Pre-Acquisition Financial Due Diligence Checklist for Dental Buyers

The practice looks profitable on paper. But how much of that revenue is real, and how much is sitting in unreconciled limbo?

Why Financial Due Diligence Makes or Breaks Acquisitions

Acquiring a dental practice is a significant investment. Whether you are a DSO adding to your portfolio, a private equity firm entering the dental space, or a dentist buying your first practice, the financials need to tell a true story.

Surface-level numbers can be misleading. A practice reporting $1.5 million in collections might have $75,000 in unreconciled deposits. Another practice showing strong margins might be writing off legitimate revenue as bad debt. Without thorough due diligence, buyers inherit problems they did not anticipate.

This checklist covers the financial reconciliation items that sophisticated buyers examine before closing a deal. Miss these, and you may pay a premium for problems.

Revenue Verification

Bank Deposit to PMS Reconciliation

The fundamental question: Does the money in the bank match the revenue reported in the practice management system?

What to request:

• 24 months of bank statements
• Corresponding PMS payment reports for the same period
• Monthly reconciliation reports if available

What to look for:

• Variances between bank deposits and reported collections
• Unidentified or unallocated deposits
• Timing differences that are not properly documented
• Patterns of discrepancies that repeat monthly

Red flags:

• Consistent gaps between bank and PMS totals
• Large unidentified deposit balances
• No evidence of regular reconciliation
• Explanations that rely on memory rather than documentation

Insurance Payment Verification

Insurance represents 40-60% of revenue for most practices. Verify that insurance payments are being tracked and posted correctly.

What to request:

• Insurance aging reports
• ERA posting logs
• Sample of 20-30 EOBs matched to corresponding ledger entries
• List of insurance EFT deposits with matching documentation

What to look for:

• EFT deposits that were received but never posted
• Payments posted to wrong patients or dates
• Contractual adjustments that seem estimated rather than precise
• Take-backs or recoupments that were not properly recorded

Red flags:

• Significant volume of unposted insurance payments
• Insurance AR aging that exceeds industry norms
• Inability to match deposits to specific ERAs
• Contractual adjustments that are round numbers

Patient Payment Verification

Patient payments are more prone to handling errors and fraud risk. Verify controls and accuracy.

What to request:

• Patient payment reports by type (cash, check, credit card)
• Credit card batch reports matched to merchant deposits
• Cash handling procedures documentation
• Sample of patient accounts with payment history

What to look for:

• Cash payments match deposit records
• Credit card batches reconcile to merchant account
• Payment posting is timely and accurate
• Patient accounts show logical payment patterns

Red flags:

• Cash shortages or unexplained variances
• Credit card deposits that do not match batch totals
• Frequent adjustments to patient accounts
• Payments posted then reversed without explanation

Accounts Receivable Quality

AR Aging Analysis

Old receivables are often uncollectible. Evaluate the quality of outstanding balances.

What to request:

• AR aging report by payer type
• Aging by bucket (0-30, 31-60, 61-90, 90+ days)
• Write-off history for past 24 months
• Collection rate calculations

What to look for:

• Percentage of AR over 90 days
• Trend in aging over time
• Consistency between reported AR and actual collectability
• Write-off patterns and reasons

Red flags:

• More than 15% of AR over 90 days
• Growing AR without corresponding revenue growth
• Sudden write-offs before sale (cleaning up the books)
• AR that has been re-aged or manipulated

Credit Balance Review

Patient credit balances represent potential liabilities. They also signal posting accuracy.

What to request:

• Complete credit balance report
• Aging of credit balances
• Refund history and procedures
• Explanation for balances over $500 or over 90 days old

What to look for:

• Total credit balance as percentage of monthly collections
• Age distribution of credit balances
• Evidence of regular review and resolution
• Proper refund processing

Red flags:

• Credit balances exceeding 2% of monthly collections
• Credit balances older than 6 months without resolution
• No documented refund procedures
• Credit balances that mask posting errors

Production and Collection Analysis

Production Accuracy

Production numbers drive valuation. Verify they are accurate.

What to request:

• Production reports by provider and procedure
• Fee schedule documentation
• UCR analysis comparing fees to market
• Adjustment reports with reason codes

What to look for:

• Consistency between scheduled production and posted production
• Fee schedule that aligns with market rates
• Logical procedure mix for the practice type
• Adjustments that have clear business rationale

Red flags:

• Production numbers that cannot be traced to patient records
• Fee schedule significantly above or below market
• Unusual procedure volume that spikes before sale
• Adjustments without documentation or approval

Collection Rate Verification

Collection rate is often cited but rarely verified. Calculate it yourself.

What to calculate:

• Gross collection rate (collections / production)
• Net collection rate (collections / adjusted production)
• Collection rate by payer type
• Trend over 24 months

What to look for:

• Net collection rate above 95%
• Consistent rates over time
• Rates that align with practice type and payer mix
• Clear methodology for calculating rates

Red flags:

• Collection rates below 90% without explanation
• Volatile collection rates month to month
• Different calculation methods at different times
• Rates that seem too good to be true

Internal Controls Assessment

Segregation of Duties

Fraud risk increases when one person controls entire processes. Evaluate controls.

