June 20, 2022

Buying A Dental Practice
Part II – Due Diligence

In our practice, we frequently work with dentists who will be buying a dental practice.  Our first post in this series looked at important first steps when buying a dental practice.  This post will cover the due diligence period, after you have found the right practice to buy and need to verify that the practice is worth the purchase price.

Looking at a practice’s annual production and collections can give you a rough estimate of a practice’s value. However, determining a practice’s true worth is more complex.  Ideally, you will have already begun some of the due diligence when negotiating the purchase price and formulating the letter of intent.  The due diligence period, though, allows you to review the initial data in greater depth to make sure there will not be any surprises.

Generally, there are five broad categories you will probably want to look at:

  • Financial records to make sure the assumptions that went into the letter of intent are accurate and to identify potential areas for revenue growth or expense reduction.
  • Patient care records to ensure that the clinical work performed in the office is satisfactory.
  • Business records including office and equipment leases and contracts with any vendors.
  • Employment records for the office staff.
  • Public records, which can include board complaints, court records and any liens against the practice.

Here’s a non-exhaustive list of some of the records you’ll likely want to take a look at under each of these five categories.

Financial Records

  • Tax returns (individual and corporate) for at least three years.
  • Monthly profit and loss statements for at least three years.
  • Accounts receivable aging reports for at least three years.
  • Agreements with all active third-party payors (insurance companies, AHCCCS/Medicaid, Care, Credit, etc.), including reimbursement rates.

Patient Records

  • Samples of patient charts.
  • Samples of treatment plans.
  • Clinical observation, if the seller will allow it (but most won’t).
  • Any written follow-up and post-op recall protocols.

Business Records

  • Any lease agreements, for the office space or equipment.
  • All advertising and marketing contracts.
  • Any other vendor agreements.
  • Declarations pages from the seller’s malpractice and general liability insurance policies.

Employment Records

  • Associate or staff employment agreements.
  • Employee handbooks.
  • Written employment policies.
  • Six months of payroll records for the staff.

Public Records

  • Look at court dockets to see if either the practice or the seller is involved in any ongoing or recent litigation.
  • Research the county recorder and Arizona Secretary of State’s website to see if there are any existing liens or UCC-1 financing statements involving the practice.
  • Search the Arizona Board of Dental Examiners’ website to see if there is a disciplinary history for the selling doctor.
  • Research the doctor on consumer rating sites like Yelp. Negative reviews can hurt patient recruitment.

You want your review to be thorough to avoid uncovering any nasty surprises after the deal has closed.  However, a 30 day due diligence period is usually sufficient.  If there are delays in receiving the information, or if the review raises some red flags, though, you may consider extending the closing date until the review can be completed.

If you have questions about due diligence and buying a dental practice, please feel free to reach out to one of our attorneys directly.