Buying a dental practice: a due diligence checklist

Due diligence is the review a buyer completes before closing on a dental practice. It checks that the practice is what the listing says it is. This post lists the areas the American Dental Association (ADA) tells buyers to check. It is general education, not legal, tax or financial advice.

What is due diligence when you buy a dental practice?

Due diligence is the stage where the buyer looks inside the practice and confirms the facts behind the price. The ADA puts it this way: “Due Diligence is the time for you to understand the inner workings of the practice and ensure that you are getting what you are paying for.”

It follows the offer stage. A letter of intent usually sets the main terms first. Due diligence then tests those terms against records, the building and the patient base. The ADA also notes, in its sale tip sheet for sellers, that careful review “can minimize delays in finalizing the transaction.” Both sides gain when records are ready.

What does the ADA tell buyers to check?

The ADA’s buyer page lists seven areas. The table below restates each one as a question you can take to the review.

The ADA adds a patient-side check. Call the office as a patient and see how staff treat the average caller. You can also stop by unannounced to see an ordinary day. These checks cost little and show how the team treats people when no buyer is watching.

Not every item carries the same weight for every buyer. A buyer who plans to change the schedule will care more about the facility and the team. A buyer who plans to keep the current model will care more about the patient base and the fee schedule. Rank the areas before you start, so the review follows your goals.

Which financial records should a buyer review?

Start with production and collections. The ADA suggests five years plus the current year, split by doctor and hygienist. Production is the value of care delivered. Collections is the money received. Reading both shows whether billed care turns into cash.

The ADA’s sale tip sheet lists the records a seller may need to assemble. Buyers can expect to ask for the same items:

1. Practice accounts, including financial statements and balance sheets.
2. Federal tax returns.
3. Staff employment contracts, job descriptions and a report of staffing expenses.
4. Data on accounts receivable, the money patients and payers still owe.
5. The collection rate and the mix of fee-for-service and managed care patients.

Your accountant should read these. The ADA also tells sellers to read the contract language on how goodwill transitions and on tax consequences. Raise both early with your adviser. For price mechanics, see dental practice valuation methods.

What should a buyer check about the facility and equipment?

Check the lease, the equipment and the records that prove the practice follows the rules. For equipment, the ADA’s seller list names the details a buyer can ask for: brand, model, serial number, year of manufacture, warranty and maintenance or repair history. It also names inspection records, licenses and permits, and documents that show compliance with federal, state and local rules.

The ADA asks buyers to judge two practical points as well. Is the equipment current, or will it need costly upgrades? Is there room for the schedule and the team you plan to run?

What should a buyer ask about patients and operations?

Ask for the numbers that describe the patient base. The ADA’s seller list includes the number of active patients, new patients per month and their referral sources, the case acceptance rate, the percentage of recare scheduled, and hours worked per month by the dentist and hygienists.

Then ask about the fee schedule. The ADA asks whether it is competitive for the area and when it was last updated. Ask which insurance plans the practice accepts and which procedures it refers out.

Reviewing charts is the step the ADA calls “one of the most informative steps in evaluating a practice.” You do it with the owner dentist. You look at treatment plans, especially complex cases, and at the quality of record keeping.

Who should be on the review team?

Build the team before you start. The ADA names a certified accountant with dental purchase experience, a lender, and an attorney. In its seller guidance, it also names a dental practice valuator and a broker. Their jobs differ:

• The accountant reads the financial records and the tax effects.
• The attorney reviews the confidentiality agreement and the contract.
• The lender checks the numbers that support a loan. See financing a dental practice purchase.
• The valuator gives an independent view of what the practice is worth.

The ADA says the owner will require a confidentiality agreement before you see valuation, financials or patient information. Read it with your attorney before you sign. For the full path from search to closing, see the buying a dental practice guide.

Next step

Read the buying a dental practice guide and the dental practice ownership guide for the wider picture. Contact Dr. Copeland about dental practice consulting.