How to Conduct Due Diligence When Buying or Selling a Skilled Nursing Facility

Like any other business, Skilled Nursing Facilities require Due Diligence.

Skilled nursing facilities (SNFs) are at the center of some of the most active deal-making in today’s health care industry. Demographic shifts, increased demand for post-acute care, and the appeal of government-backed reimbursement streams have made SNFs attractive to investors, private equity groups, and strategic buyers alike. Sellers are finding competitive valuations, while buyers see opportunities to expand portfolios and capture long-term growth.

But success in this active marketplace requires more than enthusiasm. Whether you’re buying or selling a skilled nursing facility, or other type of healthcare business, careful due diligence ensures that the deal closes smoothly and that both sides are protected from surprises after closing.

Workforce Structure and Staffing Stability

Labor is the lifeblood of any SNF. Buyers and sellers alike know that staffing levels, wage pressures, and turnover trends can dramatically affect value. Investors should also be mindful of employee classification issues.

Market lens: Facilities with stable staffing and efficient workforce structures often command higher prices, while chronic turnover or heavy agency use can depress value.

Due diligence focus:
- Payroll and staffing schedules (RN, LPN, CNA coverage).
- Overtime and turnover rates.
- Employee classification (W-2 vs. 1099).
- Contracts with staffing agencies.

Licensure and Credentialing

Clean licensing records are critical to maintaining both valuation and transferability in an SNF transaction. Buyers want reassurance that the facility is fully licensed and in good standing.

Market lens: Buyers often move faster and pay more when licensure and credentialing are in order, since uncertainty can delay closing.

Due diligence focus:
- Facility license status with the state health department.
- Administrator and clinical staff licenses.
- Any pending disciplinary actions or compliance issues.

Insurance and Liability Exposure

Investors look closely at liability risk, particularly in the skilled nursing sector where claims are common. Strong insurance coverage can preserve value and ease buyer concerns.

Market lens: Facilities with continuous coverage and manageable claims history are far more attractive to buyers and financing partners.

Due diligence focus:
- Workers’ compensation coverage.
- General and professional liability insurance.
- Claims history and pending litigation.

Financial Performance and Reimbursement

SNFs often derive the bulk of revenue from Medicare and Medicaid. Buyers want to see stable reimbursement streams and clean receivables, while sellers who prepare thorough financials build confidence and valuation.

Market lens: A well-documented revenue cycle, with timely payments and clean cost reports, increases buyer competition and deal speed.

Due diligence focus:
- Audited financial statements and tax returns.
- Medicare/Medicaid cost reports.
- Accounts receivable aging reports.
- Liens, debt, and repayment obligations.

Regulatory and Compliance History

While the market is active, compliance issues still affect deal terms. Buyers must understand survey history and penalties, while sellers who can show a track record of improvement strengthen their negotiating position.

Market lens: Facilities with fewer deficiencies and a history of corrective follow-through are perceived as lower risk, often resulting in stronger valuations.

Due diligence focus:
- State survey history and statements of deficiencies.
- CMS enforcement actions (CMPs, DPNA, denial of payment).
- Plans of correction and follow-up reports.

Structuring the Deal

Even in a hot market, buyers and sellers protect themselves with thoughtful deal structures. These structures allocate risk fairly and keep deals on track.

Best practices:
- Asset purchase, not stock purchase – Buyers take desired assets, leaving legacy liabilities behind.
- Indemnification provisions – Sellers cover claims tied to pre-closing operations.
- Escrow/holdbacks – Part of the price is held back to cover open risks.
- Transition agreements – Smooth continuity for residents, staff, and vendors.

Due Diligence Checklist for Skilled Nursing Facilities

- Staffing: Payroll, turnover, classifications, and coverage levels.

- Licensure: Facility license, administrator license, employee credentials.

- Insurance: Workers’ comp, liability, malpractice, and claims history.

- Financials: Cost reports, tax returns, AR aging, debt obligations.

- Compliance: Surveys, deficiencies, enforcement actions, and penalties.

- Deal Terms: Asset purchase, indemnities, escrow, and transition agreements.

- Professional Review: Involve an experienced health care attorney and CPA.

Bottom Line

The skilled nursing facility marketplace is active and competitive, with buyers looking for growth opportunities and sellers finding strong valuations. The key to success is preparation and thorough due diligence. For buyers, diligence ensures that the facility you acquire delivers on its promise without hidden liabilities. For sellers, readiness increases buyer confidence and strengthens your position at the negotiating table.

With the right team, clear documentation, and smart deal structures, SNF transactions can move quickly and set both parties up for long-term success.

The information provided above is intended for educational purposes and serves as a general guide. It is not tailored legal advice for specific circumstances. For detailed guidance on this topic, please consult with a qualified legal professional or reach out to our firm.

We welcome your feedback and topic suggestions! If there’s a particular issue related to healthcare facility that you’d like to see addressed, please email me at Brian@Pinkowskilaw.com.