Acquisition Due Diligence for Assisted Living Facilities: Complete Checklist

Acquiring an assisted living facility is a complex transaction that requires thorough due diligence across multiple dimensions—financial, operational, regulatory, physical, and legal. Missing critical issues during due diligence can lead to costly surprises after closing.

This comprehensive guide provides a complete due diligence framework for ALF acquisitions, including detailed checklists, red flags to watch for, and best practices for evaluating potential purchases.

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Due Diligence Overview
Financial Due Diligence
Operational Due Diligence
Regulatory Due Diligence
Physical Due Diligence
Legal Due Diligence
Market Due Diligence
Red Flags to Watch For
Due Diligence Timeline
Post-Due Diligence Steps

Due Diligence Overview

What is Due Diligence?

Due diligence is the comprehensive investigation and analysis of a business or property before completing a transaction. For ALF acquisitions, it involves examining every aspect of the facility to:

Verify seller representations
Identify risks and liabilities
Confirm value and pricing
Plan for post-acquisition operations
Satisfy lender requirements

Due Diligence Categories

Category	Focus Areas
Financial	Revenue, expenses, cash flow, projections
Operational	Staffing, residents, services, quality
Regulatory	Licensing, surveys, compliance
Physical	Building condition, systems, maintenance
Legal	Contracts, litigation, title, zoning
Market	Competition, demographics, demand

Due Diligence Team

Assemble a qualified team including:

Healthcare attorney - Regulatory and transaction expertise
CPA/accountant - Financial analysis
Property inspector - Physical condition assessment
Environmental consultant - Phase I/II assessments
Appraiser - Value determination
Healthcare consultant - Operations evaluation
Insurance broker - Coverage analysis

Financial Due Diligence

Historical Financial Review

Income Statements (3 years minimum):

[ ] Revenue by source (private pay, Medicaid, other)
[ ] Revenue per resident/per bed
[ ] Occupancy trends
[ ] Rate increases history
[ ] Bad debt and write-offs

Balance Sheets:

[ ] Assets and liabilities
[ ] Working capital position
[ ] Accounts receivable aging
[ ] Accounts payable status

Cash Flow Statements:

[ ] Operating cash flow
[ ] Capital expenditures
[ ] Debt service payments

Revenue Analysis

Resident Revenue:

Item	What to Review
Census data	Daily/monthly census for 24+ months
Rate sheets	Current and historical rates
Payer mix	Private pay vs. Medicaid percentages
Ancillary revenue	Additional services, fees
Move-in/move-out	Turnover patterns

Revenue Verification:

[ ] Compare reported revenue to bank deposits
[ ] Review resident billing records
[ ] Verify rate increases were implemented
[ ] Analyze seasonal patterns
[ ] Check for one-time or unusual items

Expense Analysis

Major Expense Categories:

Category	% of Revenue	What to Review
Labor	50-60%	Staffing levels, wages, benefits
Food	5-8%	Per resident costs, vendors
Utilities	3-5%	Usage trends, rates
Insurance	2-4%	Coverage, claims history
Supplies	3-5%	Medical, housekeeping, other
Management	4-6%	Fee structure, services
Maintenance	2-4%	Repairs, capital items

Expense Verification:

[ ] Review vendor contracts and invoices
[ ] Verify payroll records
[ ] Check for deferred expenses
[ ] Identify owner-related expenses
[ ] Analyze expense trends

Accounts Receivable

AR Analysis:

[ ] Aging report (current, 30, 60, 90+ days)
[ ] Collection history
[ ] Bad debt write-offs
[ ] Medicaid pending claims
[ ] Private pay collection rates

Red Flags:

High percentage of AR over 90 days
Increasing bad debt trends
Medicaid billing issues
Resident payment problems

Normalized NOI Calculation

Adjust reported financials to reflect true operating performance:

Add Back:

Owner compensation above market
One-time expenses
Non-recurring items
Related party transactions above market

Deduct:

Below-market management fees
Deferred maintenance
Below-market compensation
Missing expenses

Operational Due Diligence

Staffing Analysis

Staffing Review:

[ ] Current staffing levels by position
[ ] Staffing ratios (staff to residents)
[ ] Wage rates vs. market
[ ] Benefits packages
[ ] Turnover rates
[ ] Open positions
[ ] Overtime trends

Key Positions:

Position	What to Evaluate
Administrator	Experience, tenure, plans
Director of Nursing	Credentials, performance
Department heads	Stability, capabilities
Direct care staff	Ratios, training, retention

Employment Matters:

[ ] Employee handbook and policies
[ ] Personnel files (sample)
[ ] Training records
[ ] Background check compliance
[ ] Workers' comp claims history
[ ] Unemployment claims
[ ] EEOC or labor complaints

Resident Analysis

Census Review:

