What Should a DSO Review Before Acquiring a Dental Practice?

DentalDex · Acquisition underwriting · 2 min read · Methodology

Dental acquisition due diligence should test financial quality, provider stability, patient durability, legal risk, payer exposure, facility condition and the assumptions supporting the purchase price. The goal is a single answer: is the business we are buying economically and operationally the business represented in the LOI?

Below is the request list DentalDex uses to structure seller packages, with what each item is actually testing and who on the buyer's side should own it.

Financial (owner: finance or QoE provider)

Request	What it tests
Three years of tax returns and monthly P&Ls	Whether reported earnings are consistent between the books and what was filed
Bank statements, 12 months	That collections on the P&L actually landed in the bank
Production and collections by month by provider	Seasonality, trend, and who generates the revenue
AR aging by payer	Collectability and any posting lag that understates or overstates revenue
Payroll register	Real staffing cost, family members, and any owner compensation buried in wages
Normalization schedule with support for every add-back	Whether the EBITDA in the LOI survives contact with documents

The single most common diligence adjustment is owner-compensation normalization: the seller's schedule adds back all owner pay, and the buyer subtracts a market-rate replacement. On a $900K-producing owner, that is roughly $270K of EBITDA that may or may not have been in the LOI number.

Provider (owner: clinical operations)

Request	What it tests
Production by provider, 36 months	Owner dependency and associate ramp
Associate employment agreements	Comp structure, term, non-compete enforceability, who they can walk to
Associate start dates and prior turnover	Whether "one associate" means a stable bench or a revolving door
Owner's clinical schedule and procedure mix	Whether the replacement is a general dentist or a surgeon

Patient and clinical (owner: clinical operations)

Request	What it tests
Active patient count (seen in 18 months)	The real base, not the chart count
Hygiene reappointment and recall rates	Durability of the recurring revenue
New patients per month, 24 months, by source	Growth and marketing dependence
Procedure mix by CDT category	Specialty leakage and whether production is diagnostic-driven or new-patient-driven
Chart audit, sampled and de-identified	Documentation quality and clinical standard of care

Do not request patient-identifiable data outside a proper privacy framework; a de-identified sample audit answers the clinical question.

Payer (owner: revenue cycle)

Payer mix by collections, fee schedules for the top five plans, credentialing status for every provider, and termination provisions. The question is whether your organization's contracts improve or worsen reimbursement at this practice, and how long re-credentialing will interrupt cash flow.

Employees (owner: HR)

Census with tenure, compensation and benefits; open positions; any key-person dependencies at the front desk or in hygiene. A 15-year office manager who runs the schedule is a retention item, not a line on a spreadsheet.

Facility and equipment (owner: real estate and operations)

Lease with all amendments and options, landlord consent requirements, rent versus market, CAM history; equipment list with age and service records; IT and practice-management system version. Deferred capex is priced in or negotiated out; it is never ignored.

Legal and compliance (owner: counsel)

Entity structure, contracts, licenses, litigation history, regulatory correspondence, HIPAA and OSHA compliance posture, and, in states with dental-ownership rules, the affiliation structure the transaction will use. This section is counsel's; corporate development should not summarize it.

Timeline

A complete package lets a buyer finish confirmatory diligence in 45 to 60 days. An incomplete one stretches to 90 or more, and every extra week is a week for the seller to hear from another buyer.

The final question

Write down, at LOI, the five assumptions the price depends on. At the end of diligence, check each one. If three or more held, close. If two or fewer held, the deal you priced does not exist, and the honest options are to re-price with the seller's agreement or walk.

Market ranges on this page are illustrative planning ranges, not offers. Involve qualified legal and tax advisers on any transaction.