Due diligence is the systematic verification process that ensures what you’ve been told about a practice matches reality. A thorough due diligence checklist protects you from buying problems disguised as opportunities and helps you negotiate confidently knowing you fully understand what you’re acquiring. Over my 30 years of dental consulting and practice acquisitions, the practices that performed best post-closing were invariably the ones where comprehensive due diligence happened before closing. This detailed checklist guides you through the entire process.
Due diligence serves multiple purposes. It verifies financial representations so you know actual profitability. It identifies legal and regulatory issues that could become your problems. It assesses the quality of the team and likelihood of retention. It evaluates patient base sustainability and growth potential. It uncovers equipment and facility issues that will require capital investment. A thorough checklist ensures nothing is overlooked.
Financial Due Diligence Checklist
Financial verification is the foundation of due diligence. You’re verifying that the numbers presented are accurate and that actual profitability matches representations.
Obtain and Verify Financial Documents
Gather the following documents for the past three to five years:
- Federal tax returns (1040 Schedule C for solo practitioners, corporate or partnership returns for entities)
- Profit and loss statements (monthly and annual)
- Balance sheets
- Bank statements (last 12 months, all accounts)
- Accounts receivable aging report
- Credit card and loan statements
- Equipment lease agreements and schedules
- Loan documentation and amortization schedules
- Payroll records and payroll tax returns (941 forms)
Request all documentation in both original form and digital format. Have your accountant verify that all documents are complete and consistent.
Reconcile Tax Returns to Accounting Records
This step catches discrepancies between what was reported to the IRS versus what’s shown in accounting records. Tax returns show what the seller claimed as income. Profit and loss statements show what the accounting system records. These should match.
If they don’t match, understand why. Perhaps records were compiled differently, or perhaps the seller is reporting inconsistently. Either way, the discrepancy needs explanation and resolution.
Analyze Revenue Trends
Document monthly revenue for the past 36 months. Graph the trend line. Ask about significant revenue increases or decreases. Understanding what’s driving revenue trends helps you predict future revenue under your ownership.
Look specifically at:
- Is revenue growing, stagnant, or declining?
- Are there seasonal patterns?
- What’s driving growth or decline?
- How much revenue comes from the departing dentist versus other providers?
- Are specific services or patient populations driving revenue changes?
Verify Production Versus Collection
Production is what services were provided. Collection is what was actually paid. The difference is accounts receivable. Request:
- Total annual production by year (all services provided)
- Total annual collection by year (what was actually received)
- Accounts receivable aging (how much is outstanding and for how long)
A healthy practice has collection rates of 90 to 95 percent. If collections are significantly below production, there’s a collection problem that becomes your problem.
Examine Expense Breakdown by Category
Request a detailed expense listing for the past three years showing:
- Payroll and payroll taxes by staff member
- Rent or lease payments (and current lease terms)
- Utilities
- Insurance (malpractice, general liability, property, health)
- Supplies and materials
- Laboratory fees
- Equipment maintenance and repairs
- Office supplies and equipment
- Marketing and advertising
- Professional services (accounting, legal)
- Continuing education
- Depreciation
- Interest on loans
- Other significant expenses
Look for any unusual expense categories and ask for explanation. Some expense categories are often used to move personal income off the books, so scrutinize these carefully.
Calculate Key Financial Ratios
Work with your accountant to calculate:
- Net profit margin (net profit divided by gross revenue)
- Overhead percentage (total expenses divided by gross revenue)
- Collection percentage (collections divided by production)
- Revenue per provider
- Revenue per employee
Compare these to industry benchmarks. If the practice’s ratios are significantly different from industry averages, understand why.
Verify Working Capital and Cash Flow
Review bank statements for the past 12 months to assess:
- Average monthly cash position
- Consistency of cash flow
- Whether the practice had adequate working capital
- Cash position at the end of each month
If the practice regularly runs tight on cash, you’ll need to ensure adequate working capital post-closing.
Review Accounts Receivable in Detail
Request an aged accounts receivable report showing:
- Each outstanding balance
- Age of each balance
- Whether it’s from a patient or insurance company
- Any notes about collectibility
Pull a sample of large outstanding balances and understand why they haven’t been collected. Some may be collectible with proper follow-up; others may be effectively uncollectible. Have your accountant assess what percentage is actually collectible.
