Due Diligence: What does it mean?

Due diligence is a phrase becoming more commonly used by buyers in the market. However, it does mean different things to different people.

Typically, when marketing a practice, prospective buyers visit the office and meet the seller. If they are interested, the broker will send financial statements and additional data. This is enough to make an offer in most cases. In other cases, the buyer may request additional information.

Once the offer is accepted, the contract phase begins. Now, in the majority of new contracts, there is a clause stating a period of time must be set aside for “due diligence.” During this time, the practice must be taken off the market and no other offers may be considered.

There are many things that are measured during a “due diligence” audit. For example:

• At least three years historical tax returns and financial statements, including the most recent interim operating income statement
• A complete inventory of all furniture and equipment being sold with the practice, including their depreciation schedule
• Staff details, including salaries, benefits and length of service with the practice
• Complete access to all patient records
• Access to all insurance plans the practice is involved with
• The reason why the practice is being sold
• A copy of the draft letter (from the seller), introducing the new buyer to the existing patients after the dental practice transition
• AR/Aging Summary
• Production by procedure and category reports
• Office lease and addendums
• Lists of contracts for the practice
• Fee schedule

In most situations, all the pertinent information has been provided before the offer was made. A buyer doesn’t need a 90-page redacted report of every patient of record prior to signing the Asset Purchase Agreement. Lenders typically only need tax returns and a YTD P&L to obtain financing. In some situations, the lender will ask for a little more. Buyers should be focused on credentialing (in practices that participate with PPOs), as that is one of the most time-consuming pieces of the transition puzzle.

While making sure you know what you are buying is important, buyers should understand that many of their “advisors” are charging them by the hour and “due diligence” can be costly. At the same time, deals fall apart when sellers experience “deal fatigue” and choose to “fire the buyer.” When requests become overly burdensome, sellers retain the right to walk away before a deal becomes binding.

“Due diligence” is becoming more and more prevalent in the buying and selling process. Accepting it as a new way of doing business seems to be the best course of action. If done correctly, it can provide a positive level of transparency for both the buyer and seller.