So you’re spending big bucks on acquiring a dental practice. And that was probably a difficult process to finalize. It’s really a conversation you need to have with yourself, your accountant and your banker. But now that you proposed a purchase price and the banks agreed to finance, the next question is: how do I make sure what I’m buying is any good?
That’s where due diligence comes into play.
Due diligence is all about investigating the practice from many and different angles to determine whether it’s a lemon or the best thing since sliced pizza. If it turns out, through your due diligence, that the practice has not been represented properly (e.g. there are less active patient charts than were stipulated in an appraisal, for example), then you may either decide not to purchase the practice, or you may demand a price reduction. Keep in mind that, given that we are in a seller’s market, this may not be a big deal for the seller! I’m just saying.
But in any event, due diligence generally involves prudently reviewing and evaluating one or more of the following aspects of the practice:
1. The Patients
2. The Team
3. The Systems and Structures
4. The Marketing
5. The Lease or Real Estate
6. The Financials
You want to be able to determine whether it is running optimally (if you want a turn-key operation), or you want to be able to pinpoint areas of improvement that will help drive the value of the practice up (e.g. initiating a better recall system, computerizing the practice, improving collections, etc.). It’s also a good idea to be able to compare the practice to others in the same geographic area that are of similar nature (e.g. size, type of dentistry being practiced, number of patients and ops and staff, etc.) to determine whether this particular practice is operating optimally and efficiently.
A big aspect of due diligence involves confirming the practice valuation. For example:
1. Is the equipment in the practice the same as is represented in the valuation? And what shape is it in?
2. Are there the same number of active patient records as was represented in the valuation?
3. Do the billing records (e.g. accounts receivables) represented in the financial information being disclosed match those in the valuation?
4. Is there potential for growth?
5. Are there significant upfront costs that you would be expected to incur (e.g. fixing or replacing equipment, interior decorating, improving leaseholds, plumbing offices so that they can be operatories, etc.)?
Due diligence also allows you to assess whether the practice is a good financial investment. Will you be able to earn a reasonable and comfortable living given that you have to pay:
1. Operating costs (e.g. staff, suppliers, utility providers, labs, etc.) and perhaps certain upfront capital costs (e.g. for new equipment or leasehold improvements, etc.).
2. Pay the landlord, if there is one, or the bank if there is a mortgage on the building which you own
3. Pay the bank/lender
And you need to be able to do all of the above within a set / reasonable period of time.
In the next blog, I’ll discuss some of the areas of due diligence in greater detail.