Buying a Dental Practice: Due Diligence Checklist

Due diligence is the window between an accepted letter of intent and the closing where you confirm that the practice is what the seller and broker say it is. It is also when you find the issues that justify a price adjustment, a holdback or walking away. This checklist goes beyond our general opening checklist and focuses on what to request, what to verify and what each item tells you.

1. Financial Records

Request at least three years of:

• Federal business tax returns (Form 1120-S, 1065 or Schedule C) and year-to-date profit and loss statements.
• Monthly bank statements for the operating account.
• Practice management software reports: production and collections by month, by provider and by procedure code.
• Accounts receivable aging, both patient and insurance.
• Payroll registers and benefit costs.

Then reconcile them. Collections in the software should roughly match deposits in the bank and gross receipts on the tax return. Gaps are not always fraud, since timing and refunds explain some, but large or unexplained differences are a red flag. Our guide to reading a dental practice P&L covers what normal looks like.

Normalize the earnings

Sellers often run personal expenses through the practice and pay themselves in ways that distort profit. Add back the owner’s salary, personal vehicle, family on payroll and one-time costs, then subtract what you will actually spend, such as a market-rate associate if the seller was working five days. The adjusted cash flow is what you are buying and what the lender will underwrite. See how dental practices are valued.

2. Patients and Production

Pull a random sample of charts and check that records are complete, that treatment matches what was billed, and that radiographs and notes are present. Your attorney and consultant can structure this review so it respects patient privacy.

3. Payer Mix and Fee Schedules

Two practices with the same gross production can have very different profits depending on how much is written off to PPO contracts. Request a payer mix report and copies of current fee schedules, and calculate the average write-off. Also confirm whether contracts can be assigned to you or whether you must credential fresh, which affects your first months of cash flow. Our guides on PPO write-offs and insurance credentialing explain both.

4. Staff

• Roster with hire dates, roles, pay rates, hours and benefits.
• Any employment agreements, bonus arrangements or promised raises.
• Accrued paid time off that you might inherit.
• Licenses for hygienists and assistants who need them, verified through the Virginia Department of Health Professions license lookup.
• Any associate contracts, including non-compete and non-solicitation terms.

Compare total payroll as a share of collections with normal benchmarks in our overhead guide. A team paid well above market is not a reason to walk away, but it changes your pro forma.

5. Real Estate and Lease

If the practice leases its space, the lease often matters more than the furniture. Confirm the remaining term and renewal options, whether the landlord must consent to assignment, any personal guarantee you would sign, and the rent escalation schedule. Lenders commonly want the lease term, including options, to cover the life of the loan. If the seller owns the building, you may negotiate a new lease with the seller as landlord or buy the real estate separately. Our lease negotiation guide lists the clauses to check.

6. Equipment, Technology and Facility

• Equipment list with age, model and service history; ask a dental equipment technician to inspect.
• Practice management and imaging software versions, licenses and data-conversion costs.
• X-ray machine registration and current inspection certificates. The Virginia Department of Health requires dental X-ray machines to be registered and inspected by a qualified inspector on a three-year cycle (VDH dental X-ray program).
• Compressor, vacuum, sterilization and HVAC condition; these are expensive surprises.
• Accessibility and code issues that could trigger upgrades if you renovate.

7. Legal, Regulatory and Compliance

• Entity structure: in Virginia, a dental entity must be a professional corporation or professional LLC (Va. Code § 54.1-2717). Decide whether you are buying assets or the entity; most dental purchases are asset purchases.
• Any Board of Dentistry complaints or disciplinary history for the seller.
• Pending or threatened malpractice claims and payer audits.
• OSHA and HIPAA programs in place; see OSHA and HIPAA basics.
• Business license (BPOL) and business personal property tax filings current with the county.

8. Patient Records and Transition

Virginia Code § 54.1-2405 requires a practitioner selling a practice to make a good-faith attempt to notify current patients (those seen in the prior two years) before their records are transferred, by mail or electronically, and to publish prior notice in a local newspaper. The notice must tell patients they can request their records be sent to another provider. Build this into the closing timeline and coordinate the letter so it doubles as a warm introduction from the seller.