What to assess:

• Who posts payments?
• Who makes deposits?
• Who reconciles accounts?
• Who approves adjustments and write-offs?

What to look for:

• Different people handling different steps
• Manager oversight of financial processes
• Regular review of reports by owner or management
• Clear approval workflows

Red flags:

• One person handling all financial tasks
• No management review of financial reports
• Missing or inconsistent approval processes
• Resistance to discussing controls

Adjustment and Write-off Controls

Adjustments are a common avenue for fraud and error. Evaluate controls.

What to request:

• Adjustment policy documentation
• Adjustment reports with approval signatures
• Write-off approval process
• Sample of large adjustments with supporting documentation

What to look for:

• Written policies for when adjustments are appropriate
• Approval requirements for adjustments above thresholds
• Documentation supporting each adjustment
• Logical patterns in adjustment activity

Red flags:

• No written adjustment policies
• Adjustments made without approval
• Round-number adjustments without explanation
• Adjustment volume that spikes at certain times

Technology and Systems

PMS Data Integrity

The practice management system contains critical data. Verify its integrity.

What to assess:

• PMS platform and version
• Backup procedures and history
• Audit trail capabilities
• User access controls

What to look for:

• Modern, supported PMS platform
• Regular backups with tested restores
• Audit trails that track changes
• Appropriate user permissions

Red flags:

• Outdated or unsupported software
• No backup procedures
• Disabled or nonexistent audit trails
• All users having administrator access

Integration and Reporting

Evaluate how financial data flows between systems.

What to assess:

• Integration between PMS and accounting software
• Reporting capabilities and usage
• Data export and analysis tools
• Historical data availability

What to look for:

• Clean data flow between systems
• Regular use of financial reports
• Ability to export data for analysis
• Complete historical records

Red flags:

• Manual data transfer between systems
• Reports that are never run or reviewed
• Inability to export or analyze data
• Missing historical records

Staff and Process Interviews

Key Personnel Interviews

Numbers only tell part of the story. Talk to the people who manage the money.

Who to interview:

• Office manager
• Lead financial coordinator
• Any bookkeeper or billing specialist
• Current owner

Questions to ask:

• Walk me through your daily deposit process
• How do you reconcile insurance payments?
• What happens when deposits do not match?
• How often do you review financial reports?

What to look for:

• Clear, consistent processes
• Knowledge of procedures beyond their specific role
• Comfort discussing financial controls
• Alignment between what they say and what documentation shows

Red flags:

• Vague or inconsistent process descriptions
• Reluctance to discuss financial procedures
• Processes that depend on one person's knowledge
• Contradictions between interviews and documentation

Post-Acquisition Integration Planning

Reconciliation Baseline

Before closing, establish a clean baseline for future comparison.

What to do:

• Complete full bank reconciliation through closing date
• Resolve all unidentified deposits
• Clear or document all credit balances
• Verify all insurance payments are posted

Why it matters:

• Clear separation between seller and buyer periods
• Baseline for measuring post-acquisition performance
• Avoid inheriting unresolved problems
• Documentation for any earnout or holdback provisions

Systems Transition Plan

Plan how financial systems will transition post-acquisition.

What to plan:

• PMS conversion or continuation
• Bank account transition
• Merchant account transition
• Insurance credentialing updates

Why it matters:

• Minimize revenue disruption during transition
• Maintain reconciliation continuity
• Clear ownership of pre and post-close transactions
• Staff clarity on new processes

Due Diligence Documentation Checklist

Use this checklist to track required documents:

Bank and Deposit Records

• 24 months bank statements
• Monthly deposit summaries
• Reconciliation reports

PMS Reports

• Production reports by month
• Collection reports by month
• Adjustment reports with reason codes
• AR aging reports
• Credit balance reports

Insurance Documentation

• Payer contracts
• Fee schedules by payer
• ERA samples matched to postings
• Insurance aging detail

Internal Controls

• Written financial policies
• Adjustment approval documentation
• User access lists
• Audit trail samples

Tax and Accounting

• 3 years tax returns
• Financial statements
• Accountant contact information

The Cost of Skipping Due Diligence

Buyers who shortcut financial due diligence often face:

Valuation surprises. Revenue that looked solid turns out to include significant unreconciled or uncollectible amounts.

Integration headaches. Messy books make it impossible to establish clean post-acquisition baselines.

Staff problems. Financial control issues often indicate broader management problems.

Ongoing losses. Problems that existed before acquisition continue after, now on the buyer's watch.

Thorough due diligence takes time and costs money. But discovering a $50,000 reconciliation problem before closing is far better than discovering it after.

Planning an acquisition? Zeldent can audit a practice's reconciliation health in days, identifying gaps between bank deposits and PMS records before you close. Schedule a demo to see how automated reconciliation supports smarter acquisitions.