Operational Due Diligence Checklist
Operational due diligence verifies that the practice actually functions the way it’s been described.
Clinical Operations Assessment
Schedule multiple visits to observe operations:
- Visit during normal hours and busy hours
- Observe patient check-in and scheduling
- Watch treatment flow
- Observe sterilization and infection control
- Look at clinical documentation
- Assess equipment condition and functionality
- Talk informally with team members
Document what you observe. Note efficiency, organization, and whether clinical standards appear to be maintained.
Equipment and Facility Review
Request and verify:
- List of all equipment (operatory chairs, compressors, imaging equipment, etc.)
- Age of equipment
- Equipment ownership (owned versus leased)
- For leased equipment, lease terms and remaining payments
- Maintenance records for major equipment
- Facility condition, age, and any maintenance issues
- Building compliance with ADA and local codes
- HVAC, electrical, and structural condition
Have a professional equipment appraiser evaluate condition and remaining useful life of major equipment. Equipment replacement might be needed soon after closing.
Sterilization and Infection Control Review
Examine:
- Sterilization protocols and procedures
- Sterilization equipment condition and maintenance
- Records of sterilization testing and validation
- Instrument storage systems
- PPE supplies and protocols
- Hand hygiene stations and supplies
- Sharps disposal procedures
Verify the practice meets current OSHA and infection control standards. Non-compliance creates liability that transfers to you.
Patient Management Systems Review
Document:
- Practice management software being used
- Patient charting system (paper versus digital)
- Scheduling system and efficiency
- Patient communication methods (email, text, phone)
- Recall system and compliance rates
- Treatment plan documentation
- Patient financial communication
Understand whether you’ll keep existing systems or transition to new ones. System transitions cost time and money.
Supply Chain and Vendor Review
Request:
- List of suppliers and vendors
- Supply ordering systems and frequency
- Pricing on major supply items
- Lab vendors and fee schedules
- Equipment maintenance and service vendors
Understand your options post-closing for suppliers and whether current pricing is competitive.
Team and Personnel Due Diligence Checklist
Your ability to retain team members significantly affects post-closing success. Thorough team due diligence helps you understand retention risk.
Team Member Information Gathering
For each team member, document:
- Name, position, and tenure
- Compensation (salary, benefits, retirement contributions)
- Current job satisfaction (best gathered informally)
- Plans for staying or leaving
- Any special skills or knowledge
- Any concerns about the transition
- Any employment agreements or non-competes
Talk to team members informally. Ask about what they like and what frustrates them. Ask about their plans and concerns about your ownership.
Review Employment Agreements and Contracts
Request:
- All employment agreements or offer letters
- Compensation arrangements
- Non-compete agreements
- Confidentiality agreements
- Any promises made to team members about post-closing employment
- Any pension, retirement, or deferred compensation obligations
Understand what commitments the practice has made to staff and what will transfer to you.
Labor Law Compliance Review
Have an employment attorney review:
- Compliance with wage and hour laws
- Proper classification of employees versus contractors
- Compliance with anti-discrimination laws
- Any worker’s compensation claims or issues
- Any complaints filed with labor department
Non-compliance with labor law creates liability.
Organizational Structure Assessment
Understand:
- Reporting structure and lines of authority
- Role clarity and job descriptions
- Training systems for new staff
- Performance management systems
- Team dynamics and any conflicts
Meeting with the office manager separately from the owner often provides insight into actual team dynamics versus what the owner describes.
Patient Base Due Diligence Checklist
Your revenue engine is the patient base. Understanding patient stability helps you project future revenue.
Patient Demographics Analysis
Request:
- Number of active patients (seen in past 12 months)
- Patient age breakdown
- Insurance coverage breakdown
- Geographic distribution of patients
- New patients acquired in past three years
- Patient retention rates
- Inactive patient count and reasons
A healthy patient base has adequate young patients to sustain long-term growth, reasonable insurance mix, and stable retention.
Patient Satisfaction and Compliance Assessment
Gather:
- Patient feedback or satisfaction surveys (if any)
- Recall compliance rates
- Appointment no-show rates
- Treatment plan acceptance rates
- Patient complaints or concerns (if documented)
High no-show or low treatment acceptance rates suggest patient issues or clinical concerns.
