Consider accounts payable when valuing a dental practice

When you perform a valuation on a dental practice, don’t forget to account for accounts payable.

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Dental practice valuation is a huge task. It’s easy to focus on the major factors such as overhead, profit margins, and staff costs. But don’t forget to include accounts payable into your equation. Otherwise, you might be in for an unpleasant reality check after you’ve closed on the practice

What are accounts payable?

Accounts payable (AP) is debt. It refers to the money a dental practice owes to vendors and suppliers for purchased goods and services. It appears as a liability on the practice’s balance sheet. 

A high accounts payable amount compared to revenue can signal cash flow problems in the practice. A low AP can be a really good sign. But either way, you need to drill down into the finer details.

Review payment terms, the concentration of AP, and other factors to get a sense of how you should adjust your valuation for this debt. 

Accounts Payable factors to consider

Accounts payable trends give you valuable insights into the practice’s expenses, especially in dental supplies, lab costs, and other dental-related overhead.

Here are some things to look at in your analysis. All of these need to be considered in the overall context of the practice’s financial health. Don’t blow any one of them out of proportion.

  1. Look at AP payment terms. Are they 30 days? 90 days? Quicker turnarounds can indicate healthier cash flow while longer terms raise concerns.
  2. Check if AP is growing over time. Increasing debts could signal financial struggles for the practice. Stable or declining AP is ideal. On the other hand, if collections have enjoyed steady growth, some amount of AP is to be expected.
  3. Compare AP to revenue. If the ratio is disproportionately high, it may point to an inability to pay bills on time.
  4. Inquire about any disputed bills within AP. Unresolved vendor debts can come back to haunt you.
  5. In most acquisitions, the buyer assumes all existing AP. A bloated AP means that you are taking a big liability burden off the seller’s hands. You could potentially consider having the seller assume AP and offer more.

What Accounts Payable info should the seller provide?

Before the letter of intent is signed, the seller probably won’t want to release financials to you. Most likely, they’ll tell you what their AP is, and you’ll need to take their word for it. After the LOI, they’ll deliver the records and you can validate AP numbers and do a deep dive. 

But don’t worry: your letter of intent can specify that it is contingent on you verifying the details the seller has provided. Including accounts payable. If, for whatever reason, AP (or any other detail) differs from what the seller has told you, you can opt to modify your LOI or withdraw from the deal. 

Important: make sure you have a good attorney who can draw up the LOI (and all the other legal docs you’ll need in the acquisition) to your advantage. 

Once the seller delivers financials to you, here’s what to look for in the AP domain:

  • Aged AP report listing unpaid bills
  • Vendor statements
  • Info on disputes 
  • Payment plans. 

Need help with your dental practice valuation?

Brian Hanks has years of experience coaching dentists through the process of purchasing a practice. He’s a seasoned dental CPA and coach, and can save you hundreds of hours, pounds of stress, and (potentially) tons of money.

Contact Dental Buyer Advocates for a free consultation with Brian.

Also, check out our extensive checklist. It outlines all the steps involved in a dental practice acquisition, and it’s free!

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