Due diligence steps before purchasing a practice
Let’s say there’s a young doctor whose goal is to own a dental practice. She found a general practice where the current owner is preparing to retire and sell 100% to her. The practice is in an area she loves, and she strongly respects the owner and the business he has built.
The caveat: this is a life-altering decision. This young doctor is moving away from the state she grew up in, away from her family and friends to start a new chapter and become a business owner. Couple that with the significant financial implications of purchasing a practice, it’s not a decision to be taken lightly. While she feels ready to move forward with this opportunity, she wants to be absolutely certain that she’s making the right choice.
How can this doctor, or any individual, looking to purchase a practice confirm that the opportunity is not only profitable, but aligns with their personal and professional goals? This is where the due diligence process comes in.
In dental practice transitions, due diligence involves researching and analyzing pertinent information about the seller and the practice, allowing the buyer to be better equipped to make an informed decision and move forward with certainty.
It can be a lengthy, complicated process that requires significant effort from all parties, but the goal is to ensure you—the buyer— trusts what is being presented by the seller.
Types of Information to Consider
The due diligence process allows you to look at sensitive financial documents, such as tax returns, production/collection reports, profit and loss statements and other applicable practice metrics.
To understand the full picture and make an informed decision about your next move, doing your due diligence on the practice involves interpreting these documents and looking at the following key factors.
Overall Practice Health: To better understand the overall practice, you’ll want to look at practice overhead, operational profitability, production by provider (doctor and hygiene), collection ratio, practice performance in recent years, current fee schedule, insurance mix, details on the practice’s referral network, number of operatories and practice location’s curb appeal and visibility.
Patients & Staff: When looking at the current patient base and the team of staff members, the type of factors to consider include active patient count, average patient age, average number of new patients over the last 12 months, where those patients are coming from, the referral network, dentist-to-population ratio in the city and surrounding area, number of staff members and their roles, key staff who are close to retirement age, benefits offered to existing staff and spouse involvement in the practice.
Partnership: If buying into a practice, as opposed to an outright sale, you should assess factors such as the percentage of the practice being purchased, legal structure, how the money will be split, how you will ultimately exit the deal, how the schedule is shared, how new patients are assigned and how decisions are made.
Orthodontic-Specific: For orthodontic practices, this requires additional due diligence. You may seek orthodontic-specific information, such as the contracts receivable balance, conversion rate from new exams to starts, case start types (phase 1, phase 2, observations, debanding, etc.), patient financing options and ratio of Invisalign to traditional bracket and wire patients.
What happens in situations where you don’t receive all the facts from the seller? This Transition Talk Podcast episode discusses how you can work with what you have, find clues and figure out the missing pieces.
Interpreting the Facts
After obtaining all of the information, ask yourself these key questions: Do you love what the numbers are telling you? Does anything stand out to you? Do you see any red flags or deal breakers?
As every doctor’s individual situation and every dental transition is unique, there unfortunately isn’t a blanket answer or formula to follow when deciding if the practice is right for you. However, doing your due diligence and taking the time to assess the information can help provide both clarity and confidence in your decision.
A dental transition advisor, like NDP, can help you obtain the important documents as well as interpret them, ensuring you have all the facts needed to make the best decision for you. Contact our team today to discuss your situation.
Our complimentary Buyers Checklist includes a complete list of the factors to consider when assessing a purchase opportunity. Download your guide here.