[ ] Current census by care level
[ ] Historical occupancy (24+ months)
[ ] Move-in/move-out trends
[ ] Average length of stay
[ ] Waitlist status
[ ] Referral sources

Resident Profile:

[ ] Age distribution
[ ] Care level distribution
[ ] Payer mix
[ ] Acuity trends
[ ] Special needs residents

Resident Agreements:

[ ] Standard admission agreement
[ ] Rate structures
[ ] Service packages
[ ] Discharge provisions
[ ] 30-day notice requirements

Quality of Care

Quality Indicators:

[ ] Resident satisfaction surveys
[ ] Family satisfaction surveys
[ ] Incident reports
[ ] Fall rates
[ ] Medication errors
[ ] Infection rates
[ ] Hospitalization rates

Care Documentation:

[ ] Care plans (sample review)
[ ] Assessment processes
[ ] Medication management
[ ] Activity programs
[ ] Dietary services

Marketing and Referrals

Marketing Review:

[ ] Marketing materials
[ ] Website and online presence
[ ] Referral source relationships
[ ] Conversion rates
[ ] Marketing budget and ROI
[ ] Competitive positioning

Regulatory Due Diligence

Licensing

License Review:

[ ] Current license status
[ ] License capacity
[ ] License history
[ ] Any restrictions or conditions
[ ] License transfer requirements
[ ] Timeline for transfer

State Requirements:

[ ] Administrator licensing
[ ] Staff certification requirements
[ ] Training requirements
[ ] Reporting requirements

Survey History

Survey Review (3-5 years):

[ ] All survey reports
[ ] Deficiency citations
[ ] Plans of correction
[ ] Follow-up surveys
[ ] Complaint investigations
[ ] Any immediate jeopardy findings

Survey Analysis:

Finding Type	Risk Level	Action Required
No deficiencies	Low	None
Minor deficiencies	Low-Medium	Review corrections
Moderate deficiencies	Medium	Verify resolution
Serious deficiencies	High	Detailed investigation
Immediate jeopardy	Very High	May be deal-breaker

Compliance Programs

Compliance Review:

[ ] Compliance policies and procedures
[ ] HIPAA compliance
[ ] Abuse prevention programs
[ ] Incident reporting systems
[ ] Quality assurance programs
[ ] Staff training programs

Medicare/Medicaid (if applicable)

Program Participation:

[ ] Certification status
[ ] Provider agreements
[ ] Reimbursement rates
[ ] Claims history
[ ] Any audits or investigations
[ ] Overpayment issues

Physical Due Diligence

Property Condition Assessment

Building Systems:

System	What to Evaluate
Roof	Age, condition, warranty
HVAC	Age, capacity, maintenance
Plumbing	Condition, code compliance
Electrical	Capacity, safety, updates
Fire/Life Safety	Sprinklers, alarms, compliance
Elevators	Condition, certifications
Kitchen	Equipment, code compliance

Structural Elements:

[ ] Foundation
[ ] Framing
[ ] Exterior walls
[ ] Windows and doors
[ ] Parking and site work
[ ] Landscaping

Capital Needs Assessment

Immediate Needs (0-1 year):

Life safety issues
Code violations
Critical repairs

Short-term Needs (1-3 years):

System replacements
Major repairs
Upgrades

Long-term Needs (3-10 years):

Roof replacement
HVAC replacement
Major renovations

Environmental Assessment

Phase I Environmental:

[ ] Historical use review
[ ] Site inspection
[ ] Regulatory database search
[ ] Interviews
[ ] Recognized environmental conditions

Phase II (if needed):

[ ] Soil sampling
[ ] Groundwater testing
[ ] Asbestos survey
[ ] Lead paint assessment
[ ] Mold inspection

ADA Compliance

Accessibility Review:

[ ] Parking and access
[ ] Entrances and exits
[ ] Common areas
[ ] Resident rooms
[ ] Bathrooms
[ ] Signage

Legal Due Diligence

Title and Survey

Title Review:

[ ] Title commitment
[ ] Ownership history
[ ] Liens and encumbrances
[ ] Easements
[ ] Restrictions
[ ] Title insurance

Survey Review:

[ ] Boundary survey
[ ] Easements shown
[ ] Encroachments
[ ] Setback compliance
[ ] Parking count

Zoning and Land Use

Zoning Review:

[ ] Current zoning
[ ] Permitted uses
[ ] Conditional use permits
[ ] Variances
[ ] Non-conforming use status
[ ] Expansion potential

Contracts and Agreements

Key Contracts:

Contract Type	What to Review
Vendor contracts	Terms, pricing, termination
Service agreements	Scope, costs, obligations
Equipment leases	Terms, buyout options
Management agreement	Fees, term, termination
Employment contracts	Key employees, terms

Contract Analysis:

[ ] Assignment provisions
[ ] Change of control provisions
[ ] Termination rights
[ ] Pricing and escalations
[ ] Renewal terms

Litigation and Claims

Litigation Review:

