By Brian Hanks (www.brianhanks.com)
I got a call from a dental practice owner in Florida last week who wanted to understand something about a buyer doing due diligence on his practice. This dentist owns a practice collecting $800,000/year with 44% overhead – meaning, the doctor was taking home $448,000 year as the owner, and selling the practice for $725,000. The seller had laid out all the financial information, production reports, and details of the office in a 40-page report he sent to the buyer.
But the buyer kept asking more and more detailed questions.
“How many implants did you refer out last year?”
“Does Marcy at the front desk get health insurance?”
“What brand of composite do you use for restorative?”
The buyer hadn’t submitted an offer yet, and the seller was starting to get annoyed.
Due diligence is really nothing more than understanding what you’re buying. When making a purchase as significant and life-altering as the dental practice where you could potentially be for the next 20+ years, it’s reasonable to assume you’ll get a chance to open the hood and peek under all the rugs.
But the timing of due diligence can trip up some buyers.
Here’s the basic truth to know about dental transition due diligence: you generally don’t get the really juicy details about a practice until you have a signed letter of intent in hand
The basic sequence of events almost always goes something like this:
- Find a Practice
- Get Financial Info, a Production Overview & Basic Practice Facts
- Submit & Negotiate the Letter of Intent
- Visit the Practice and Do In-depth Due Diligence
Think of step #2 above as high-level due diligence. You’re usually getting tax returns & production reports at this stage of the process, which will give you a decent sense of whether or not this is a practice that will fit you and your skills.
Step #4, is the in-depth due diligence where you get to audit patient charts, closely examine equipment, and ask detailed questions about referral partners & advertising strategy..
In order to let another dentist see that level of detail about a business, most sellers and their brokers want a firm commitment that you’re relatively committed to a purchase.
That means that you’ve submitted, and finished negotiating the LOI.
If you have a signed LOI in hand, it’s customary to be granted access to the practice computers, patient charts and the seller for in-depth questions about how they run their business.
And, yes, while it’s rare it can happen that buyers find something during their in-depth due diligence that materially changes their mind about purchasing a practice. Most LOIs are written with a 30-60 day due diligence period where a buyer can change their mind.
If you’d like a 7-page document with lists of questions I’ve created to guide clients through the in-depth due diligence process, feel free to snag your copy here free of charge.
Good luck and thanks for reading!
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