Dental Blog - ON, Canada

The most expensive mistakes in a dental practice purchase are not always hidden in the financial statements.

Sometimes, they are hidden in the questions that never get asked.

Purchasing a dental practice is one of the largest financial decisions most dentists will make. By the time due diligence begins, buyers often have an accepted offer, financing conversations are underway, and the excitement of ownership is building.

Most buyers expect due diligence to confirm one thing:

“Is this a good business?”

In reality, the more important question is:

“Will this practice be successful under my ownership?”

Those are two very different questions.

A practice may have strong historical financial results and still present risks, constraints, or untapped opportunities for a new owner. The purpose of due diligence is not simply to verify historical information. It is to reduce uncertainty before making one of the biggest investments of your career.

Key Takeaways

• An appraisal estimates value, but it does not always explain whether the practice is the right opportunity for the buyer.
• Financial statements show what happened, but not always why it happened.
• 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 and opportunities that do not appear in the appraisal.
• 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 guide ownership, not just support the bank application.

The Risk Is Often in the Relationship Between the Data

At CFO of Smiles, our team works exclusively with dental professionals and has reviewed over $233 million in dental practice appraisals.

Through that experience, we have found that the issues buyers miss are rarely obvious.

They often exist in the relationship between the financial statements, the practice management software, patient charts, and the day-to-day operation of the practice.

That is why dental practice due diligence should go beyond confirming the numbers.

It should help the buyer understand the business behind the numbers.

Financial Statements Tell You What Happened — Not Why

Financial statements are an essential part of every acquisition.

They tell you what the practice earned, what it spent, and how profitable it has been.

What they do not always tell you is why.

Two practices may each collect $2 million annually and report similar profitability.

One may have strong patient retention, efficient scheduling, consistent collections, a healthy hygiene department, and a balanced provider mix.

The other may have declining active patients, inconsistent collections, underutilized hygiene, and production concentrated in one provider.

On paper, they may look almost identical.

Operationally, they are very different businesses.

Understanding those differences is where dental practice due diligence becomes valuable.

The numbers matter. But the story behind the numbers matters just as much.

Does the Practice Management Software Support the Financial Statements?

One of the most valuable sources of information during due diligence is the practice management software.

It can help explain how financial results were generated and whether operational performance supports what appears in the financial statements.

A software review may include:

• Production trends year over year
• Collections compared to production
• Provider productivity
• Hygiene performance and capacity
• Treatment mix
• Active patient trends
• Recall effectiveness
• Scheduling utilization
• Accounts receivable
• Patient retention

The goal is not simply to pull reports.

The goal is to understand what the reports mean together.

For example:

• Has production remained stable while active patients are declining?
• Has hygiene production slowed even though total production increased?
• Are collections keeping pace with production?
• Do provider productivity trends support future growth?
• Are accounts receivable increasing?
• Does the current schedule support the buyer’s expected production goals?

These questions help determine whether historical performance is sustainable after the transition.

Patient Charts Can Help Confirm the Story Behind the Numbers

Patient chart review can provide important insight into the health, activity, and future opportunity of the patient base.

Chart review may help identify patient trends, recall behaviour, treatment patterns, patient retention, attrition, and future production opportunities. These details can help determine whether the practice’s reported performance is supported by real patient activity.

Digital chart audits can be completed virtually, which allows 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 distinction is important because chart-level insight helps connect the patient base to the financial story of the practice.

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

One of the Most Overlooked Questions: Does Production Become Cash?

Production is important.

Collections are more important.

Cash deposited into the bank is what ultimately supports payroll, loan payments, taxes, equipment purchases, technology upgrades, and owner compensation.

One area buyers can overlook is whether the relationship between production, collections, accounting records, and bank deposits makes sense.

By comparing these sources of information, due diligence can help identify whether:

• Production is converting into collections as expected
• Collections reported by the practice management software reconcile with accounting records
• Cash received is reflected in bank deposits
• Accounts receivable are increasing over time
• Collection processes require improvement
• Internal controls require further review

Differences are not always problematic. Dental practices are busy operations, and reporting can vary.

But understanding why differences exist is an important part of evaluating the practice.

A strong due diligence process connects three critical sources of information:

the practice management software, the accounting records, and the bank statements.

Together, they help show not only what the practice earned, but how efficiently production is converted into cash flow.

Appraisal Normalizations Should Be Questioned Carefully

Another area buyers should review carefully is the normalization adjustments included in the appraisal.

Normalizations are adjustments made to present the practice’s financial performance in a simplified or more comparable way — but they are not automatically accurate or achievable under new ownership.

Some adjustments may be reasonable, while others may be unrealistic or require further support before being relied on in valuation or forecasting.

The key is understanding whether the normalized earnings reflect a realistic picture of the practice under new ownership.

A dental-specific review can help identify:

• Which adjustments are supportable
• Which adjustments may be overly optimistic
• Which adjustments require further explanation
• Whether the adjustments would still apply under new ownership
• Whether the normalized earnings align with software reports, collections, and cash flow
• How the adjustments affect valuation, financing, and future cash flow

If you do not work with dental practices regularly, it can be difficult to know which normalizations make sense and which ones are a stretch.

This is one of the areas where dental-specific experience can change the questions you ask before moving forward.

Is the Goodwill Supported?

An appraisal estimates value.

Due diligence helps determine whether that value is supported by the current operation of the practice.

Goodwill is often one of the most significant components of a dental practice purchase. It reflects the patient base, reputation, systems, continuity, and earning potential of the practice.

But buyers should understand what is supporting that goodwill.

For example:

• Has production changed significantly over the past several years?
• Is the practice dependent on one provider?
• Is the seller responsible for most high-value production?
• Has patient activity changed?
• Is hygiene supporting the valuation?
• Are there operational trends that may affect future performance?
• Are patients likely to remain after the transition?

