The practice looks perfect on paper—strong production numbers, steady patient flow, a willing seller, and a price that seems reasonable. Then you close the deal and discover the reality: inflated financials, hidden liabilities, and problems the seller never mentioned. Within months, you are wondering how a promising acquisition became a financial burden.
This scenario plays out regularly in dental practice acquisitions. Dental accountantsspecializing in due diligence spot the warning signs that general practitioners miss. The financial red flags hiding in a seller’s books can determine whether an acquisition accelerates your growth or derails it entirely.
Planning a practice acquisition? Our team conducts thorough financial due diligence to protect your investment. Schedule a consultationbefore you sign.
Why Financial Due Diligence Requires Specialized Expertise
Buying a dental practice differs fundamentally from other business acquisitions. The revenue streams, expense categories, and valuation methods are unique to dentistry. General accountants may miss industry-specific concerns that dental accountants recognize immediately.
By examining financial statements, tax returns, and production reports, you can verify the practice’s profitability and identify any financial red flags. Due diligence also helps you evaluate the practice’s legal standing and operational health.
The purpose of financial due diligence is straightforward: confirm that the practice will generate enough revenue to cover your overhead, service the acquisition debt, and provide the income you expect. Without this verification, you are buying based on the seller’s representations rather than verified facts.
Accounts Receivable Anomalies That Signal Problems
The accounts receivable balance reveals more about a practice’s financial health than almost any other metric. Dental accountants closely examine A/R because it reveals collection problems, billing issues, and, sometimes, fraud.
What the Numbers Should Look Like
A healthy dental office will have an accounts receivable ratio of 1.0, meaning your total accounts receivable equals your average monthly production. An office producing $40,000 monthly with $60,000 in total receivables has a ratio of 1.5, which indicates collection problems.
Red Flags in A/R Reports
When evaluating an acquisition target, watch for these warning signs:
A/R ratios significantly above 1.0 suggest patients are not trained to pay promptly, which indicates systemic collection problems you will inherit. High percentages of aged receivables (over 90 days) mean much of that balance may never be collected.
Revenue Verification and Production Analysis
Seller-provided financials require independent verification. Dental accountants cross-reference multiple data sources to confirm that reported revenue reflects actual practice performance.
Cross-Checking Production Reports
Understanding a potential practice’s cash flowis non-negotiable. You must adjust for non-cash expenses, such as depreciation, and normalize owner-specific expenses to see the true financial picture.
Dentists and hygienists should break down production and collection reports. This segmentation reveals whether the practice depends heavily on the selling dentist’s personal production. If so, revenue may decline significantly after the transition when patients must adjust to a new provider.
Expense Normalization
Some expenses in the seller’s books may not continue under your ownership, while others may be artificially low. Family members on payroll at inflated wages, personal expenses run through the practice, or deferred maintenance can distort the true cost of operations.
According to ADS Transitions, staff costs should align with industry standards of 20-28% of gross income. Wages significantly outside this range warrant investigation. Occupancy costs should hover around 5 percent of gross income; rural practices may be lower.
For ownersscaling multi-location dental practices, these normalized financials become the foundation for integration planning and performance projections.
Hidden Liabilities That Derail Acquisitions
Beyond the numbers on financial statements, dental accountants search for liabilities that may not appear in standard reports but will become your problem after closing.
Insurance Contract Considerations
According to Dental & Medical Counsel’s due diligence guide, you must determine the effect on the practice if the seller is a Delta Dental Premier Provider. When you take over the practice, you may be required to contract with Delta Dental’s PPO program, which pays fees that are 20 to 30 percent lower than Premier fees.
This single factor can reduce practice revenue by tens of thousands annually. Dental accountants identify these contract transitions and model the financial impact before you commit.
Staff Obligations and Benefit Plans
Get a complete list of all dental team members and their current salaries, along with any bonuses earned but not yet paid, benefit obligations, and retirement plan commitments. These liabilities transfer with the practice and affect your cash flow from day one.
Practices showing signs of losing financial controloften have informal arrangements with staff that create unexpected obligations. Verbal promises about raises, time off, or benefits may not appear in any documentation, but create employee expectations you will need to address.
The Embezzlement Question
Fraud and embezzlement remain significant concerns in dental practice acquisitions. The seller may not even know their practice has been victimized.
According to the ADA’s research reported by Prosper-Ident, surveys show that 48 percent of dental practices have experienced embezzlement. This represents a significant increase from 35 percent reported in 2008.
