Buying a dental practice is almost certainly one of the two largest purchases you’ll ever make in your life.
The other big purchase is likely to be your house.
When you buy a house, there’s a whole defined process to make sure what you’re buying is what a seller tells you it is.
Title companies. Inspectors on roofs and in crawl spaces. Multiple visits to the property to see the house yourself.
No one closes on a house and says, “Wait…there’s a 4th bedroom over here?” (Well, no one I’ve ever heard of anyway…)
But, unlike buying a house, surprises when buying a dental practice can pop up.
So how does it work when you buy a dental practice?
How do you know what you’re actually buying? How do you reduce the number of surprises?
First and foremost, you need to recognize the two types of due diligence. There’s financial due diligence and in-person due diligence.
Financial Due Diligence in Dental Transitions
The financial due diligence portion of buying a dental practice is the side that is going to look more familiar and defined. Typically your transitions accountant and bank are spearheading this approach and doing the following:
- Tax Returns Matched to P&Ls
- Tax Lien & Liability Searches
- Paystubs Matched to Tax Returns
- A/R Aging & Patient Credit Reports
- Tax Return Transcripts
- Background Checks
- Lexis Nexus (Public Records) Search
- UCC Searches
- Professional License Search
- Business Entity Searches
- Fictitious Business Name Search
Typically, the majority of the above will happen after you’ve signed an LOI on a practice and are working towards a closing date.
Since the bank is lending the cash, they will typically take the lead on the majority of the items, but I often find myself doing a number of the things on that list for my clients.
The other type of due diligence is the type most dentists think of and are intuitively familiar with: in-person due diligence.
In-Person Due Diligence in Dental Transitions
The in-person due diligence is what dentists are excited to do and talk about. This is the due diligence where you get to dive into the practice and see what’s actually happening in the chairs.
This type of due diligence will include inspecting:
- The Equipment
- The Daily Schedule
- Patient Charts
- Interior/Exterior of the Practice
- New Patient Reports
- Employees and Employee Handbook
- Staff Skills and Habits
The in-person due diligence is always done by you, the buyer. Occasionally, I hear of a buyer hiring a consultant to assist in a patient chart or staff review, but in my experience, 99+% of buyers complete the in-person due diligence on their own.
No one knows better than you exactly how your skills and temperament will fit in a specific office, it’s clinical culture and with existing equipment.
A typical buyer will make a minimum of two full-day visits to a practice before purchasing. Most sellers (for better or worse with heavy broker coaching on this point) will be nervous about letting a buyer have access to everything in an office early on in a transition. The closer you get to closing with bank loans and legal documents in place, the more comfortable a seller is going to feel letting you poke around in the computers and cabinets.
The hardest and most controversial part of in-person due diligence is assessing the staff. Some sellers have no problem letting the staff know they’re retiring and selling, while other owners refuse to let the staff know until the purchase price of the practice hits their bank account.
Personally, while I understand the desire to not throw off staff with a too-soon announcement of a boss change, I think meeting the staff is a must prior to closing.
Since a huge portion of what you’re purchasing as a buyer is goodwill – or the knowledge and patient relationships your staff has – why wouldn’t assessing how you’ll fit with, and how good the staff is, be a required part of due diligence from a buyer?
Push hard on a seller to meet the staff and get to know them and assess their skills as part of due diligence. But also know it’s likely to come near the end of a transition out of necessity for the seller.
It’s impossible to know everything about a practice before you buy, but solid due diligence can help reduce the number of surprises.
But, ensure the financial and in-person due diligence is as complete as you can make it and chances are the surprises will be small ones.
Get a free Due Diligence Checklist here!
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