Transitions Roundtable

We ask two experts the same question on a complex issue.

Question: What kinds of due diligence on charts and financial records should I perform before buying a practice?

MARIA G. MELONE, CPA, CVA

There is a wide variety of diligence performed today on acquisitions of dental practices, from first-time and unsophisticated buyers who don’t know where to begin, to sophisticated private equity-backed groups that can’t get their hands on enough numbers and data to crunch.

In terms of a chart review, focus on the following.

Determine if you can provide the same mix of services as the seller.

Understand how the seller planned treatment, and if it is consistent with your philosophy.

Check to see if the procedures billed were actually performed.

Review radiographs and compare them to what was noted in the chart. What treatment was planned and what was performed?

In terms of financial records, here are the main steps to take:

Compare cash deposits in the bank statements to cash posted in the practice management software to what was recorded in the tax returns.

Review the payroll register for the most recent year-end and the most current payroll period in order to confirm employee counts and wage rates. Take care to notice recent pay raises.

Review source documentation for any add backs.

Review the accounts receivable balances how they are aged, and the amount of credit balances that may be offsetting them.

Performing due diligence is a necessary step to ensure you are paying the right price for the practice, and to ensure that the figures you’ve used to prepare your offer are true, accurate, and replicable.

Maria G. Melone, CPA, CVA, began her accounting career at Klynveld Peat Marwick Goerdeler (KPMG). She then spent 10 years working for one of the largest dental support organizations, handling all aspects of the buying side of dental transactions. She has helped facilitate hundreds of transactions and has valued even more. She is a founder of MORR Dental Solutions LLC, and dentaldealmate.com. She can be reached at [email protected].

CRYSTAL SMITH, RDH

Goodwill, or “blue sky,” generally represents the bulk of the value of any existing practice. Since goodwill is tied to the patient base (charts) and profits, it is important to learn as much as you can about both as part of your due diligence process. With regard to the former, we recommend conducting an audit of patient charts and an analysis of the financial records to assess the latter.

Chart audits, if done correctly, can be somewhat time-consuming. We recommend reviewing enough to constitute a reasonable sample size. Pull charts at random, either physically or on the computer system, and review the following:

Patients’ most recent visits to the office and frequency of visits

X-rays, notes, and perio charting

Post-operative x-rays

Patient visit documentation

Case acceptance history

Types of dental insurance coverage patients have

How far patients travel to the office

Additionally, verify the number of active patients, or at least a reasonable estimate. Discern how conservative or comprehensive the seller has been with his or her treatment planning. Also, review production by procedure code reports for the most recent 12 months to determine what types of procedures are most commonly performed and are the most productive. Determine what type of dentistry has been performed in the practice. Do the clinical services the seller provides complement your skill set?

When reviewing the income and expenses of the practice, we recommend reviewing tax returns or accountant-prepared financial statements for at least the last three years and current year to date. Look for and question trends as well as expenses that fall outside of industry averages. Also consider discretionary and investment-related expenses. Ultimately you want to estimate your take-home after debt service and return on investment. An experienced professional, such as a CPA or a broker, can be a valuable asset during this analysis.

Finally, if a seller will not allow you access to conduct a chart audit or will not provide copies of tax returns and financial statements prior to you buying the practice, you should seriously reconsider whether or not to buy that practice.

Crystal Smith, RDH, is with CTC Associates Dental Practice Transitions Consultants. Having served the dental industry for over 25 years, she possesses a strong understanding of the business of dentistry. She is determined to fully comprehend the unique needs of clients in order to best meet their goals. For more information about appraisals and practice transitions, contact her at (480) 229-9733 or at [email protected].