Acquiring a dental practice is a significant investment that requires meticulous preparation and informed decision-making.
In this comprehensive guide, we delve into the due diligence process, what any buyer would be expecting to see, and how a practice can be best prepared for a pain-free sale.
This article is a must-read for dental professionals thinking about selling or purchasing a practice, as it offers valuable insights and practical advice, highlighting the essential steps and considerations for a successful dental practice acquisition.
The Importance of Due Diligence
Conducting due diligence is a critical step in the process of buying and selling a dental practice. It involves a thorough investigation into the financial, legal, and operational aspects of the practice, ensuring that the buyer is fully informed about the practice’s strong points and potential risks before making a purchase.
It helps the potential buyer identify areas for improvement, ensures compliance with industry regulations, and provides a comprehensive assessment of the practice’s financial health and operational efficiency.
Proper due diligence helps avoid unforeseen issues and ensures a smooth transition into practice ownership.
Due Diligence Checklist for a Dental Practice Purchase
When purchasing a dental practice, thorough analysis and assessment of a practice’s strengths and weaknesses are crucial to ensure a sound investment.
That’s why preparing for due diligence well in advance of a potential sale is essential. Early preparation not only enhances the practice’s appeal to buyers but also ensures that you, as a seller, are well-informed and ready for any eventuality.
By organizing financial statements, updating legal agreements, and ensuring operational efficiency, you can facilitate a smooth and successful transition.
Here’s a checklist to ensure you get your practice prepared in five key areas:
1) Financial Due Diligence
Financial due diligence is a critical component of purchasing a dental practice as it provides a comprehensive review of the viability of the practice. This ensures that the investment is sound and the clinic will continue to attract new patients in the future.
Comprehensive due diligence helps identify any red flags, understand profitability trends, and evaluate the overall economic stability of the practice.
To instill confidence in potential buyers, sellers should consult with a dental CPA to:
- Ensure balance sheets are up-to-date and accurately reflect the practice’s financial position.
- Provide clear and detailed profit and loss statements to showcase the practice’s profitability and financial trends over time.
- Ensure all tax returns are filed correctly and are readily available for review.
2) Legal Due Diligence
Identifying and mitigating any legal risks is an essential part of every dental practice purchase. Legal due diligence involves a thorough review of various legal documents and agreements to ensure there are no hidden liabilities or unresolved legal issues that could impact the acquisition.
To give buyers peace of mind over the legal standing of the practice, the selling dentist should:
- Ensure lease agreements for the practice premises are current and include provisions for transferability to the new owner.
- Review all equipment leases to identify ongoing obligations and ensure they can be transferred or renegotiated as needed.
- Update employment contracts to ensure they are compliant with current labor laws and reflect accurate terms of employment, including non-compete and confidentiality agreements.
For both buyers and sellers, we advise engaging a dental attorney to navigate the complexities of these legal aspects effectively.
3) Operational Due Diligence
Operational due diligence in the context of a dental practice purchase evaluates the day-to-day functionality and practice management.
A thorough operational assessment ensures that the practice runs efficiently and complies with all necessary standards, facilitating a seamless transition for the new owner. By understanding these operational elements, potential buyers can identify any areas needing improvement and plan accordingly for post-acquisition integration.
With this in mind, to minimize future disruption and to make your practice more appealing to a buyer, as a seller, you should:
- Document and review all Standard Operating Procedures (SOPs) to ensure they are consistent, up-to-date, and compliant with industry standards.
- Maintain accurate and current inventory records for all dental equipment and supplies, highlighting any recent purchases or upcoming needs.
- Verify that the practice meets all relevant industry regulations and standards, addressing any compliance issues before the sale.
4) Clinical Due Diligence
To maintain patient satisfaction and retention, the new buyer has to ensure continuity in the standard of care during the transition.
As a result, when carrying out assessments of a clinic, buyers will be looking for evidence that the practice upholds high clinical dentistry standards for its patient base and complies with regulatory requirements.
