Due Diligence– What you Should Do and Expect From Your Advisors
We are finding more dentists being dissatisfied following closing to find the Practice they expect is not the Practice they find. Most of the Problems can be solved with proper due diligence by yourself, your accountant and your lawyer.
This blog is intended to give assistance to dentists on what they should expect. It should be noted that many dentists are relying on the information set out in the appraisals for the Practice.
Although we have found the appraisals to the most extent are accurate they sometimes do not reflect all of the actual financial aspects of the practice such as the number of active charts, the billings per chart, your expectations of the equipment at the Practice, patient deposits. The more due diligence that is done the less likely you will be surprised following closing.
We as lawyers will ensure the following are dealt with:
1. The Agreement will have a due diligence period defined to give the Buyer the opportunity to satisfy himself/herself as to the due diligence on the Practice, arranging financing and obtaining the consent of the landlord to the Buyer assuming the lease. These conditions are all drafted to be satisfied by yourself in your sole and unfettered discretion. If you do not waive the conditions in writing on or before the end of the Due Diligence Period the agreement is deemed to be at an end and the deposits returned to you.
2. There are rarely representations and warranties in the agreement setting out the number of active charts – if we insert this type of clause the Seller’s solicitor will delete it as they will advise it is the Buyer’s responsibility to check during the Due Diligence Period.
3. We will review and prepare a lease memorandum setting out the business terms of the lease. Some of the business terms we look for in the lease can be described as follows:
- Is there is a minimum of 10 years in the term and/or renewal term. This will be the normal period required by the bank;
- Is there an exclusivity to you as a dentist in the building/centre;
- Is there a demolition/move clause – although many leases have these clauses there is often little we can do about them as they have become standard landlord lease clauses. It will be up to the dentist to decide the risk of leaving the clause in the lease;
- Do the remaining lease terms reflect what you want in the lease.
- Cost to obtain landlord’s consent – we try to have the seller pay this amount but normally it is a shared expense.
You should retain your accountant or some other professional advisor to review and comment on the following:
- Review the financial statements and other financial information and give a written report to you setting out the advisor’s comments;
- A comment on whether the billings are increasing or decreasing – if decreasing why?
- are the co-payments being made;
- what is the average billings per chart – average will probably be approximately $400.00 – if less you have room to increase your billings per patient – probably indicates that the selling dentist was not performing any specialty services;
- are all financial statements being properly prepared and taxes being paid currently;
- is the dentistry professional corporation an HST registrant – should not be;
- was the Practice properly rolled into the DPC;
- is the Seller/DPC paying his/its liabilities in a timely fashion including paying the associates when due;
- are there family members employed in the Practice;
- assist in a chart count.
- What is the amount of the patient prepaid deposits – these amounts should be liabilities of the dentist to his/her patients and sometimes are substantial;
- The worse problem is discovering possible fraud by the selling dentist which may include insurance and billing fraud including:
>> Is the selling dentist being investigated by insurance companies for incorrect or aggressive billing codes. Unfortunately, the only real way of determining this is to obtain a confirming letter from each insurance company that it is not presently investigating the seller.
>> Is the seller performing the services he/she actually is billing for.
Buying Dentist’s Due Diligence
- This is often the most important part of the due diligence that the Dentist buyer should be involved in and should encompass the following:
- The Dentist should either by himself/herself or with the assistance of a professional do a complete chart audit and obtain a proper number of active patients in the Practice;
- Review charts to determine the type of patients in the Practice. What is the average billing per chart – the lower the average the better the opportunity of increasing the billings;
- Review the Schedule of equipment and assets and ensure everything is at the Practice and in good condition.
- Review billings and payments to the associates;
- Review charts to determine the amount of patient prepayments of deposits.
- Do a random review of charts to determine whether he/she can see strange patterns of the use of billing codes;
- Determine whether he/she should contact insurance companies to determine whether an investigations are in process.