Article Written & Provided by Blue & Co., LLC
Practice acquisition red flags can derail even the most promising dental transitions. The following five issues are the most common deal-breakers buyers encounter during due diligence — and knowing them in advance gives sellers a real advantage.
Let’s set the scene. A buyer has narrowed their focus and deemed your dental practice potentially worthy of acquisition. Though all seemed to be progressing smoothly, red flags appeared after the initial investigation, sending the once hopeful buyer on a quest to find a more reliable prospect. This scenario is quite common. Certain red flags often appear late in the process and cause deals to unravel at the seams, leaving both parties in grief over the loss of what could have been. In no order of importance, the following list includes a brief overview of the most common red flags buyers are likely to encounter once the real diligence of acquiring your dental practice has begun.
The Most Common Practice Acquisition Red Flags Buyers Encounter
Red Flag #1 Staff turnover
Despite attractive financials, a practice that has experienced routine staff turnover can cast concern into the mind of a buyer. This red flag leaves them doubtful as to their ability to manage the nuances of staffing. The issue can be compounded if an office manager plans to exit alongside the selling dentist.
Red Flag #2 Low patient revisits
An enthusiastic buyer can quickly become discouraged upon discovering an unreliable reporting of the current patient base or a patient base that averages 12+ month revisits.
Red Flag #3 Declining production/collections
Not always apparent at first glance, a downward trend of production and collections could indicate a host of issues, the least of which may cause a buyer to question the future potential of the practice.
Red Flag #4 Sudden production/collection increases
Contrary to expectation, a sudden increase in production or collections could signal to a buyer an overpriced practice. Perhaps an increase was caused by overtreating patients in attempt to maximize value, or maybe an increase was an anomaly due to unforeseen consequences of global and regional events, such as the aftermath of the Covid-19 pandemic. In most cases, consistent annual collections with a slight upward growth rate of 3 to 5 percent is preferred by buyers.
Red Flag #5 Secretive/combative seller
If at any point during the acquisition process a seller becomes secretive with information they are willing to share, or combative in the answering of questions, alarm bells will be sounding to a potential buyer. Lack of transparency is guaranteed to prevent the closing of a transaction.
While not an exhaustive list, these are the most common red flags that we find buyers encounter far into the diligence phase. Many days of frustration and heartache can be avoided if you give these red flags careful consideration before beginning the process of selling your dental practice.
Serving as trusted advisors to hundreds of dentists per year, we highly urge all practice owners to work closely with an experienced industry professional in the years and months leading up to a potential transaction to avoid these deal breaking red flags.
About the Author- Matthew Howard, CPA/ABV, CVA
Matt Howard joined Blue & Co. LLC in July 2011. As a Director in the Transaction Advisory Services Group, Matt performs business valuation, transactional due-diligence, quality of earnings, buyer representation, litigation support, and other consulting services for clients around the United States. He is a Certified Public Accountant, Accredited in Business Valuation, a Certified Valuation Analyst, with a Bachelors of Accounting and Finance. Matt Howard helps manage the small business, dental, and veterinary service lines, providing over 400 engagements per year in these verticals. He speaks across the United States on transactions and valuation.
