How To Buy A Dental Practice: The Due Diligence Process (Part 1 of 2)
Learning How To Buy A Dental Practice
The process of evaluating a dental practice acquisition opportunity is often referred to as “due diligence”. Due diligence is an essential part of purchasing a practice, as it allows the buying dentist to fully examine the seller’s practice and confirm the material facts provided by the seller or practice broker. When learning how to buy a dental practice, buyers often ask us questions regarding how to go about completing their due diligence, so we offer this two part article as a brief guide to this process.
First, let’s examine the meaning of due diligence. According to investopedia.com, due diligence is defined as:
- An investigation or audit of a potential investment. Due diligence serves to confirm all material facts in regards to a sale.
- Generally, due diligence refers to the care a reasonable person should take before entering into an agreement or a transaction with another party.
The due diligence process begins upon the buyer receiving the initial information regarding the practice and typically continues for 15-20 days following the execution of a Letter of Intent to purchase the practice. The staff and patient base are usually unaware that the practice is being offered for sale, so buyers are expected to complete their due diligence in a confidential manner and visit the practice after business hours.
There are several key areas for buyers to focus their attention during the due diligence process:
Practice Information, Reports & Financials – The buyer will need the following information to properly evaluate the practice: Practice Questionnaire (provided by the broker or lender), Office Lease, Fee Schedule, Accounts Receivable Aging Summary, Production by Provider, Category & Procedure Code Reports, Last 3 Years Profit & Loss Statements and/or Practice Tax Returns, and Current Year P&L Statement.
Practice Visit – Once the buyer has reviewed the practice information and determined they have a strong interest in the opportunity, the next step is visiting the practice in person to evaluate the location, facility, equipment, décor, etc. During this meeting with the seller or practice broker, the buyer should ask any questions they may have regarding the practice information.
Meet the Seller – Once the buyer has reviewed the practice information and visited the office, it is important for them to meet with the seller. During this meeting the buyer should get to know the seller on a personal and professional level, observe the seller’s personality, discuss the seller’s practice philosophy, review why the seller is selling the practice, discuss the seller’s involvement during the transition and following the sale, and ask the seller any questions they have regarding the practice, patient base, staff, etc. After meeting with the seller, the buyer should have a much better feel for the practice and be able to determine if the practice is a good fit for them.
We will examine the remaining keys to completing the due diligence process in Part 2 of this article.