New Patient Sources Analysis
Understand where new patients come from:
- Direct referrals from existing patients
- Dental referrals from other dentists
- Insurance or managed care panels
- Paid advertising (if any)
- Walk-ins or other sources
Over-reliance on one source is risky. A diversified patient acquisition mix is more stable.
Review Patient Records Sample
Pull and review a random sample of 20 patient records:
- Are records organized and complete?
- Are treatment plans documented?
- Are clinical notes adequate?
- Do records show evidence of good patient communication?
- Are there any documentation gaps or quality concerns?
Patient records quality reflects clinical standards and documentation practices.
Legal and Regulatory Due Diligence Checklist
This due diligence prevents inheriting legal problems.
Verify Dental License and Board Standing
Request:
- Current dental license
- State dental board record (check for disciplinary actions, complaints, restrictions)
- Any CE requirements or restrictions
- DEA registration and standing
- Any board complaints or legal actions
These are public records. Your attorney should check them.
Verify Regulatory Compliance
Have your attorney check:
- OSHA inspection history
- Any regulatory complaints or violations
- Environmental compliance issues
- Building permit and occupancy history
- Local zoning compliance
- ADA compliance status
Any regulatory violations become your responsibility to remediate post-closing.
Review Insurance and Coverage
Request:
- Malpractice insurance declarations page
- Coverage limits and deductibles
- Claims history
- Any pending claims or suits
- Tail coverage options and costs
Understand what coverage exists and whether claims history will affect your insurability.
Lease Review
Have your attorney review:
- Current lease terms and remaining duration
- Renewal options and terms
- Rent escalation clauses
- Landlord responsibilities and maintenance obligations
- Any disputes with landlord
- Right to sublease or assign lease
Lease terms significantly affect your occupancy costs. Ensure you can continue occupying the space on acceptable terms.
Review Insurance Contracts and Participation Agreements
Request and verify:
- All insurance panel participation agreements
- Fee schedules for major payers
- Contract renewal dates
- Any restrictions on patient treatment
- Your ability to withdraw from panels
- Coordination of benefits requirements
Some insurance contracts are difficult to withdraw from and lock you into unfavorable fee schedules for years.
Corporate Structure and Ownership Review
Understand:
- How the practice is legally structured (sole proprietorship, corporation, LLC, etc.)
- Ownership structure if partnership
- Any liens or claims against the practice or assets
- Any pending litigation or disputes
- Any debt obligations or guarantees
Your attorney should review all ownership documentation.
Data Room Organization and Access
Request that the seller organize all due diligence materials in a data room (physical or digital) organized by category. This makes it easier to review systematically and reduces the risk of missing documents.
Typical data room categories include:
- Financial documents (3-5 years)
- Tax returns and filings
- Accounts receivable aging
- Patient records (sample)
- Insurance contracts and participation agreements
- Equipment leases
- Facility documents and lease
- Employment agreements
- Equipment lists and appraisals
- Board and regulatory documents
- Legal documents and litigation history
Timeline for Due Diligence
Complete due diligence typically takes 4 to 8 weeks depending on practice complexity and seller responsiveness. Build time for due diligence into your purchase timeline. Don’t rush this process.
Professional Help for Due Diligence
Due diligence is complex and benefits from professional expertise:
- Accountant or CPA: Reviews financial documents and prepares financial analysis
- Attorney: Reviews legal documents, contracts, and regulatory compliance
- Practice Consultant: Evaluates operational aspects and practice viability
- Equipment Appraiser: Evaluates equipment condition and remaining useful life
- Real Estate Attorney: Reviews lease terms and property issues
Using Your Findings
As you complete due diligence, document all findings. Flag any issues requiring clarification. Work with the seller and their advisors to resolve issues before closing. Update your valuation and purchase price based on what due diligence reveals.
If due diligence uncovers significant issues, you have options. You can renegotiate terms and price to reflect the issues. You can ask the seller to remedy issues before closing. You can decide not to proceed with the acquisition.
The dentists who acquire practices successfully use comprehensive due diligence to make informed decisions. They don’t discover problems post-closing; they discover them before closing and account for them in their purchase decision.
Work with a professional dental practice acquisition consultant to guide you through due diligence and ensure nothing is overlooked. Contact JoAnne to discuss your practice acquisition and develop a comprehensive due diligence plan. With expertise in practice evaluations and 30+ years of acquisitions, JoAnne ensures you understand exactly what you’re buying before you commit capital.