Dental Blog - ON, Canada

Dental Practice Due Diligence Checklist: What to Review Before Buying a Practice

Buying a dental practice is exciting — but it can also be overwhelming.

By the time a buyer reaches due diligence, there is often a lot already in motion. You may have reviewed the appraisal, started speaking with lenders, submitted or negotiated an offer, and begun imagining what ownership could look like.

But before moving forward, it is important to pause and ask:

Do I really understand what I am buying?

A dental practice appraisal can help estimate value, but due diligence should go further. It should help you understand the financial performance, patient base, practice management software, operational systems, cash flow, and future ownership requirements behind the opportunity.

The goal is not just to confirm whether the practice performed well under the seller.

The goal is to understand whether the practice can realistically support your ownership plan.

Key Takeaways

• Dental practice due diligence should go beyond reviewing the appraisal.
• Financial statements show what happened, but they do not always explain why.
• Appraisal normalization adjustments should be reviewed carefully to determine whether they are realistic, unreasonable, or require further questions.
• Practice management software and patient charts can reveal risks or opportunities that may not appear in the financial statements.
• Production only matters if it converts into collections and cash flow.
• Banks require a CPA-prepared forecast as part of the financing process.
• A CPA-prepared forecast with business plan should reflect the buyer’s expected ownership plan, not only the seller’s historical results.

1. Review the Dental Practice Appraisal

The appraisal is usually one of the first documents a buyer reviews.

It may include historical revenue, adjusted earnings, valuation methodology, goodwill, equipment value, patient information, production trends, and market assumptions.

A due diligence review should help you understand whether the appraisal is supported by the current operation of the practice.

Questions to ask include:

• What valuation method was used?
• Are the assumptions reasonable?
• What normalization adjustments were made?
• Are the normalization adjustments supported by the financial records?
• Would these adjustments still apply under new ownership?
• Are any adjustments overly optimistic?
• Do the normalized earnings align with practice management software reports, collections, and cash flow?
• How do the adjustments affect valuation and financing?
• Is goodwill supported by the patient base and practice activity?
• Has production changed over the past several years?
• Is revenue concentrated in one provider?
• Are growth opportunities realistic?
• Does the appraisal reflect current performance or an older trend?

An appraisal is useful, but it is not the full story. It estimates value. Due diligence helps determine whether that value is supported.

2. Review Appraisal Normalization Adjustments

Many appraisals include normalization adjustments.

These are adjustments made to present the practice’s financial performance in a simplified or more comparable way. Some adjustments may be reasonable. Others may be unrealistic or require more explanation.

During due diligence, these adjustments should be reviewed carefully to determine whether they are reasonable, supportable, and realistic under new ownership.

Normalization adjustments can affect:

• Adjusted earnings
• Practice valuation
• Purchase price expectations
• Financing assumptions
• Cash flow forecasts
• Owner compensation expectations
• Post-closing planning

If you do not know dental well enough, it can be difficult to spot which adjustments are realistic, which are unreasonable, and which need to be questioned further.

This is why dental-specific due diligence matters.

3. Review Historical Financial Statements

Financial statements are an essential part of buying a dental practice.

They help show revenue, expenses, profitability, overhead, and historical financial performance. However, they should not be reviewed in isolation.

A financial review may include:

• Profit and loss statements
• Balance sheets
• Tax returns
• Revenue trends
• Expense categories
• Normalized earnings
• Owner compensation
• Overhead
• Working capital
• Debt obligations
• Cash flow

The goal is to understand how the practice has performed historically and whether that performance is likely to continue after the transition.

Buyers should also ask whether certain expenses will change under new ownership. Staffing, rent, associate costs, technology, debt payments, insurance, professional fees, and owner compensation may look different after closing.

4. Understand Production and Collections

Production is important, but collections and cash flow are what support the business.

A practice may show strong production, but if collections are inconsistent, accounts receivable are growing, or cash deposits do not align with reported performance, the buyer needs to understand why.

During due diligence, review:

• Gross production
• Net production
• Collections
• Collection rate
• Adjustments and write-offs
• Accounts receivable
• Bank deposits
• Payment trends
• Insurance receivables
• Patient receivables

A key question to ask is:

Does production become cash?

