The Complete Due Diligence Guide for Practice Buyers

Due Diligence: The Foundation of Smart Acquisitions

Due diligence is the systematic process of verifying everything about a practice you're considering buying. It happens after you've decided a practice warrants deeper investigation but before you fully commit financially.

Thorough due diligence prevents costly mistakes. Practices that fail after acquisition almost always had red flags during due diligence that were missed, downplayed, or ignored. This guide walks you through every critical evaluation area.

Financial Due Diligence

Revenue Analysis

Request three to five years of tax returns and detailed production reports. Analyze:

• Revenue trend (growing, stagnant, declining?)
• Month-to-month consistency
• Revenue by service category (hygiene, restorative, surgical, etc.)
• New patient numbers over time
• Average case values

Collection Analysis

Production and collection are different. Review:

• Collection percentage (production vs. actual cash received)
• Accounts receivable aging
• Insurance vs. patient-paid percentages
• Write-off patterns

Expense Analysis

Understand cost structure by category:

• Staff costs (as % of revenue)
• Facility costs (rent, utilities, maintenance)
• Supply costs
• Lab fees
• Continuing education and professional development
• Marketing and patient acquisition
• Insurance and professional liability

Profitability Assessment

Calculate adjusted profitability for your ownership:

• Remove owner's personal expenses from the P&L
• Account for compensation differences (you may not need to pay the seller's salary)
• Estimate team changes and new compensation costs
• Project realistic expenses under your ownership

Operational Due Diligence

Clinical Systems Assessment

Observe and evaluate:

• Treatment protocols (are they documented?)
• Clinical quality consistency
• Infection control and sterilization procedures
• Equipment condition and maintenance
• Operatory organization and efficiency

Team Evaluation

Assess your team carefully:

• How many hygienists, assistants, front desk staff?
• Tenure and retention history
• Compensation and benefits
• Will key staff stay after transition?
• Team morale and engagement (informal conversations reveal truth)
• Training and skill levels

Systems and Processes

Evaluate operational systems:

• Practice management software (outdated?)
• Scheduling system efficiency
• Patient communication processes
• Documentation and record-keeping
• Administrative workflows

Patient Flow and Scheduling

Observe the practice in action:

• How long are patients waiting?
• Are operatories idle or is the dentist idle?
• How efficient is the daily flow?
• Can you improve efficiency without changing schedule slots?

Patient Base Due Diligence

Patient Demographics

Request patient demographic analysis:

• Total active patients
• Age distribution
• New patient acquisition rate
• Patient retention patterns
• Recall compliance rates

Payer Mix

Understand who pays for treatment:

• Insurance vs. self-pay percentage
• Insurance breakdown by plan
• Fee collection rates by payer type

Patient Attrition Risk

This is critical:

• How dependent are patients on the current dentist personally?
• Will patients follow if the dentist leaves?
• How much of the patient base is referral-driven vs. marketing-driven?

Facility and Equipment Due Diligence

Building and Lease

Evaluate the facility:

• Lease terms and renewal date
• Maintenance condition
• Needed renovations or upgrades
• Parking and accessibility
• Zoning and legal status

Equipment Assessment

Evaluate major equipment:

• Operatory chairs and units (age and condition)
• Sterilization equipment
• X-ray equipment
• Compressor and vacuum systems
• HVAC system
• Any leased equipment

Legal and Regulatory Due Diligence

Credentials and Board Status

Verify:

• Professional license in good standing
• No complaints with state dental board
• Malpractice history
• DEA registration

Insurance Contracts

Review all insurance agreements:

• Fee schedules and payment terms
• Participation requirements
• Termination clauses
• Renewal dates

Employment Agreements

Review staff employment contracts:

• Non-compete agreements
• Confidentiality agreements
• Any equity or profit-sharing arrangements

Pending Legal Issues

Identify any problems:

• Pending lawsuits
• Board complaints
• Unpaid judgments

The Due Diligence Document Checklist

Request and review these documents:

• Last three years of tax returns
• Last 12 months of monthly P&L statements
• Production and collection reports (last 3 years, monthly detail)
• All insurance contracts and fee schedules
• Employee list with compensation
• Real estate lease with renewal terms
• Equipment lists and lease agreements
• Patient list (de-identified or with consent)
• Accounts receivable aging report
• Clinical protocols and policies

Red Flags That Require Deeper Investigation or Concern

See our comprehensive guide to red flags for detailed information about what warning signs predict acquisition problems.

• Revenue declining over multiple years
• Collections below 90%
• Accounts receivable over 60 days
• High staff turnover
• Equipment in poor condition requiring major replacement
• Lease expiring soon or landlord concerns
• Board complaints or pending legal issues
• Insurance participation concentrated with low-paying plans
• Patient base over-dependent on current dentist

Timeline for Due Diligence

Plan for 4-8 weeks of comprehensive due diligence once you're under contract. Some items can happen faster, but thorough evaluation takes time.

Working With Advisors During Due Diligence

Your CPA verifies finances. Your attorney reviews contracts. Your consultant evaluates operational reality and helps coordinate the evaluation process. Learn more about comprehensive due diligence consulting that brings all these elements together.