Dental and Medical Counsel Blog

Whether you are fresh out of veterinary school or a seasoned practitioner hoping to buy an established veterinary practice, you need to exercise due diligence before you sign the purchase contract. This is the only way to avoid unpleasant surprises that could spring up during your first few days or weeks in your new practice.

What Is Due Diligence and Why is it Important?

Due diligence is the process of evaluating all aspects of the practice you want to buy to verify that the information the seller has given you is accurate. Due diligence concentrates on three main areas:

• Financial due diligence. You check all financial information, both profit, and loss, to determine if the practice is viable and will provide you with your hoped-for income. At the end of the process, you will know what the expenses are so you are not met with any unpleasant surprises. You will also understand what income you can expect and what the cash flow of the practice is on a consistent basis.
• Practice management due diligence. You evaluate everything from the appointment book to how employees are treated.
• Legal due diligence. You want to be sure the practice is in good standing and is in compliance with all state and federal regulations. All contracts, from the lease of the space to equipment leases must be carefully reviewed.

Some aspects of due diligence overlap categories. Have a due diligence checklist so that when one task is completed, you can mark it off the master list.

Due diligence occurs prior to signing the final purchase agreement but after your Letter of Intent (LOI) has been accepted. The seller is obligated to provide all necessary information to you so that you can conduct your own investigation and evaluation.

Who Conducts the Due Diligence?

Although it is possible for you to do this yourself, it is not recommended. You need a team of professionals like the ones you will find at Dental & Medical Counsel. We have a team of professionals, including legal counsel and certified public accountants who are experienced in providing legal services to veterinarians and helping them purchase established practices.

What is Financial Due Diligence?

Financial due diligence is to make sure the financial aspect of the practice is as it has been represented. You want to be sure that there is enough cash flow to cover the expenses of the practice, including the overhead and the payment on the loan you took out to buy the practice. In addition, the income generated must provide you with enough to cover your living expenses after the practice expenses have been paid.

Financial documents to be reviewed. You need your CPA to review the following:

• At least two years of tax returns.
• Bank statements and other financial statements.
• Profit and loss statements.
• Collections as shown on the general ledger.

Review a list of all ongoing expenses. These documents include, but are not limited to:

• Staff salaries and benefit plans. Are there payments for health insurance, continuing education, retirement plans, like 401k plans? How is vacation time accrued?
• Office lease agreement for the space unless you are purchasing the building.
• Office equipment leasing contracts. Check to see when the leases need to be renewed.
• Overhead costs, including the cost of supplies, utilities, telephone, answering service, payroll, advertising, equipment maintenance contracts, laboratory fees, etc.
• Vendor agreements. Are you limited for any length of time in dealing with specific vendors?
• Any contracts that you will be assuming when the practice is yours.

Obtain a list of all assets and liabilities. You want to know exactly what is included in the purchase. The list should include the equipment, cash on hand, accounts receivable, and intellectual property if any is included. Also, if you purchase the real estate, that needs to be included on the list.

Check on equipment leases to see when they expire and what is involved in renewal. Will any of the equipment need to be replaced any time soon?

What is Legal Due Diligence?

Legal due diligence is what it sounds like. You review all legal documents. This includes lease agreements, federal and state licensing requirements to ensure compliance, any liens on the practice, and more.

If there are associates in the practice, check their employment contracts. Will they be staying on after the purchase? How is that handled in their contracts? Find out why one or more of them are not buying the practice themselves.

Other aspects of legal due diligence include checking:

• Employment handbook to be sure issues are dealt with appropriately. Analyze salaries and benefits for each employee.
• What is employee turnover like? If high, find out why.
• Check all leases including those for real estate and equipment.
• Check all vendor contracts.
• Are the business name and intellectual property registered as required by law?

What is Practice Management Due Diligence?

Practice management due diligence involves an intensive evaluation of how the practice is actually managed. This generally requires a personal visit to the veterinary practice. This gives you a chance to ask the veterinarian some questions, such as why he or she is selling the practice.

Things you need to check out and evaluate include:

• Does the seller want to stay in the practice for any length of time?
• Is the space how you want it to be, or will you need to do any remodeling or reconfiguration?
• Is the equipment what you expect you will need and is it all in good working order?
• Check the appointment book. Look for new patients and returning ones. Is there a good balance? Is the schedule full, or is the veterinarian cutting back the practice in preparation to sell it and leave it?
• Check patient charts to see if the care provided is on par with the care you will be providing. This also lets you know if the patient base has been accurately presented to you.
• Is the patient management software compatible with your needs?
• Are there any new services you may want to offer that the veterinary practice is not currently offering?
• What is the fee schedule? Is it competitive with other veterinary practices in the area?
• Will employees be staying with the practice? If so, are you able to meet with them and discover how they feel about the sale of the veterinary practice?
• Understand any ongoing, routine expenses related to the practice.

Due Diligence Checklist

Check items off the comprehensive due diligence checklist that you made at the beginning of the process. This helps you know that everything that can be done has been done to verify the veterinary practice you are purchasing is a good fit for you, is in good legal standing in the community, and will provide you the income you expect.

Get Professional Help at Dental & Medical Counsel

Purchasing an established veterinary practice may be the best thing to ever do for yourself. If done correctly, and you only sign the purchase contract after you have conducted due diligence and are satisfied the practice is everything the seller purports it to be, you will be able to bask in doing what you love and reaping the financial rewards.

At Dental and Medical Counsel, we are proud to be one of the most trusted law firms that veterinarians use when they are buying a veterinary practice. When you are ready to learn more, the veterinary attorney team at Dental and Medical Counsel is available to help. Contact us to set up a complimentary consultation with, award-winning attorney, Ali Oromchian.

Dental & Medical Counsel is committed to helping doctors avoid legal pitfalls. We take care of the legal stuff so you can take care of your patients. Our passion is to help you traverse the legal landscape and it is a job we take very seriously. We provide a wide range of services, including practice transitions, partnerships, employment agreements, employment law, lease reviews, real estate purchases, estate planning, trademarks, incorporations, and more. We can’t wait to work with you!