When you decide to purchase a dental practice, consider consulting with a dental lawyer who has a team of advisors who can conduct due diligence to be sure you do not face any surprises when the practice purchase process is complete. You want to begin working in your new practice on the very first day well-equipped to call the practice your own. Due diligence includes:

• Legal due diligence.
• Practice management due diligence.
• Financial due diligence.

We have previously discussed both legal due diligence and practice management due diligence. This blog is dedicated to the importance of financial due diligence.

The purpose of the financial due diligence part of the overall due diligence process is to make sure the practice will provide you enough revenue to cover your overhead, to cover your liabilities, which include paying back the bank loan you took out to buy the practice, and also to provide an income that will support your lifestyle.

Financial Due Diligence When Buying a Dental Practice

Your certified public accountant (CPA) will review the financial stability of the dental office you hope to purchase. That includes the following.

Reviewing production/collection reports. You want to confirm that what the seller tells you is the annual production is in fact true. A CPA will review at least two years of various financial statements and compare the collections stated in each one to be sure they are consistent. The financial documents that will be analyzed include:

• Tax returns, including federal, state, and local returns as well as any sales tax returns.
• Financial and bank statements.
• Accountant prepared profit and loss statements
• Collections shown on the general ledger. This may be part of the CPA’s profit and loss statement.
• Collections shown on the collections summary from the seller’s dental practice management software.

Due to timing issues, such as when bank deposits are made, the five sources will never be exactly the same, but they should be within 1 to 2% of each other.

Obtaining a realistic picture of ongoing expenses. Be sure you have a firm understanding of all ongoing expenses such as: overhead, office rent, staff salaries and benefit plans, dental supplies, cost of the lab, any equipment maintenance contracts, vendor arrangements, equipment leases and warranty contracts, that will be assumed.

Analyzing production and collection reports. These should be broken down according to each dentist and hygienist.

Checking aged accounts receivables. Accounts receivable should be approximately 65-70% of one month’s production. If accounts receivable are significantly higher, it is a red flag indicating the patients are not trained to pay their bill on time. If the amount is higher, that is a good sign indicating patients pay up front.

Also check to see if the dentist makes payment arrangements with patients. If so, review how they fit into the accounts receivable portion of the practice.

Verifying the true net profit and net income. This may be the most important part of the financial due diligence process. That calculation starts with looking at the tax returns for the past two calendar years. The CPA will also use the most recent monthly report prepared by the seller or the practice accountant.

From that number, the CPA will add back items that will not be expenses to you, like contributions to the seller’s retirement plan, the seller’s salary if the practice is incorporated, depreciation and amortization of equipment, and other expenses, including those that are personal to the seller that you will not incur as the buyer.

Listing all major assets and liabilities. Exactly what you are purchasing must be listed. For example, assets may include all the equipment, inventory, cash, intellectual property, domain names, accounts receivable and any real estate.

Liabilities will include bank debt, employee benefits and bonuses earned, but not paid. Any lawsuits pending or threatened. Get a list of all dental team members and their current salaries.

Obtaining a list of all ongoing expenses. This is everything that will tell you how much it costs to run a dental practice. For example, get everything from telephone expenses to funding retirement plans. Reviewing all overhead costs including rent, lease payment, salaries, dental supplies, advertising contracts, insurance payments, and more.

Determining the effect on the practice if seller is a Delta Dental Premier Provider. If the seller is a Delta Dental Premier Provider and has been receiving Premier fees, those fees are generally 85-95% of the dentist’s usual and customary billing fees. Those agreements were phased out. When you take over the practice, you will now be required to contract with Delta Dental’s PPO program, which pays dentists fees that are between 20-30% lower than the fees paid under the Premier program.

This means a potential revenue loss depending on the number of Delta Dental Premier patients the seller had. If the revenue loss looks substantial, evaluate the buyer may determine the loss can be made up by performing procedures the seller was not performing.

Checking hygiene department revenues. The percentage of the hygiene department revenues should be around 25-30% of the total office production. Billing should be in the 4000 codes showing they are for non-surgical periodontal maintenance. This means the buyer will have the opportunity to increase revenue

Dental and Medical Counsel is proud to be one of the most trusted law firms that dentists use when they are buying a dental practice. Ali Oromchian and our team of dental attorneys can answer any of your questions and assist you with all aspects of financial due diligence when you decide to purchase a dental practice, and can introduce you to reputable CPAs to assist you.