Also negotiate how long the seller will stay to introduce you, whether they will work part-time, and a non-compete radius that protects the goodwill you are paying for. See non-compete clauses for dentists in Virginia.

9. Accounts Receivable, Credit Balances and Unfinished Treatment

Money in motion at closing causes more post-sale disputes than almost anything else. Settle these points in writing:

• Accounts receivable. In many asset purchases the seller keeps receivables for work done before closing, and the buyer’s team collects them, sometimes for a fee. Others buy the receivables at a discount. Decide which, and how payments that arrive after closing are split.
• Patient credit balances. Prepayments and overpayments belong to patients. Get a credit-balance report and agree on who funds refunds or applies credits.
• Treatment in progress. Crowns prepped but not seated, orthodontic cases paid in advance, and dentures in the lab. Agree on who finishes the work and who keeps which part of the fee.
• Insurance overpayments and audits. Agree that the seller remains responsible for refunds or recoupments tied to pre-closing claims.

10. Liens, Entity Status and Tax Filings

• Run a UCC lien search on the seller and the selling entity through the Virginia State Corporation Commission. Equipment leases and old loans often appear as liens that must be released at closing.
• Confirm the selling entity is in good standing with the SCC.
• Confirm county BPOL and business personal property filings are current; the seller’s license does not transfer to you.
• Ask whether any equipment is leased rather than owned. A leased pano or scanner may not be the seller’s to sell.

From Diligence to the Purchase Agreement

Everything you learn feeds the asset purchase agreement. The terms that most often change because of diligence findings are:

The allocation has real tax consequences. For an asset purchase of a business, both buyer and seller generally report the allocation to the IRS on Form 8594, attached to their federal returns for the year of the sale, and the two filings should match. Agree on the allocation in the purchase agreement with your CPA before closing; see tax planning for dental practice owners.

Two people issues belong in the agreement as well. Employees are usually terminated by the seller and rehired by the buyer at closing, so decide who pays out or assumes accrued paid time off. And because a new malpractice policy covers only your own work, confirm the seller will buy tail coverage, or keep an occurrence policy, for claims arising from treatment before the sale.

A Typical Diligence Timeline

Many deals run 30 to 60 days of diligence and a few more weeks to close; slow records or a landlord who takes time to consent can stretch that. Start credentialing as soon as the LOI is signed, because it is often the longest single step.

Red flags that justify a price change or a pause

• Collections in the software that cannot be reconciled to bank deposits.
• New-patient numbers falling for two or more years.
• Most production coming from the seller, with little hygiene or associate production.
• A lease with less than five years remaining and no renewal option.
• Imaging or sterilization equipment near end of life with no replacement in the price.
• Key staff who say they plan to leave after the sale.

Red flags are negotiating points, not automatic deal-breakers. A shorter lease can be renegotiated before closing. An equipment issue can be priced in. A dependence on the seller’s production can be managed with a longer transition and an earn-out or holdback. What matters is that you find the issues before closing, while you still have leverage, and that your lender and advisors see the same picture.

Keep a written diligence tracker with each request, the date received, who reviewed it and any open questions. It keeps the seller and broker on schedule, gives your lender a clear record, and makes it obvious what is still missing as the closing date approaches. Sellers usually respond better to a single organized list than to requests that arrive one at a time.

Questions to Ask the Seller

Documents show what happened. Conversations explain why. Ask the seller, ideally with your advisor present:

• Why are you selling now, and what will you do afterward?
• Which procedures do you refer out, and to whom?
• Have any key staff given notice or asked about the sale?
• Are any fee increases, PPO changes or contract terminations pending?
• What equipment has needed repeated repairs in the last two years?
• Are there any patient complaints, Board inquiries or payer audits open?
• How many days a week do you work, and how many new patients do you personally see?

Compare the answers with the records. A seller who says production is steady while new patients have fallen for three years is not necessarily hiding anything, but it is a discrepancy you need to resolve before closing.

Who Should Be on Your Team

At minimum: a healthcare attorney for the purchase agreement and lease, a dental CPA to verify financials and structure the purchase for tax, and a lender experienced in dental acquisitions. Cisor Consulting’s Cisor Metrics practice analysis and dental accounting teams can review a target practice’s numbers and help you see what you are really buying. Call (703) 345-0606.