What Diligence Is Due When Buying A Practice?

Most doctors know that, as part of buying a practice, they need to perform due diligence into the practice’s records to ensure they know what they are buying.  However, determining what that diligence will entail can vary widely, depending on the circumstances.  As a general rule, you should review at least the following:

Financial Records

  1. Tax returns (individual and corporate) for at least three years.
  2. Monthly profit and loss statements for at least three years.
  3. Accounts receivable aging reports for at least three years.
  4. Agreements with all active third-party payors (insurance companies, AHCCCS/Medicaid, Care Credit, etc.), including reimbursement rates.

What to look for: You want to see how much the doctor actually takes home from the practice, whether there is adequate cash flow from the practice to service your debt, what the reimbursement rates and payment times are with third-party payors, whether there are any unusual or unusually high expenses, and whether the profit margins are satisfactory.

Patient Care Records

  1. Samples of patient charts.
  2. Samples of treatment plans.
  3. Clinical observation – if the seller will allow it, spend a day in the office watching him or her work.
  4. Patient follow-up and post-op recall protocols.

What to look for: You want to make sure that the dentist’s clinical work is satisfactory, that you agree with the doctor’s diagnosis philosophy and treatment plans and identify potential risk areas or problem patients.

Business Records

  1. Lease Agreement.
  2. Advertising contracts.
  3. Copies of the declarations page from the seller’s malpractice and general liability policies.

What to look for: The lease should be reviewed by an attorney, but generally you want to make sure that the lease term and extension options are sufficient, determine whether there are additional charges on top of the base monthly rent and see if there are any other potential problems with the landlord.  You also want to make sure that the practice is not locked into any long-term contracts for which you may be liable after the close of the practice, and you want to make sure that the seller is adequately insured in the event there is a claim or risk of loss that may affect you.

Employment Records

  1. Copies of any associate or staff employment agreements.
  2. Copies of any employer handbooks.
  3. Copies of any written employment policies.

What to look for: You want to make sure that, if there are any employment agreements with doctors or staff that they can either be assigned to you or terminated by you, depending on the circumstances.  If you are taking on the employees of the practice, you also want to make sure you know what rules are in place to govern staff conduct.

Public Records

  1. Research the docket at the Maricopa County Superior Court to determine whether the seller has been involved in any lawsuits.
  2. Research the County Recorder’s website to see if there are any recorded liens or judgments against the seller or the practice.
  3. Research the Arizona Board of Dental Examiners to determine whether the seller has had any board complaints filed against him.
  4. Research the doctor on consumer rating sites like Yelp.

What to look for: You want to see if the seller is a serial litigator, whether he has judgments against him or a lien on the practice that may carry over beyond the sale, and whether there are patient satisfaction issues that might affect the goodwill of the business.

These are just some general examples of the minimum information you should obtain and consider when performing due diligence on a practice.  You should also review the financial records with your accountant and the legal documents with your attorney to ensure that you are comfortable with the practice before investing hundreds of thousands of dollars into it.