When buying a dental practice, due diligence is the process of evaluating the significant items related to the practice. This means conducting a deep investigation into the financial, legal, and operational aspects of the practice so that there will be no undesirable surprises should the potential purchaser decide to buy.
Due diligence is also a process of verification wherein the buyer has the opportunity to verify and confirm everything that the seller has told him or her about the business. In smaller transactions, due diligence can be performed in as little as a couple of weeks. However, with larger transactions, it is not unusual for the process to take even longer. In some transactions, due diligence will continue right up to the closing.
The due diligence process obliges both the purchaser and the seller. The purchaser must thoroughly evaluate the financial, legal, and operational aspects of the practice being sold. The seller must provide proof of the practice's value, by making available things like its financial books, a redacted patient list, taxes, and copies of any insurance or commercial contracts.
Depending on the size of the practice, due diligence can be an arduous investigation of many facts and figures. Working with a team of professionals who specialize in the sale and purchase of dental practices will help reduce your risk and ensure a safe and smooth transition after the purchase has been made.
For the purchase of a large dental practice, due diligence can require multiple accountants, attorneys, and expert advisors. With a smaller practice, it is not unusual for the purchaser's accountant to go over the financial aspects, while his or her attorney handles the legal aspects, and often the purchaser himself or herself deals with the operational aspects.
Performing due diligence is important to confirm that your expectations of the proposed purchase are in line with what is actually being sold. Purchasing any business without first performing proper due diligence increases your risk. Unlike other business entities that have inventory and tangible assets, a dental practice is unique. When you purchase a dental practice, there are essentially four main components to the purchase:
1. Income - The bank is financing this purchase based on the practice's cash flow and you are purchasing this cash flow. Dental practices are priced based on a seller's net cash income. You need to make sure that this income is going to continue well into the future.
2. Assets - You might get lucky and buy a practice with new equipment and the latest technology, but it is more likely you will buy one with used chairs and equipment. Pricing is almost always based on the practice's revenue, not the equipment. Although the seller produced their revenue with the current equipment you will be buying, you may need to invest in some upgrades for the future of your own practice.
3. Goodwill - You are buying the practice's goodwill, such as its patients and reputation in the community. The amount of goodwill accumulated in the practice (and the income expected from it) is its foundation. Therefore, you should protect it by negotiating a solid non-compete agreement with the seller. Standard non-compete agreements vary by radius, but 5 years is the customary length.
4. The Practice’s Name and Contact Information - This includes phone numbers, email addresses, internet domains, websites, the business name, social media marketing, and anything else the practice uses to acquire and maintain patients.
There are many things you need to consider when purchasing an established dental practice. An exhaustive checklist of items to be reviewed can contain hundreds of items. To get you started, here is a non-exhaustive list of items that should be reviewed during the due diligence process:
1. Make sure that you have your CPA review all the practice’s financial records, such as accounts receivable and payable, cash deposits, and payment records. Also, you should review the practice's profit and loss statements, balance sheets, and tax returns for at least the past three years. Furthermore, you should go over the practice's ongoing contracts, utility bills, and other business expenses to ensure that they match up to the profit and loss statements.
2. Verify the seller's claims about the practice, such as:
3. Review the current staff and how much each is paid, as well as whether they intend to stay on with the practice after it is sold to you.
4. Inspect the tools, instruments, equipment, and fixtures to determine if they are in good working condition, and what their lifespan is so that you can ascertain when the next capital expenditure might be.
5. Look into whether the practice's trademarks, business name, and intellectual property are properly registered, that they will pass through to you upon settlement, and that there will be no issues or litigation regarding any of the intellectual property after the purchase.
6. Review existing contracts with insurers, suppliers, staff, and any organizational clients to ensure that they will transfer.
7. Consider the technology used in the dental practice and whether this is suitable to the way you intend on operating the practice and the services you intend to provide, as well as, to make sure that you are not purchasing a problem that cannot be changed.
Purchasing a dental practice can be a profitable venture if you choose wisely, and it also pays to understand exactly what you are buying.
This is why due diligence is a critical part of the purchase of any business. Deals can yield bad results when due diligence is not done properly.
When properly performed, due diligence will provide you with a clear picture of the current state of the practice, its potential for growth, why it is being sold, and whether or not it is worth the asking price.
Enlisting the assistance of professionals, like business brokers, dental attorneys, CPAs, and consultants who specialize in the purchase of dental practices will give you more confidence in the investment you will be making. The knowledge that your due diligence was performed thoroughly as possible by experts who know the ins and outs of what they should be looking for in the information provided by the seller will help to ensure the profitability of your business through the transition, and for years in the future.
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