Dental Practice Due Diligence: A Six-Step Review

Due diligence is where a buyer confirms that the practice is what the seller says it is. It begins after a letter of intent is signed and should be finished before the purchase agreement is final. A thorough review protects the price you pay, the loan you take on and your first years as owner.

1. Financial Due Diligence

Confirm that the income the price is based on actually exists, ties to independent records and will continue under new ownership.

What to review

• Three years of business tax returns and P&Ls, plus the current year to date

• Tie collections in the practice software to gross receipts on the tax returns and to bank deposits

• Recalculate owner’s discretionary income (ODI) or adjusted EBITDA and test every add-back against documents

• Benchmark overhead: staff payroll, supplies, lab, rent, marketing and contractor costs as a percentage of collections

• Production by provider and by procedure code; collections ratio; adjustments and write-offs

• Accounts receivable aging and how A/R will be handled at closing

• Payer mix by carrier, fee schedules and any recent or planned network changes

• Debt, liens, equipment leases and any liabilities the buyer could assume

• Debt service coverage at the proposed price and loan terms

Red flags

• Collections in the software do not match the tax returns or bank deposits

• Add-backs that cannot be documented, or normal operating costs treated as one-time

• Supplies or lab well outside benchmark ranges with no clear explanation

• Declining collections or new-patient counts in the most recent year

• Heavy dependence on one PPO carrier, or a recent exit from a major network

2. Software Review

The practice management system holds the schedule, the patient base and the financial history. Its data must be reliable and must transfer cleanly to you.

What to review

• Practice management software name and version, licensing and who owns the license

• Whether the license and data transfer to the buyer, and any fees to do so

• Imaging software, e-prescribing, patient communication, online scheduling and payment tools, with their contracts

• Data integrity: duplicate patients, inactive patients counted as active, incomplete ledgers

• Report settings, so production and collection reports are run consistently

• Data backup method, frequency and the most recent successful restore

• Cloud vs. on-site systems and the monthly cost of each subscription

Red flags

• Software no longer supported by the vendor, or a license that cannot be transferred

• Reports that cannot be reproduced or that change when run again

• No recent backup, or backups that have never been tested

3. IT and Hardware Review

Technology is expensive to replace and essential to daily operations. Find out what works, how old it is and what it will cost to keep running.

What to review

• Inventory of computers, servers, network equipment and phones, with ages

• Clinical technology: CBCT, panoramic X-ray, sensors, intraoral scanners, milling units, lasers and cameras, with ages and service records

• Dental chairs, delivery units, compressors, vacuum systems and sterilization equipment

• Service contracts, warranties and outstanding equipment leases or loans

• Cybersecurity: firewall, antivirus, user passwords, multi-factor authentication and HIPAA security risk assessment

• IT support provider, response times and contract terms

• Replacement budget for items near the end of their useful life

Red flags

• Major equipment near or past its useful life, such as compressors, vacuum systems or the server

• Leased equipment shown as owned in the asset list

• No HIPAA security risk assessment, or a prior data breach

4. Chart Review

A sample of patient charts shows whether the reported production and patient counts are real, and whether the clinical care meets the standard you want to continue.

What to review

• A random sample of charts across providers, ages and payer types, done in compliance with HIPAA

• Active patients: seen in the last 18 to 24 months, and how many have a future appointment

• Hygiene recall rate and percentage of patients in periodontal maintenance

• Unscheduled treatment and its dollar value

• Documentation quality: diagnoses, X-rays, consent forms, treatment notes and signatures

• Billing matches the documented treatment, with no unusual coding patterns

• Quality of clinical work and how much rework the buyer may inherit

Red flags

• Active patient counts that include patients not seen in years

• Weak documentation or billing that does not match the clinical notes

• Patterns of over-treatment or poor-quality dentistry that could lead to complaints

• Low recall and few future hygiene appointments

5. Demographics and Population Review

The market around the practice determines how easily you can keep and grow the patient base.

What to review

• Population and growth within a 3-, 5- and 10-mile radius

• Household income, age profile and share of families with children

• Dentist-to-population ratio and the number of competing practices nearby

• DSO and corporate offices in the area

• Major employers and the dental insurance plans they offer

• Where current patients live, by ZIP code, from the practice software

• Visibility, signage, parking, access and planned development nearby

Red flags

• Shrinking or aging population that does not match the practice’s services

• High concentration of competing practices or new DSO openings

• Patients drawn mainly from one employer or one insurance plan

6. Employees and Office Culture Review

Patients often stay because of the team they know. Keeping key staff through the transition protects the value you are paying for.

What to review

• Staff roster with roles, pay, benefits, hours and length of service

• Employment agreements, handbooks, and any bonus or profit-sharing promises

• Accrued vacation and paid time off, and who pays it at closing

• Compliance with California wage and hour rules, licenses and required certifications

• Associate and specialist agreements, and whether they will stay

• Staff who are family members of the seller, and their roles after closing

• Office culture: morale, turnover, how the team works together and with patients

• Interviews with key staff, timed with the seller’s approval and usually late in the process

Red flags

• Key staff planning to leave with the seller, or very high turnover

• Pay well above or below market, or unwritten promises to employees

• Misclassified employees, unpaid overtime or open labor claims

• A culture or clinical philosophy that conflicts with how you plan to practice

Due diligence protects your investment. Work with Advisors who specialize in dental practices and finish all six reviews before you sign the final purchase agreement. Issues found now can be fixed, priced into the deal or used to walk away; issues found after closing are yours.