Why Financial Assessment Matters
When clients come to us to buy a dental practice, we always start by having a conversation about their financial planning. It’s important to make sure the buyer has a solid plan in place before diving into the purchase. Having this foundation helps avoid common pitfalls and ensures they’re ready for the investment. Once we’ve had this initial discussion, we move on to a detailed financial assessment of the dental practice. This review is key to understanding how the practice is performing and spotting any potential risks. The process involves several steps, and we work with different experts to guide you through it. Let’s break it down step by step to make sure you’re fully prepared to assess a dental practice.
Initial Financial Review: Getting Started
The first step in evaluating a dental practice is gathering basic financial information. This helps you get an overview of the practice’s financial health and identify any areas that may require further analysis.
Typical documents to request include:
- Bank Statements: Review of all business checking accounts, credit card, and line of credit statements.
- Payroll Information: Forms W-3, W-2s, and DE9s for all employees. Check employee seniority, wages, and benefits.
- Production and Collections Reports: A breakdown of revenue generated by each dentist and hygienist.
- Profit & Loss Statements: Key financials including the practice’s income, expenses, and balance sheet.
- Merchant Service Statements: Review statements from credit card processors and other merchant accounts.
These are just the basics, and the process may expand if more details are needed.
Types of Reviews You Should Perform
To have a full understanding of the practice, we recommend conducting multiple reviews, each handled by specialized professionals. Here’s a breakdown:
- Financial Review by a Dental CPA A certified public accountant (CPA) who specializes in dental practices should assess the financial statements to verify income, expenses, and any potential financial risks.
- Operational Review by a Practice Consultant A consultant will assess the efficiency of the office’s operations, including patient flow, scheduling, and practice management software. This helps you understand how well the practice runs on a day-to-day basis.
- Contract and Lease Review by an Attorney Have a legal professional review the practice’s contracts and leases to ensure there are no unfavorable terms or hidden liabilities that could affect your purchase.
- Chart Audit by a Dentist (DDS) A dental professional will audit patient charts to verify treatment plans, billing practices, and overall patient care quality. This step helps you see how the practice is run from a clinical perspective.
- Loan Underwriting by a Lender Work with a reputable bank or lender experienced in dental practice financing. They will assess the practice’s financials and determine if it qualifies for a loan.
- Field Examination All professionals involved (CPA, consultant, attorney, etc.) should visit the office to review original documents such as patient day sheets, invoices, and equipment. This step ensures that the financial information provided matches the actual operations of the practice.
- Engage an Escrow Company Use a reputable escrow company to handle the financial transaction and ensure all funds and documents are transferred smoothly and securely.
Important Financial Documents to Review
Before finalizing the purchase, you’ll need to review key documents. These provide important insights into the practice’s financial history and current standing.
- Tax Returns: Review the seller’s tax returns for at least the past three years.
- Employee Information: Gather details on employees, including their job roles, seniority, and compensation packages. This helps you assess the cost of retaining or replacing staff.
- Production Reports: Ensure you have access to production and collection reports for each provider in the practice.
- Legal Disclosures: Confirm whether the seller has been involved in any lawsuits or legal actions in the past three years.
Red Flags to Watch Out For
Be cautious if you encounter any of the following situations:
- Resistance to Providing Financial Data: If the seller or their broker is hesitant to provide basic financial documents, it could be a sign that something is being hidden.
- Overvaluation: Sellers often overvalue their practice. Make sure to compare the asking price to market averages and have a professional CPA verify the figures.
- Incomplete Due Diligence: Many buyers regret their purchase because they didn’t perform the necessary reviews. Make sure you don’t skip any steps, even if the deal looks promising.
The Importance of Patience
Purchasing a dental practice is a significant investment. It’s essential to take your time, gather all relevant information, and make a decision that benefits you both financially and personally. The process can take months, but being thorough will help you avoid bad deals and costly mistakes.
Making an Informed Decision
Buying a dental practice is a major decision, and it involves a thorough review of financial, operational, and legal factors. Working with trusted professionals like Dental CPA California will ensure you have all the information needed to make a smart and informed choice. Don’t rush the process—take your time, ask the right questions, and be confident that you’re choosing the right practice for long-term success.
Why Work with Dental CPA California?
At Dental CPA California, we go beyond just the basics. We’re more than accountants—we’re dedicated partners who take the time to understand your unique needs and develop tax-saving strategies tailored to you. Our goal is to give you peace of mind by ensuring that your finances are always being handled with the best possible strategies. Here’s what sets us apart:
- Dedicated Partner: We create personalized tax savings plans based on your individual situation.
- Peace of Mind: Rest easy knowing an experienced advisor is continually working on strategies to save you money.
- Personal Guidance & Accessibility: You’ll always get one-on-one service and clear, straightforward answers to all your tax questions.
- Online/Paperless Processes: Submit your documents securely online 24/7 through our highly secure platform.
- Year-Round Trusted Advisor: We’re not just here for tax season—we want to be your financial partner for life, helping you plan for today and the future.
Ready to start your journey? Contact us at Dental CPA California for expert guidance and support through every step of the way.