[ ] Pending lawsuits
[ ] Threatened claims
[ ] Historical litigation
[ ] Insurance claims
[ ] Regulatory actions
[ ] Employment claims

Corporate Documents

Entity Review:

[ ] Articles of incorporation/organization
[ ] Bylaws/operating agreement
[ ] Good standing certificates
[ ] Board/member resolutions
[ ] Ownership documentation

Market Due Diligence

Competitive Analysis

Market Study:

[ ] Identify all competitors within market area
[ ] Compare rates and services
[ ] Assess occupancy levels
[ ] Evaluate quality ratings
[ ] Analyze competitive positioning

Competitive Matrix:

Competitor	Beds	Occupancy	Rates	Quality
Subject
Comp 1
Comp 2
Comp 3

Demographic Analysis

Population Data:

[ ] Total population trends
[ ] 65+ population
[ ] 75+ population
[ ] 85+ population
[ ] Growth projections

Economic Factors:

[ ] Median household income
[ ] Home values
[ ] Employment trends
[ ] Major employers

Supply and Demand

Supply Analysis:

[ ] Current inventory
[ ] Planned developments
[ ] Recent openings/closings
[ ] Absorption rates

Demand Analysis:

[ ] Penetration rates
[ ] Unmet demand
[ ] Referral patterns
[ ] Hospital discharge data

Red Flags to Watch For

Financial Red Flags

🚩 Declining occupancy without clear explanation 🚩 Increasing bad debt or AR aging 🚩 Unusual revenue spikes before sale 🚩 Deferred maintenance not reflected in financials 🚩 Related party transactions at non-market rates 🚩 Missing or incomplete records 🚩 Inconsistent financial reporting

Operational Red Flags

🚩 High staff turnover especially in leadership 🚩 Staffing below required ratios 🚩 Resident complaints or family concerns 🚩 Quality metrics declining 🚩 Key staff planning to leave 🚩 Deferred training or certifications

Regulatory Red Flags

🚩 Recent serious deficiencies 🚩 Pattern of repeat violations 🚩 Pending investigations 🚩 License restrictions or conditions 🚩 Immediate jeopardy history 🚩 Medicaid/Medicare issues

Physical Red Flags

🚩 Deferred maintenance throughout facility 🚩 Life safety deficiencies 🚩 Environmental concerns 🚩 ADA non-compliance 🚩 Outdated systems requiring replacement 🚩 Code violations

Legal Red Flags

🚩 Pending litigation especially negligence claims 🚩 Title issues or encumbrances 🚩 Zoning non-conformance 🚩 Unfavorable contracts that survive closing 🚩 Employment disputes

Due Diligence Timeline

Typical 45-60 Day Timeline

Week 1-2: Initial Review

Receive and organize data room materials
Begin financial analysis
Order third-party reports
Schedule site visit

Week 2-3: Deep Dive

Complete financial analysis
Conduct site inspection
Review regulatory history
Analyze operations

Week 3-4: Verification

Verify key assumptions
Interview key personnel
Complete third-party reports
Identify issues

Week 4-5: Resolution

Address identified issues
Negotiate adjustments
Finalize due diligence
Prepare closing checklist

Week 5-6: Pre-Closing

Final verifications
Closing document review
Transition planning
Lender requirements

Due Diligence Checklist Summary

Financial:

[ ] 3 years financial statements
[ ] Tax returns
[ ] Bank statements
[ ] AR/AP aging
[ ] Census reports
[ ] Rate sheets

Operational:

[ ] Staffing records
[ ] Resident agreements
[ ] Policies and procedures
[ ] Quality reports
[ ] Marketing materials

Regulatory:

[ ] License and certifications
[ ] Survey reports
[ ] Plans of correction
[ ] Compliance programs

Physical:

[ ] Property condition assessment
[ ] Phase I environmental
[ ] Capital needs assessment
[ ] ADA compliance review

Legal:

[ ] Title commitment
[ ] Survey
[ ] Zoning verification
[ ] Contract review
[ ] Litigation search

Post-Due Diligence Steps

Issue Resolution

For Each Issue Identified:

Quantify financial impact
Assess risk level
Determine resolution options
Negotiate with seller
Document in purchase agreement

Purchase Price Adjustments

Common Adjustments:

Deferred maintenance credits
Working capital adjustments
Occupancy guarantees
Earnouts for performance
Escrow holdbacks

Transition Planning

Pre-Closing:

Develop transition plan
Identify key staff to retain
Plan resident/family communication
Prepare regulatory notifications
Arrange insurance coverage

Post-Closing:

Implement operational changes
Complete license transfer
Notify vendors and payers
Begin improvement plans

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Disclaimer: This guide is for informational purposes only and does not constitute legal, financial, or professional advice. Due diligence requirements vary by transaction and jurisdiction. Consult with qualified professionals for advice specific to your situation.