Cash flow supports payroll, loan payments, taxes, equipment purchases, owner compensation, and future investment. A strong due diligence process should help connect production, collections, accounting records, and bank activity.

5. Review Practice Management Software Reports

Practice management software can provide valuable insight into how the practice operates day to day.

Financial statements may tell you what happened. Software reports can help explain how those results were generated.

Depending on the practice, reports may include:

• Production by provider
• Collections by provider
• Hygiene production
• Treatment mix
• Recall effectiveness
• Active patient trends
• New patient flow
• Scheduling utilization
• Accounts receivable
• Unscheduled treatment
• Patient retention
• Provider productivity

These reports should be reviewed together, not separately.

For example:

• Is production stable while active patients are declining?
• Is hygiene supporting future growth?
• Are collections keeping pace with production?
• Is the schedule fully utilized?
• Are there significant amounts of unscheduled treatment?
• Is production dependent on one provider?

Software data can help reveal whether the practice’s historical results are sustainable under new ownership.

6. Review Patient Charts and Patient Activity

The patient base is one of the most important assets in a dental practice purchase.

Patient chart review can help assess whether the reported opportunity is supported by real patient activity.

This may include reviewing:

• Active patient trends
• Recall patterns
• Treatment history
• Patient retention
• Patient attrition
• Hygiene activity
• Treatment acceptance patterns
• Future production opportunities
• Gaps between chart activity and reported performance

Digital chart audits can be completed virtually, allowing CFO of Smiles to support buyers across Canada. If a paper chart audit is required, this service is available only for practices located in the GTA.

This matters because not every patient list represents an active, engaged patient base.

A practice may appear strong financially, but if patient activity is declining, hygiene is underutilized, or future production depends on assumptions that are not supported by chart activity, the buyer should understand that before closing.

7. Review Hygiene Performance and Capacity

Hygiene is often one of the most important indicators of practice health.

A strong hygiene program can support recall, patient retention, treatment identification, and long-term stability. An underperforming hygiene department may signal both risk and opportunity.

During due diligence, consider:

• Hygiene production
• Hygiene hours
• Hygiene production per hour
• Recall effectiveness
• Patient retention
• Hygiene schedule utilization
• Periodontal program strength
• Relationship between hygiene and restorative treatment

A buyer should ask:

Is the hygiene department supporting the valuation and future growth plan?

If the appraisal assumes hygiene growth, it is important to understand whether that growth is realistic and what changes may be required to achieve it.

8. Review Provider Productivity

Provider productivity helps a buyer understand how revenue is generated.

It is not enough to know total production. Buyers should understand who is producing, how much they are producing, and whether that production can continue after closing.

Review may include:

• Production by provider
• Production per clinical hour
• Treatment mix by provider
• Seller production
• Associate production
• Hygiene production
• Chair utilization
• Schedule efficiency
• Billing efficiency

This is especially important if the seller is responsible for a large portion of production.

If the buyer’s clinical style, schedule, procedure mix, or treatment philosophy differs from the seller’s, the practice may perform differently after the transition.

9. Review Staffing, Lease, and Operational Considerations

A dental practice purchase is not only a financial transaction. It is also an operational transition.

Buyers should understand the key agreements and systems that may affect ownership after closing.

This may include reviewing:

• Staffing structure
• Compensation model
• Associate agreements
• Hygiene team structure
• Lease terms
• Renewal options
• Equipment condition
• Technology needs
• Software systems
• Office hours
• Scheduling workflows
• Insurance model
• Patient communication systems

These details can affect profitability, patient experience, and the first several years of ownership.

For example, a practice may appear profitable, but future lease increases, staffing changes, deferred maintenance, or technology upgrades may affect cash flow after closing.

10. Identify Future Cash Requirements

The purchase price is only one part of the financial picture.

After closing, buyers may need cash for transition, improvements, equipment, staffing, technology, taxes, working capital, and debt payments.

