The 411 on due diligence
Due diligence: if you’re a practice owner you will remember only too well what the process involves when buying a practice, but for first time buyers it can be as perplexing as quantum physics. To help demystify due diligence and ensure you get the optimum outcome – that goes for both buyers and vendors – this article will break down the process whilst providing top tips along the way.
What’s it all about and why is it important?
In practice sales, due diligence is a process where the buyer undertakes to collect all the relevant information about the practice to determine whether it is a viable, profitable purchase. It is also an opportunity to highlight any potential risks and get under the skin of the business to see if there are any skeletons lurking in the closet.
Unfortunately, it’s not always plain sailing (especially if the due diligence process throws up unexpected adverse findings), but there are a number of possible routes to take should that be the case. Where inaccuracies or new information comes to the fore that might impact the goodwill of the practice, the buyer may request a reduced asking price or arrange for the vendor to provide reimbursement for specific liabilities to protect against issues that occur post-completion. In more serious cases, buyers can choose to withdraw completely from the transaction.
How long does it take?
From the point both parties have agreed a deal (but not signed the contract), the due diligence process usually takes between 60 and 90 days to complete, though this can vary significantly. During that time, a questionnaire is sent from the buyer’s solicitors to the vendor’s representative requesting written replies along with the appropriate evidence and supporting documentation. All that information is then inspected with a fine-tooth comb. While it sounds simple enough, many vendors often underestimate the time it takes to collect everything together, which can result in delays to both the due diligence process and overall sale. Luckily, this can be avoided – which brings us to our first top tip!
Top tips for vendors
To avoid a lengthy sale or any unnecessary delays during due diligence (which might cause tension with the buyer), make sure you’re as prepared as possible and have your paperwork in order in advance. Any gaps or missing information will only result in solicitors requesting the documents again, so it pays to ensure that all the relevant paperwork is both in date and correctly filled in. Likewise, it helps to use a filing system that is easy to understand – for instance, colour coding for each key area or different folders. The easier and more transparent you can make it, the less time a buyer will need to search through the paperwork to find the information they’re looking for.
The second piece of advice is to use a specialist solicitor who has experience in dealing with the minutiae of a dental practice transaction. They will be able to prepare you for what to expect and best represent your interests so that you get the most from your sale. It can also be useful to enlist the services of a specialist sales and acquisitions agency with a proven track record of achieving successful outcomes. That way you can rest assured that no stone is left unturned from beginning to end.
Top tips for buyers
If you’re a buyer, it is again beneficial to work with a solicitor that has been trained to deal with dental practice due diligence. Not only will they be able to handle the process on your behalf, alleviating a large proportion of the stress, they will also be able to deal with any issues that present – including potential discrepancies that might impact the viability of the practice. Apart from that, expect that there might be delays and you won’t be disappointed.
Key areas covered in due diligence
The last thing you need to know is what’s examined in the due diligence process. The main areas are:
Equipment – what equipment there is within the practice and details of ownership and maintenance requirements. This information can also be used by the buyer to calculate on-going expenses and future cash-flow analysis.
Financial reports – including practice tax returns and at least three years of profit and loss statements.
Property – evidence of building regulations, asbestos reports, risk assessments, energy performance certificates and D1 certification, as well as details of how the practice is set up.
Practice – proof of CQC registration and inspection reports, data protection registration and policies.
Employees – information about vaccinations, PAYE and NI, employment status, salaries and copies of contracts.
Insurance – copies of all insurances and details of any historical or current claims.
Litigation – details of any claims made against the practice and/or employees.
The next step
Essentially, that’s everything you need to know about due diligence; all that’s left to do is begin your journey. If you would like help with your sale or purchase, or wish to know more about what the process entails, get in touch with Dental Elite. The team has over 100 years’ experience between them and is renowned for providing a first-class service that achieves outstanding results. With their help you are sure to achieve the outcome you desire.