Due Diligence: what you need to know: The Probe

Due diligence has always had an ominous air about it, but in reality there’s very little to be apprehensive about – as long as you do your homework and execute the process correctly and thoroughly of course!

The first thing to get your head round is what it all means, where it sits within the practice sale processes and how it affects the outcome of the transaction. So what is due diligence? Quite simply, it is the term used to describe the gathering of information by a prospective buyer before they decide if they want to progress with the sale. In other words, it affords the purchaser the opportunity to investigate all facets of the business to ensure that it has commercial potential.

So while this part of a practice acquisition may seem like an arduous task – and, indeed, it is an aspect that requires extraordinary patience and scrutiny – it is absolutely essential to the buyer’s success. Without such an investigation a buyer would only be able to judge the practice on face value which, when you’re investing a large amount of money, just doesn’t cut it. Most importantly, if the buyer isn’t happy with the information that is produced during due diligence for one reason or another, say the practice isn’t what they thought it was or they don’t think it’s worth the money it has been valuated at, this is the point when a buyer can withdraw from the purchase.

Thus, while due diligence can be stressful and time-consuming it is also highly practical, not to mention that it can be quite exciting – indeed, it’s a chance as a buyer to find out everything one could possibly need to know about the practice. So, while for the seller the process can be somewhat intrusive, akin to being put under the microscope, for the buyer it is an opportunity to be capitalised upon.

The process itself usually begins as soon as both parties have agreed upon a deal – though before the signing of the contract – and usually lasts between 60 and 90 days. In some cases, the process can last a lot longer, causing serious delays to the completion of the sale. More often than not, this is due to a hold up on the seller’s side while obtaining information – it is common for vendors to underestimate the time and effort it takes to put the necessary documents together. That is why it is always advisable to work with a top solicitor that knows what questions to ask and how to get results.

During due diligence, there are a number of areas to take into consideration. As such it is always best that a buyer utilises the services of a specialist solicitor with dental experience. That way they can rest assured that the transaction is being dealt with accurately and to a high standard. By utilising a solicitor without any previous experience in the dental sector, a buyer runs the risk of encountering unwanted mistakes and delays. A specialist, on the other hand, will be more than aware of potential obstacles and how to overcome them. Moreover, they will be able to spot, and rectify, any discrepancies in the paperwork. Despite this, it is always best to take an active role during the due diligence process, not just for peace of mind, but to gain a clear picture of the practice and how the business is, and could be, run.

The first key area that is covered during due diligence is practice information, reports and financials. Pivotal documents that fall into this category include the office lease (if applicable), fee schedule, category and procedure code reports, last three years profit and loss statement and practice tax returns.

Then there is the matter of the practice itself – though it may seem obvious, evaluating the location, facility, décor and equipment is an essential part of due diligence. As you might expect the staff and patient base of the practice are usually unaware that the practice is being offered for sale, so naturally buyers are expected to complete this part of the process in a confidential, discreet manner outside of office hours.

Visiting the practice also provides the buyer with the opportunity to meet face to face with the vendor, which is an ideal time to discuss why the practice is for sale (this could impact future plans so will always be good to know) as well as patient base and the ethos of the practice. It is good to use this occasion to discuss the seller’s plans as well. For instance, are they staying on in the practice part-time? Are they retiring? The disclosure of such information at this stage can be practical and saves time later on down the line.

During this time, the buyer might also want to consult a practice management consultant to complete a chart audit, evaluate the existing fee schedule, review the practice management reports/software and identify strengths and weaknesses of practice. In doing so, not only will the buyer be able to verify the information provided by the vendor – and unearth any discrepancies if there are any – but also gain insight into future business potential and revenue.

Another area of due diligence is equipment inspection and inventory. As well as ensuring that all equipment is in good working order, the buyer should request a room-by-room equipment list of what will be included in the sale. It is also the responsibility of the buyer’s side to calculate on-going expenses and complete cash flow analysis – an aspect lenders will be interested in too. Other paperwork that is typically requested includes staff records, complaints and on-going legal proceedings as well as documentation on the property.

All in all, there’s a lot of work involved with due diligence – and that’s just one aspect of the purchase. So to ensure that everything goes according to plan, make sure that you enlist the help of independent advisers, accountants and solicitors. Finance specialist DE Finance, for instance, can help with all aspects of the transaction as well as recommend reputable representatives.

With the right help, due diligence can be just another tick off the list in the purchase of your practice, so for a hassle-free and smooth transaction, choose your team wisely.