Key Takeaways

• Due diligence goes beyond valuation to examine the financial and operational factors that could affect a dental practice after the sale.
• Patient activity, procedure mix, staffing, insurance participation, receivables, and lease terms can reveal risks or opportunities that topline revenue alone may not show.
• What you learn during due diligence can help you evaluate the purchase and begin planning for ownership before you close.
• Allow enough time for a thorough review; a 45- or 60-day due diligence period may be more realistic than the 30 days often proposed in a Letter of Intent.

Buying an existing dental practice can be a great way to step into ownership or expand an existing business. Instead of starting from scratch, you may be acquiring an established patient base, experienced team, equipment, cash flow, and reputation in the community.

But you’re also buying a business someone else built.

The practice may have strong collections, but what is driving them? How dependent is production on the selling dentist? How is the hygiene department performing? Is the patient base really as active as it appears? Are staffing costs sustainable? What insurance plans does the practice participate in? Is the lease favorable and transferable?

Those are very different questions from simply asking, “What is this practice worth?” That’s where due diligence comes in.

What Is Dental Practice Due Diligence?

Due diligence is the process of looking closely at the financial and operational information behind a dental practice before completing a purchase. The objective isn’t to find something wrong with every deal. It’s to understand what you are actually buying and identify issues that could affect the transaction or the future performance of the practice before you become responsible for them.

The exact process will depend on the practice and what the buyer needs to understand. It can include reviewing several years of tax returns and financial statements, accounts receivable, and production and collection trends, procedure by procedure, hygiene reappointment rate, unscheduled treatment, and fee schedules.

Due diligence also looks beyond the financials, examining staffing, patient activity, insurance participation, lease obligations, equipment, scheduling, and other information that helps tell the story behind the numbers.

For example, E&A’s due diligence checklist requests three years of tax returns, financial statements, production and collection reports, along with current-year information. It also goes well beyond the financials to examine staffing, active patients, referral sources, insurance participation, lease terms, equipment, and scheduling. 

Due Diligence Isn’t the Same as a Valuation

A valuation and due diligence answer related but different questions. A valuation helps determine what a practice is worth based on its financial performance and other relevant factors. Due diligence digs deeper into the information behind the transaction and helps a buyer understand what may affect the practice going forward.

Consider two practices with similar annual collections. One might have a growing active patient base, strong hygiene production, reasonable overhead, and a long-term lease. Another could have declining collections, heavy dependence on the selling dentist, aging receivables, or a lease nearing expiration. The topline number alone won’t tell you those things.

Even when a practice has already been professionally valued, due diligence can provide important information about whether the business is the right investment for you.

What Are You Really Looking For?

There isn’t one magic number that tells you whether a dental practice is a good acquisition. Due diligence is about understanding how the pieces fit together and where you may need to ask more questions.

Financial trends are obviously important. If collections have declined for several years, why? If production is strong but collections lag, what’s happening? How old are the accounts receivable? Are there significant outstanding insurance claims?

Then there are the things that may not be obvious from the financial statements. A practice may report thousands of patients, for example, but how many have actually been seen for non-emergency care within the past 12 months? Where are new patients coming from? When were fees last increased? Which insurance plans does the practice participate in? We specifically request this information because patient counts and revenue don’t necessarily tell the whole story. 

Procedure mix deserves a close look, as well. A selling dentist may have years of experience doing procedures that a younger buyer doesn’t yet have the training or confidence to perform. If the buyer will need to refer those procedures out after the transition, that production may leave the practice with the seller. Understanding how much revenue is tied to those procedures can help the buyer determine what the practice may realistically produce under new ownership and whether the asking price still makes sense.

Staffing matters, too. Who works in the practice? How much does the practice depend on associates or particular team members? Are any employees related to the seller? Are the staff planning to stay after the sale? What happens to compensation and staffing costs when ownership changes?

Even the building can change the economics of the deal. Buyers need to understand the existing lease, its expiration and renewal provisions, whether it can be assigned, and any other leases or loans they may be expected to assume. 

None of these findings automatically makes a practice a bad acquisition. Sometimes due diligence uncovers a problem. Sometimes it explains something that initially looked concerning. And sometimes it confirms that the practice is every bit as strong as it appeared.

Due Diligence Can Help You Plan for What Happens After Closing

One of the most overlooked benefits of due diligence is that it can tell you more than whether you should proceed with the purchase. It can help you understand what you’re walking into on day one. Maybe the practice is financially healthy, but fees haven’t been increased in several years. Perhaps there are procedures the seller currently refers out that you can perform. Maybe collections need attention, the schedule has unused capacity, or certain employees will be particularly important to retain through the transition.

Understanding those things before closing can help turn due diligence into the beginning of your ownership plan. And if the review does uncover something significant, that doesn’t necessarily mean walking away. Depending on the issue, you may need more information, want to revisit an assumption, involve your attorney or another advisor, adjust your financial projections, or consider whether the terms of the transaction still make sense. The important part is learning those things before you own the problem.

When Should You Begin Due Diligence?

Ideally, you should start the due diligence process before you’re emotionally committed to the deal. It’s easy to start picturing yourself in a particular practice after you’ve toured the office, met the seller, reviewed the headline financials, and started talking about financing. That’s also when it can become harder to objectively evaluate information that challenges the picture you’ve already formed.

The Letter of Intent (LOI) will typically set forth the due diligence period, so pay close attention to how much time you’re being given before you sign. Many sellers’ brokers propose a 30-day due diligence period, but that may not provide enough time to receive all of the necessary information, review it with your advisors, and follow up on questions. Asking for 45 or even 60 days can provide a more reasonable window for a thorough review.

Due diligence also takes time. The seller may need to provide several years of financial records, detailed practice-management reports, employment information, patient data, insurance information, leases, equipment information, and explanations for unusual trends. E&A’s seller checklist reflects how much information may be involved in developing a complete picture of the practice. 

Give yourself and your advisors enough time to understand what you’re reviewing and ask follow-up questions before deadlines start driving decisions.

Is Due Diligence Worth the Cost?

Buying a dental practice is likely to be one of the largest financial commitments you’ll make. At the same time, acquisition costs add up quickly. You’re likely working with a lender, attorney, CPA, and potentially other advisors, so it’s reasonable to question whether every additional expense is necessary.

But the better comparison isn’t simply what due diligence costs; it’s what getting the decision wrong could cost. An unexpected staffing expense, deteriorating patient base, problematic lease, weak collections, or financial trend you didn’t understand before closing can cost considerably more than identifying the issue beforehand. You aren’t paying someone simply to review documents. You’re investing in a better understanding of the business you’re about to own.

Know What You’re Buying

No due diligence process can eliminate all of the risk involved in buying a business, and no advisor can guarantee how a dental practice will perform after ownership changes. But there’s a significant difference between taking an informed risk and taking one because you didn’t know what questions to ask or didn’t ask the questions at all.

At Edwards & Associates, we work extensively with dentists and dental practice transitions. Because every acquisition is different, our due diligence work is tailored to the buyer’s needs and the specifics of the transition. The goal is to help you understand the financial and operational story behind the numbers, identify areas that deserve a closer look, and make a more informed decision about the practice you’re considering.

Considering buying a dental practice? Contact Edwards & Associates before you sign. We can help you understand what information to request, what the numbers are telling you, and what deserves a closer look.

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