Dental accountants look for the telltale signs: unusual write-off patterns, cash deposits that do not match production reports, unexplained adjustments to patient accounts, and financial controls concentrated in one person’s hands.
Concerned about hidden financial problems in an acquisition target? A fractional CFOcan conduct the thorough analysis your investment requires.Connect with our teamto discuss due diligence support.
Operational Red Flags With Financial Implications
Some warning signs are not strictly financial but carry significant economic consequences. Dental accountants look beyond the ledger to identify these concerns.
Patient Base Quality
An over-reliance on older patients can slow down future treatment opportunities unless offset by strong new patient acquisition systems. The demographics of the patient base affect long-term revenue sustainability.
Review the appointment book for active returning patients and new patient flow. A new-patient inflow of 20 to 30 patients per month indicates a viable practice. Significantly fewer new patients each month may require substantial marketing investment post-acquisition.
Equipment and Facility Concerns
Old or poorly maintained equipment adds high costs post-sale. Tanner Management notes that these issues can impact your ability to modernize or expand. The due diligence process should include an assessment of equipment condition and remaining useful life.
Lease terms matter as well. According to CIBC’s dental financing guide, your loan typically will not exceed the remaining term of a lease. Watch out for unattractive conditions such as demolition clauses or non-transferable clauses.
What Due Diligence Should Cost
Skipping professional due diligence to save money is false economy. The investment in thorough analysis protects against far larger losses.
According to Tanner Management, one client’s due diligence revealed that $150,000 had been quietly transferred into the business account from the seller’s spouse’s personal savings, a detail that had not been disclosed and that falsely inflated the practice’s financials. Without professional review, this manipulation would have resulted in paying a premium for overstated performance.
Dental accountants familiar with practice valuationsbring a perspective on whether asking prices align with verified financial performance. This expertise helps you negotiate from a position of knowledge rather than assumption.
Frequently Asked Questions
What financial documents should I request during dental practice due diligence?
Request at least three years of tax returns, monthly profit and loss statements, balance sheets, production reports by provider, accounts receivable aging reports, and bank statements. According to Dental & Medical Counsel, you should also obtain a list of all ongoing expenses, including rent, lease payments, salaries, dental supplies, advertising contracts, and insurance payments. Compare the tax returns to the seller’s representations to verify consistency.
How long does financial due diligence take for a dental practice acquisition?
Thorough financial due diligence typically takes 4 to 8 weeks, depending on the practice’s complexity and the seller’s responsiveness. This period begins after your letter of intent is accepted but before signing the purchase agreement. Rushing this process to meet arbitrary deadlines puts your investment at risk.
What accounts receivable ratio indicates collection problems?
According to Dental Economics, a healthy practice maintains an A/R ratio of 1.0, meaning total receivables equal one month’s average production. Ratios above 1.5 indicate significant collection issues. Additionally, no more than 20 percent of receivables should be aged 60 days or more. High percentages of aged A/R suggest systemic problems you will inherit.
Should I be concerned about embezzlement in a practice I am acquiring?
Yes. According to ADA research, 48 percent of dental practices have experienced embezzlement. Dental accountants conducting due diligence look for warning signs including unusual write-off patterns, inconsistencies between production and deposits, and financial controls concentrated in one employee. The seller may not even be aware of ongoing fraud.
How do insurance contract changes affect acquisition economics?
Changes to insurance fee schedules can significantly impact post-acquisition revenue. Dental & Medical Counsel notes that transitioning from Delta Dental Premier to PPO contracts can reduce fees by 20 to 30 percent. Dental accountants model these impacts before you finalize the purchase price to ensure the acquisition remains economically viable under your ownership.
Protecting Your Investment Through Professional Analysis
The time and cost invested in thorough financial due diligence pale compared to the consequences of acquiring a practice with hidden problems. Dental accountants who specialize in acquisitions know where to look, what questions to ask, and how to verify seller representations.
Every practice acquisition involves risk. Professional due diligence does not eliminate that risk, but it reveals the true nature of what you are buying. Armed with verified financial information, you can negotiate appropriate terms, plan for known challenges, or walk away from deals that do not make sense.
Understanding what makes a dental practice financially stronghelps you evaluate acquisition targets against established benchmarks. This knowledge, combined with professional due diligence, positions you to make informed decisions about significant investments.
Ready to evaluate an acquisition opportunity? Our dental accountants provide the due diligence expertise your investment requires.Contact usto discuss your acquisition timeline.