Future cash needs may include:

• Equipment replacement
• Technology upgrades
• IT infrastructure
• Leasehold improvements
• Deferred maintenance
• Staffing changes
• Marketing
• Legal or professional fees
• Working capital
• Tax obligations
• Debt servicing
• Owner compensation

A practice may be affordable based on the purchase price but still require additional investment to operate and grow successfully.

Due diligence should help buyers understand what cash may be required after closing — not just what is needed to complete the transaction.

11. Build a Buyer-Specific CPA-Prepared Forecast with Business Plan

Banks require a CPA-prepared forecast as part of the financing process.

However, the forecast should not simply extend the seller’s historical results. A meaningful CPA-prepared forecast with business plan should reflect the buyer’s ownership plan.

It may consider:

• Expected clinical schedule
• Procedure mix
• Production goals
• Staffing model
• Financing structure
• Debt payments
• Transition timeline
• Growth strategy
• Cash flow requirements
• Planned operational improvements
• Owner compensation expectations

This helps answer important questions:

• Can the practice support debt?
• What happens if production changes after closing?
• How much cash should remain in the business?
• What level of owner compensation is realistic?
• When can equipment be replaced?
• What growth is required to meet the buyer’s goals?

The CPA-prepared forecast with business plan should support financing, but it should also help guide ownership.

12. Prepare Lender-Ready Forecasting Support

Many buyers need financing to complete a practice purchase.

Lender-ready forecasting support can help communicate the opportunity clearly to the bank as part of the CPA-prepared forecast with business plan.

This may include:

• Projected revenue
• Projected expenses
• Cash flow
• Debt servicing capacity
• Owner compensation assumptions
• Working capital needs
• Planned operational improvements
• Growth assumptions
• Sensitivity considerations

A strong forecast should be realistic, clear, and connected to the buyer’s actual plan.

It should help the lender understand how the practice may support financing, while also giving the buyer a practical roadmap for the first stage of ownership.

13. Understand the First 12 to 24 Months of Ownership

Due diligence should not end with the purchase decision.

It should help prepare the buyer for ownership.

The first 12 to 24 months often determine whether the acquisition achieves its potential. This is when the buyer begins managing the team, patient relationships, production goals, cash flow, collections, debt payments, reporting, and operational improvements as the new owner.

Before closing, buyers should understand:

• What needs attention immediately?
• What should be monitored after closing?
• What investments may be required?
• What risks should be addressed before transition?
• What assumptions are built into the forecast?
• What financial reporting will be needed after closing?

A strong due diligence process helps buyers move from “Can I buy this practice?” to “How do I operate this practice successfully?”

Dental Practice Due Diligence Checklist

Before buying a dental practice, consider whether you have reviewed:

• Dental practice appraisal
• Appraisal normalization adjustments
• Historical financial statements
• Tax returns
• Revenue and expense trends
• Normalized earnings
• Production and collections
• Accounts receivable
• Bank deposits and cash flow
• Practice management software reports
• Provider productivity
• Hygiene performance
• Active patient trends
• Patient charts
• Digital chart audit availability
• Paper chart audit requirements, if applicable
• Recall effectiveness
• Treatment mix
• Scheduling utilization
• Staffing structure
• Associate agreements
• Lease terms
• Equipment and technology needs
• Future cash requirements
• CPA-prepared forecast with business plan
• Lender-ready forecasting support
• Post-closing priorities

This checklist is not meant to replace professional advice. Every acquisition is different, and the right due diligence process should be tailored to the practice, purchaser, and financing requirements.

Frequently Asked Questions

Final Thought

Dental practice due diligence is not about creating a longer checklist for the sake of it.

It is about asking better questions before making one of the biggest financial decisions of your career.

The appraisal may estimate value.

The financial statements may show what happened.

But due diligence helps you understand whether the practice can realistically support your goals as the new owner.

Before you move forward, take time to understand the numbers, the appraisal assumptions, the normalization adjustments, the software data, the patient base, the cash flow, the forecast, and the operational reality behind the opportunity.

Because buying a practice is not just about completing a transaction.

It is about building a business that can succeed under your ownership.

Reviewing a dental practice opportunity?

CFO of Smiles provides white-glove dental practice due diligence support for a limited number of purchasers at a time.

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