Therefore, to prepare for due diligence, sellers should:
- Ensure patient files and records are up-to-date and reflect current treatment statuses and histories.
- Maintain detailed and accurate treatment plans and progress notes to demonstrate the quality of care provided.
- Verify that all patient records are compliant with HIPAA regulations to protect patient privacy and avoid legal issues.
- Keep thorough records of insurance claims and billing processes to show transparency and efficiency in financial dealings.
5) Human Resources Due Diligence
Human resources due diligence involves examining various agreements and documents related to employees, contractual obligations, and workforce stability. Proper review of staffing and employee contracts helps identify potential risks, maintain staff morale, and ensure operational continuity post-acquisition.
To present a well-organized and transparent human resources framework, sellers should:
- Ensure all employee records are up-to-date and easily accessible.
- Confirm that non-disclosure agreements are in place to protect sensitive information.
- Review non-compete agreements to understand any restrictions that might affect the practice’s operations.
- Make sure all employment agreements are current, legally compliant, and reflect the terms of employment accurately.
Communicate Effectively with Potential Buyers
When potential buyers are carrying out their analyses and assessments, effective communication can help ensure a smooth and successful practice transition.
Timely and transparent interactions, ensuring that all requested documents and information are provided promptly, not only facilitate a smoother process but also foster trust between you and the buyer.
Honesty plays a pivotal role in this process, too. Be upfront about any issues or challenges the practice may face. Transparency about potential problems helps in addressing concerns early and builds credibility with prospective buyers. After all, it’s better than having them discovered later, jeopardizing the sale.
Additionally, it’s important to be well-prepared to answer any questions potential buyers might have. They will likely seek detailed information about various aspects of the practice. Addressing these inquiries thoroughly and professionally demonstrates your commitment to the transaction and helps in establishing a positive and trustworthy relationship.
Do not allow that demon in your head saying: “They don’t trust me!” This is not a trust issue. This process allows all parties a clear understanding of the practice that is being offered “For Sale”. It eliminates surprises and actually cements trust. It is vital for the buyer’s advisory team and the lending underwriters. And it is the best insurance for a selling dentist as it concerns risk management.
Contact a Professional Broker With Dental Industry Experience
When preparing for due diligence in the sale of a dental practice, utilizing a professional broker offers substantial benefits compared to managing the process independently. Professional brokers specializing in dental practice transactions bring a wealth of expertise in handling the nuances of due diligence. They ensure that every aspect of the practice is meticulously prepared for scrutiny, which is crucial for a smooth and successful sale.
A professional broker conducts a thorough and accurate valuation of the practice, reflecting its true market value and identifying potential issues that could impact the sale. This comprehensive assessment not only helps in setting a realistic price but also prepares the practice for buyer inquiries and inspections.
Brokers are skilled in organizing and presenting critical documentation, such as financial records, operational details, and legal agreements, in a manner that facilitates due diligence. Their experience helps in addressing potential red flags and ensuring that all necessary disclosures are made, thereby reducing the risk of complications during the transaction.
Additionally, brokers manage the intricate details of negotiations and regulatory compliance, ensuring that the process is handled efficiently and professionally, minimizing the risk of legal and financial pitfalls.
Secure That Purchase Agreement – Now!
Now approaching 60 years, our team at Professional Practice Sales (PPS) has been a leader in the California dental market, providing comprehensive and accurate practice valuations that ensure you receive the best possible price.
Our expert brokers offer unparalleled guidance throughout every step of the buying or selling process, from initial valuation to finalizing the deal. We manage the intricate details, including contract negotiations with strong focus on reducing risks and ensuring a smooth transition.
Our dedication to creating win-win outcomes for both buyers and sellers is backed by numerous testimonials from satisfied clients who have experienced our commitment firsthand.
Contact us for a consultation today to see how we can assist you. Request a practice valuation to get a precise estimate of your practice’s worth, or schedule a meeting to discuss buying or selling a practice.
With our expertise, your sale is in expert hands.