Understanding these trends helps buyers evaluate whether the purchase price reflects both the current reality of the practice and its future earning potential.

An appraisal may provide a value.

Due diligence helps a buyer understand the risk behind that value.

Not Every Growth Opportunity Is Realistic

Many appraisals identify opportunities to increase production.

That may include expanding hours, improving recall, adding procedures, increasing treatment acceptance, growing hygiene, or investing in technology.

These may be valid opportunities.

But identifying an opportunity is different from determining whether it can realistically be achieved.

One area we frequently analyze is provider-level productivity.

Rather than simply reviewing total production, due diligence may evaluate:

• Production by provider
• Production per clinical hour
• Hygiene production per hour
• Billing efficiency
• Chair utilization
• Treatment acceptance patterns
• Scheduling efficiency

If a production gap exists, the next question is:

Can the purchaser realistically close that gap?

The answer depends on several operational factors, including:

• Patient education
• Clinical philosophy
• Team experience
• Leadership capacity
• Hygiene integration
• Scheduling systems
• Insurance model
• Existing workflows
• Patient expectations
• Transition plan

Sometimes growth opportunities can be achieved quickly.

Other times, realizing that opportunity requires investment, leadership, process improvement, or changes to the patient experience.

Understanding what is required — and how long it may take — is just as important as identifying the opportunity itself.

The Purchase Price Is Only the Beginning

Many buyers focus heavily on the acquisition price.

That is understandable. The purchase price is significant and directly affects financing.

But it is not the only cash requirement.

Buyers should also consider what may be required after closing.

Future obligations may include:

• Equipment replacement
• Technology upgrades
• IT infrastructure
• Lease commitments
• Legal obligations
• Staffing requirements
• Deferred maintenance
• Capital improvements
• Working capital needs
• Marketing or patient communication
• Software or systems updates

These future investments can directly affect cash flow during the first several years of ownership.

A practice may be affordable on paper but still require significant additional cash to operate, improve, or stabilize after closing.

Due diligence helps buyers understand not just the purchase price, but the financial reality of ownership.

A CPA-Prepared Forecast with Business Plan Should Guide Ownership — Not Just Secure Financing

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

But the forecast should do more than support the loan application.

A strong CPA-prepared forecast with business plan should become part of the ownership roadmap.

Rather than simply extending historical financial results, it should consider:

• Expected clinical schedule
• Procedure mix
• Production goals
• Staffing plans
• Financing structure
• Transition timeline
• Planned operational improvements
• Cash flow requirements
• Debt servicing capacity
• Working capital needs

The result is a financial forecast designed to answer practical questions that extend beyond loan approval.

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

These are the questions that shape long-term ownership.

A lender-ready forecast should support the financing application, but it should also help the buyer understand what the first few years may look like.

Dental Experience Changes the Questions You Ask

Receiving reports is not difficult.

Knowing what they mean requires experience.

Dental practices have unique financial and operational drivers. Production, collections, hygiene capacity, patient retention, provider productivity, treatment mix, recall systems, staffing, and scheduling all affect performance.

A dental-specific advisor knows how these pieces connect.

At CFO of Smiles, our team works exclusively within the dental industry and has reviewed over $233 million in dental practice appraisals.

That experience allows us to connect financial performance with provider productivity, hygiene capacity, patient behaviour, practice management software, operational systems, and cash flow.

It also changes the questions we ask.

We are not simply looking for whether the numbers are accurate.

We are evaluating whether the practice aligns with the purchaser’s goals, clinical style, growth plans, financing structure, and long-term vision.

Because a great practice for one dentist may not be the right practice for another.

The Goal of Due Diligence Is Not to Find Problems

Many people think due diligence is about finding reasons not to buy a practice.

We see it differently.

The goal is to provide clarity.

To understand the business behind the numbers.

To identify risks before they become surprises.

To validate opportunities before they are included in the financial plan.

And ultimately, to help a buyer make one of the biggest financial decisions of their career with confidence.

Sometimes due diligence confirms that the opportunity is strong.

Sometimes it identifies risks that need to be addressed before closing.

Sometimes it helps adjust the forecast, purchase expectations, or transition plan.

In every case, the value is in understanding the practice more clearly before moving forward.

What Buyers Should Ask During Due Diligence

Before moving forward with a purchase, buyers should ask questions such as:

• Does the appraisal reflect the current operation of the practice?
• What normalization adjustments were made in the appraisal?
• Are the normalization adjustments realistic, or do any appear overly optimistic or unsupported?
• Do any adjustments need further support or explanation?
• Are production and collections aligned?
• Are active patient trends stable?
• Is hygiene performing at a level that supports future growth?
• Is production concentrated in one provider?
• Are growth opportunities realistic for the purchaser?
• Does the practice management software support the financial statements?
• Do patient charts support the reported opportunity?
• Can a digital chart audit be completed virtually?
• Is a paper chart audit required, and is the practice located in the GTA?
• What cash will be required after closing?
• Can the practice support debt, owner compensation, taxes, and future investment?
• Is the CPA-prepared forecast with business plan based on the purchaser’s plan or only the seller’s historical results?
• What should be prioritized in the first stage of ownership?

These questions help move the buyer from excitement to informed confidence.

Frequently Asked Questions

Final Thought

When due diligence is done well, it does not just verify the past.

It helps you understand the future.

The biggest risks are not always found in the appraisal. They are often found in what buyers do not ask.

Before buying a dental practice, take the time to understand the financial statements, 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 the most important question is not only:

“Is this a good business?”

It is:

“Will this practice be successful under my 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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