locations, equipment purchases, or partner changes in their expected months. A forecast should make the operating path visible. Avoid applying one annual growth rate to every line when the underlying drivers move differently.

Show debt service under the proposed facility and existing obligations. Separate principal and interest where the loan terms allow, and state assumptions for rate, amortization, fees, and any interest-only period. Include scheduled payments on obligations that remain after closing. Calculate coverage using the lender's requested definition if known, then show the underlying cash flow measure so a reviewer can reproduce it. Do not present a coverage ratio without saying which cash flow and debt service amounts produced it.

Include a base case and a downside case with identifiable drivers, such as collections arriving later, hiring taking longer, occupancy costs increasing, or a provider start date slipping. Show the cash effect by month and the mitigation available, such as deferring a planned distribution or phasing a discretionary purchase. Tie mitigations to decisions management can actually make. A downside case that simply reduces revenue without showing the related expense response may overstate the shortfall, while a case that assumes every problem is solved immediately understates it.

If the forecast relies on a partner contribution, seller note, delayed capital expenditure, or affiliate rent arrangement, document the commitment and its conditions. Identify whether cash is already available, contingent on closing, or dependent on future approval. Lenders assess sources based on enforceability and timing. A verbal promise to contribute later does not have the same weight as cash in escrow or a signed capital commitment, and the forecast should represent the actual status rather than the most favorable interpretation.

Illustrative worked example

The following figures are illustrative only. Assume a two-location practice seeks a $900,000 term loan to acquire a retiring partner's interest and refinance $150,000 of equipment debt. The draft sources and uses show $750,000 for the interest purchase, $150,000 to repay the equipment lender, and $30,000 of fees, for total uses of $930,000. Sources show $900,000 of loan proceeds and $30,000 of buyer cash. The funds flow identifies the operating borrower, the seller, and the equipment creditor, and specifies that payoff funds go directly to the creditor at closing.

The practice reports $620,000 in annual cash flow before debt service after adding back $90,000 of depreciation and $40,000 of documented one-time transaction costs to $490,000 of earnings before interest and taxes. Existing annual debt service is $110,000. The proposed facility has illustrative annual debt service of $145,000, so combined debt service is $255,000 and the simple coverage ratio is 2.43 times, calculated as $620,000 divided by $255,000. The schedule separately identifies $25,000 in annual partner distributions that management expects to defer if collections weaken; those distributions are shown as a cash use in the forecast, not removed from historical earnings.

The lender's review then finds that the $40,000 transaction cost includes $12,000 of recurring legal and advisory expense embedded in the prior period, so the owner removes that portion from the proposed add-back. The revised cash flow is $608,000 and illustrative coverage is 2.38 times. In the downside case, collections fall 4 percent for six months and a planned $35,000 equipment purchase moves to the following period. The monthly model shows the lowest cash balance, the deferred distribution decision, and the remaining headroom after debt service. The owner also supplies the executed partner purchase agreement, evidence of buyer cash, an equipment payoff statement, and the revised debt schedule. Each adjustment now has a source, and the lender can trace the requested amount to a repayment case without treating the original draft as final.

This example demonstrates why a clean bridge matters more than a dramatic headline ratio. The proposed loan can be discussed against concrete uses, supported cash flow, existing obligations, and a defined response to weaker collections. The numbers alone do not establish that a lender will approve the facility, since underwriting standards, collateral, guarantees, and transaction terms vary. They do show the type of transparent mechanics that make a financing request easier to assess.

Avoid common diligence mistakes and manage follow-up

Common mistakes include sending conflicting versions without labels, mixing cash and accrual figures, omitting a related-party balance, treating all distributions as discretionary, and describing an expense as one-time without supporting detail. Another frequent problem is using one entity name in the request letter and a different one in the bank statements without explaining the structure. Correct these issues with a dated index, tie-out schedules, and concise explanations. Do not overwrite source records to make them match a presentation; preserve the original and show the adjustment.

Assign one owner to each lender question and maintain a request log with the request, responsible person, source, status, delivery date, and follow-up. Answer each question directly, attach the relevant support, and state the period covered. If a number changes after submission, identify the prior figure, replacement figure, reason, and affected schedules. This gives the lender a reliable trail and reduces the risk that an old attachment remains in circulation after a correction.

Hold a weekly internal review while diligence is active. Compare open questions with the index, identify dependencies such as a payoff quote or accountant reconciliation, and raise timing issues early. Before a lender call, agree who will answer questions on accounting, ownership, operations, and transaction terms. If the answer depends on a contract interpretation or legal obligation, route it through the appropriate adviser and provide a consistent written response. Avoid guessing in a meeting and later trying to reconcile an unsupported statement with the document record.

Action checklist

• Write a transaction brief with amount, uses, borrower, guarantors, collateral, and repayment source.
• Build a sources and uses schedule and map each transfer to the entity that pays or receives it.
• Gather tax returns, financial statements, bank records, debt schedules, and supporting reconciliations.
• Reconcile revenue, receivables, related-party flows, partner economics, and proposed cash flow adjustments.
• Organize ownership, contracts, real estate, equipment, insurance, and material legal records.
• Prepare a monthly base and downside forecast with proposed debt service and practical responses.
• Maintain a document index and request log, label revisions, and assign one owner to every open item.

Questions about your own practice? Contact richard@doctorsinvestorclub.com.