“I’m considering paying a massive amount of money for this practice, and I want to see the seller’s bank account to know for sure that what they’re telling me they collect is actually true and accurate information. Can I do that?”
It’s a great question, in part because the answer is so clear: No. (I love when I get to give straightforward answers.) Let me back up a second.
I once worked with a very jumpy buyer in California who was looking to purchase a dental practice. The buyer wanted to be sure that everything was on the up and up. Certainly understandable, I think we can all agree. But the buyer crashed his own deal.
He took his role in due diligence too far, wanting every possible bit of information, including bank statements, to review himself. At one point in the deal, the buyer wanted the seller’s bank login information because “the seller could alter the bank statements.” Specifically, he wanted to see if the cash income figures matched what the seller was claiming.
Before you ask, no, it’s not normal for a buyer to request a seller’s bank statements. And it’s definitely not normal to ask for login credentials. The deal fell apart, and the buyer ended up wasting everyone’s time and money, including his own.
Why was this buyer so jumpy? It may have been because of the seller’s pushy broker. Or maybe he had experienced fraud in the past. Perhaps he fancied himself a moonlight accountant. Who knows?
What I do know is that it’s normal to have a lot of questions during the purchase process. And most of those questions will be answered during the due diligence phase.
Here’s the best part: when it comes to due diligence, you’ve got a whole team in your corner. You don’t have to do it yourself.
- You will get to do the in-practice due diligence, where you walk the premises yourself and check out the equipment, the building, and so on.
- Your accountant (you hired an accountant, right?) will handle the financial due diligence, going through the practice’s records, looking at Accounts Payable and all the rest.
- But the most thorough of all is the bank due diligence. The bank does the deepest dive of all, checking bank records, pulling credit reports, and checking everything against IRS records. It’s the bank’s money on the line, after all, and they’re going to protect their investment,
When it comes to the big stuff, it’s unlikely that anything would slip through all of those due diligence nets.
When it comes to the small stuff, as the buyer you’re going to have to take some information on faith. Is every patient in the system a real person? Are any records fabricated? Did the seller, even in the face of taxes, penalties, and jail time, submit inaccurate information to the IRS?
Am I making you nervous yet? So many unanswerable questions! But don’t worry. Smart lawyers built the ultimate protection into the standard purchase contract, the Asset Purchase Agreement. The APA has a section called “Representations and Warranties,” which says — in plain English — that if after the purchase the buyer discovers any fraud, they’re entitled to sue the seller for the loss plus damages.
It’s impossible to know with 100% certainty how much cash a practice is collecting, or that there is no fraud going on in the practice. But the bottom line here is that there has to be some trust involved in your purchase of a dental practice.
Trust … but verify. To a normal degree. Due diligence is a thing — and a thorough one — for a reason. If you’re not sure what’s normal, well, that’s where a transition advisor comes in.