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Buying a Dental Practice Checklist: Do Your Financial Due Diligence with X-Ray Vision

Posted by Admin Posted on May 31 2017

Dentist looks at dental x-ray

Dental school equipped you with the tools to be a dentist, but if you’re considering buying a dental practice, now is the time to equip yourself with the right financial analysis tools.  

You don’t want to begin understanding the value (or lack thereof) of your practice after you’ve purchased it. Use this checklist to position and prepare yourself to make a solid financial investment.

  1. Assemble a trusted team. Would you ask an accountant or attorney to perform a tooth filling? You can not expect yourself to have the knowledge and experience of a broker, accountant, consultant, banker and attorney. Hire a trusted advisory team. It’s a short-term expense that will protect your long-term investment.
  2. What will a dental accountant look for? Reviewing basic financial information is a necessity and should include an analysis of:
    • Balance sheet and income statements
    • Comparative statements to industry standards
    • Three years of tax returns
    • Production/collection reports from the practice management system
  3. Information is only as good as its source. Determine and confirm the source of the financial information provided. If you leave something to chance, you’re taking a chance. Even if buying a practice from an individual or group that you know or trust, it is too easy for mistakes to be made. Ideally, the financial statements you are provided are produced by a reputable accountant or CPA.
  4. Is this practice the right one for you? Envision the practice you want in five to ten years. Don’t look for potential, look for performance. Potential is nice but if unrealized could lead to financial instability. Does a pattern exist of this being a high-performing practice?
  5. How do you assess the value of a practice? “The ADA Practical Guide to Valuing a Practice: A Manual for Dentists” spells out the valuation process and dispels valuation myths, such as the commonly used "gross revenue" method of determining practice value. The ADA book also covers:
    • Choosing the right valuation method for you.
    • Explanations of valuation concepts, such as the capitalized earnings, discounted cash flow and net asset methods.
    • Legal and tax issues.
    • Guidance on buying an entire practice or portion of a practice and planning a future buy-in or buy-out.

Why do you use X-rays before diagnosing and treating? An X-ray allows you to gauge factors you can't see with the naked eye. Likewise, there is often more than meets the eye when buying a dental practice. Doing your financial due diligence with X-ray vision is guaranteed to give you a brighter smile.

For questions about financial analysis and practice valuation, contact Donovan & Limroth for assistance.

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