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How to Buy a Dental Practice: The Due Diligence Process (Part 2 of 2)

Understanding The Process Of How To Buy A Dental Practice

How to Buy a Dental PracticeAs we discussed in Part 1 of this article, understanding the due diligence process is a fundamental element of learning how to purchase a dental practice.  Here are the remaining key areas that buyers should consider when evaluating practice acquisition opportunities:

Chart Audit, Practice Management Software, Fee Schedule & Appointment Book – The buyer may want to pull a sample of active patient charts to review the seller’s notes, practice philosophy, and the type of treatment being provided.  Some buyers will hire a practice management consultant to assist them with completing the chart audit, evaluating the seller’s fee schedule to see how it compares with other practices in the area, and reviewing the practice management reports/software to verify the information provided by the seller or broker and identify strengths and weaknesses of the practice.  The buyer may also want to review the appointment book to gain insight into the seller’s work flow and the historical and future busyness of the practice.

Equipment Inspection – The buyer or a local dental equipment representative should inspect all of the equipment to ensure that it is in good working order prior to the sale.  The buyer should also request a room by room equipment list, which should be included in the Asset Purchase Agreement.

Verification of Information – The buyer’s lender will typically file a 4506 Form with the IRS to verify the seller’s practice tax returns are true and correct.  The buyer may also want to peruse the practice management software to confirm the accuracy of the active patient count and other practice information provided by the broker and/or seller.

Cash Flow Analysis – The buyer and/or the buyer’s lender or accountant should complete a cash flow analysis to confirm the practice generates sufficient cash flow to pay the overhead of the practice and the debt service associated with the practice loan while providing the buyer with sufficient personal income to cover their living expense needs.  The practice broker may also provide a cash flow analysis to the buyer.  Please note that a cash flow analysis may not be applicable to smaller practices that are priced based primarily upon the replacement value of the leasehold improvements/equipment and the future potential of the practice.

Future Potential – The buying dentist should evaluate the potential for reducing overhead and/or enhancing practice revenue through decreasing expenses by switching labs or dental supply companies, increasing internal or external marketing, increasing operating hours, retaining services that are not being provided by the seller, increasing the fee schedule, etc.

Ongoing Expenses – The buyer needs to have a firm understanding of the overhead and ongoing expenses of the practice, including the major overhead expenses such as office rent, staff, dental supplies, lab, and advertising as well as any contracts that will be assumed after the sale such as maintenance contracts, equipment leases and warranties, and advertising contracts.  In addition to the monthly rental rate for the office space, the assignability and term (including options to renew) of the lease are also important considerations.

Taking a focused, organized approach to the due diligence process will allow the buying dentist to make an informed, confident purchasing decision and set the foundation for a successful transition.

This article is brought to you by Brannon Moncrief and Patrick Johnston, MHA of McLerran & Associates, specializing in How to Buy a Dental Practice in Texas.



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