Buying an existing dental or medical practice can be one of the most important financial decisions a provider will make. An established patient base, trained staff, existing systems, and immediate revenue can all make an acquisition attractive. But those advantages do not automatically mean the practice is a good financial fit.
Before moving forward, buyers should look beyond headline revenue, tax returns, and the seller’s asking price. The more important question is whether the practice can support the buyer after closing. That means understanding profitability, cash flow, debt service, taxes, working capital, staffing needs, equipment demands, and other financial realities that may not be obvious at first glance.
A thoughtful due diligence process helps buyers see the practice more clearly before they commit. It can confirm whether the opportunity is financially sound, identify risks that may affect future performance, and give the buyer a stronger basis for negotiation.
Is the Practice Truly Profitable?
One of the first areas to evaluate is the quality of earnings.
A practice may report strong income, but the financial statements may not show the full picture. Buyers should review tax returns, practice management reports, production and collection trends, payer mix, provider compensation, adjustments, write offs, and nonrecurring expenses.
In many dental and medical practices, reported income needs to be normalized to reflect the true economics of the business. Owner compensation, related party expenses, discretionary spending, one time costs, or expenses that may change after closing can all affect profitability.
This is where adjusted EBITDA or normalized cash flow becomes important. The goal is not just to understand what the practice earned in the past. The goal is to understand what the practice is likely to generate under new ownership.
Can Cash Flow Support the Purchase Price?
A practice can appear profitable before accounting for the realities of ownership.
After closing, the buyer may need to cover acquisition debt, taxes, owner compensation, payroll, rent, supplies, insurance, equipment, technology, marketing, and ongoing reinvestment. If those obligations are not modeled carefully, a practice that looked attractive during the sale process can create pressure once the buyer is responsible for the full financial picture.
Financial due diligence should help answer practical questions:
- Can the practice support the proposed debt payments?
- Will the buyer have enough cash flow for reasonable owner compensation?
- Are tax obligations being considered in the projections?
- Will the practice need near term investment in equipment, technology, staffing, or marketing?
- Does the purchase price still make sense after these costs are included?
This analysis is especially important when financing is involved. Lender approval is helpful, but it should not be the only measure of whether the transaction is sustainable.
What Expenses Could Change After Closing?
Expense structure is another essential part of diligence.
Staffing levels, compensation arrangements, lease terms, supply costs, lab fees, billing costs, software subscriptions, insurance, and equipment needs can all affect post closing profitability. Buyers should understand which costs are likely to continue, which may change under new ownership, and where additional investment may be needed.
For example, equipment that has not been updated in years may require capital investment soon after closing. A lease with limited remaining term may create uncertainty around occupancy costs. Staffing changes, compensation expectations, or billing disruptions can also affect cash flow during the transition.
The purchase price is only one part of the economic commitment. Buyers also need to understand what it will cost to operate, stabilize, and improve the practice after closing.
What Does the Buyer Need to Know About Deal Structure and Taxes?
The way a transaction is structured can materially affect the buyer’s tax position, cash flow, and risk after closing.
Buyers should review the proposed purchase structure, purchase price allocation, financing terms, and working capital needs before signing a definitive agreement. In many transactions, the allocation of purchase price among assets such as equipment, supplies, goodwill, patient records, and other intangible assets may have different tax implications for the buyer and seller.
These details should be addressed before the deal is finalized, not after closing. A structure that looks acceptable from a purchase price standpoint may create tax, cash flow, or operational issues if the broader economics are not considered.
Why Involve a Healthcare CPA Early?
A healthcare specific CPA (like the team at YHB) can help buyers evaluate the transaction through the lens of future ownership, not just the closing.
That includes reviewing financial statements, analyzing normalized cash flow, evaluating debt capacity, identifying working capital needs, assessing tax implications, and helping the buyer understand whether the acquisition supports their personal and professional goals.
This type of guidance is especially valuable in dental and medical practice transactions because the numbers are closely tied to operational realities. Payer mix, provider productivity, staffing, billing patterns, equipment needs, lease terms, and patient retention can all affect financial performance.
With the right advisor involved early, buyers can make a more informed decision, negotiate with greater clarity, and enter ownership with a better understanding of the financial responsibilities that come with acquiring a practice.
FAQ:
What financial records should I review before buying a dental or medical practice?
Buyers should review tax returns, financial statements, production and collection reports, payer mix, provider compensation, staffing costs, lease terms, equipment needs, and practice management reports.
Why is normalized cash flow important in a practice acquisition?
Normalized cash flow helps buyers understand the practice’s sustainable earning power after adjusting for owner specific, discretionary, one time, or unusual items.
When should I involve a CPA in a practice acquisition?
A CPA should be involved before the buyer commits to the transaction structure or financing terms, so tax, cash flow, working capital, and deal structure considerations can be evaluated early.
About the Author
Justin Bryan, CPA, is a Principal at YHB who advises healthcare practice owners and prospective buyers on tax planning, practice acquisitions, cash flow considerations, and long-term financial strategy.
