You get an LOI. You sign it. The buyer wants to do due diligence. What is that, exactly?
Most owners have never been through it. Some think it is a quick document review. Others assume it is a hostile audit. Neither is right.
Diligence is the buyer's attempt to prove out what they think they are buying. Every claim you made about your practice gets checked. Every number gets verified. Every risk gets surfaced. Done well, it is an information exchange. Done poorly, it feels like an interrogation.
Here is what actually happens, phase by phase, plus the ways deals fall apart and what you can do to prevent it.
The Three Phases of Diligence
Diligence is not one thing. It is three overlapping phases that together take 6 to 10 weeks for most practice sales. Knowing the shape of it helps you prepare and reduces the stress of not knowing what is coming.
Phase One: Financial and Operational Review (Weeks 1 to 4)
This is the first wave and the most document-heavy. The buyer wants to verify what the practice actually earns and how it operates day to day.
What gets reviewed:
- Three years of tax returns and P&Ls
- Monthly financial statements for the trailing 12 months
- Bank statements to reconcile deposits against reported revenue
- Accounts receivable aging
- Insurance carrier mix and reimbursement schedules
- Production and collection reports by provider
- Patient counts, new patient counts, recall rates
- Equipment and technology inventory
What this phase is really trying to answer: Is what you told me matches what the numbers show? If your books say $2M in collections and the deposits show $1.7M, we need to talk about that gap.
Where sellers get frustrated: The same document gets asked for in three different formats by three different people. Requests come in waves rather than all at once. It feels endless. Keeping everything organized in a shared folder from day one saves an enormous amount of pain.
Phase Two: Legal and Regulatory Deep Dive (Weeks 3 to 6)
Runs in parallel with phase one. The buyer's attorneys look at every contract, license, and legal obligation attached to the practice.
What gets reviewed:
- Real estate lease or ownership documents
- Associate and staff employment agreements
- Independent contractor agreements
- Vendor contracts (software, DSO services, labs, supplies)
- State dental board licensure and any past complaints
- Malpractice history and current coverage
- DEA registration and controlled substance records
- HIPAA compliance documentation
- Any pending litigation
What this phase is really trying to answer: Are there any legal, regulatory, or contractual issues that would follow the buyer after close? Buyers are especially focused on things that are hard to fix after the deal.
Where sellers get frustrated: Lease terms that seemed fine when signed 10 years ago now look problematic. Old contracts nobody remembers signing surface. Staff contracts that were never formalized create ambiguity about what transfers. This is where a solid dental M&A attorney earns their fee.
Phase Three: Team, Culture, and Transition Planning (Weeks 4 to 8)
The final phase and often the most sensitive. The buyer wants to understand who the team is, how the practice runs day to day, and how to keep it running through transition.
What gets reviewed:
- Staff roster with tenure, roles, and compensation
- Team culture and turnover history
- Patient communication protocols
- Marketing and referral sources
- Provider schedules and PTO patterns
- Standard operating procedures (or lack of them)
- The owner's day-to-day involvement and what happens post-close
What this phase is really trying to answer: Will this practice keep running after we take over? Will the team stay? Will patients stay?
Where sellers get frustrated: Deciding when and how to tell the team is the hardest part of this phase. Buyers usually push for direct conversations with key team members before close. That conversation needs careful timing and framing.
The Five Ways Deals Fall Apart in Diligence
Most deals close. But when they fall apart, it is usually one of these five things. Knowing them in advance is the best way to avoid them.
1. Books That Do Not Match the Tax Returns
The single most common issue. Your P&L says $2.1M in collections. Your tax return says $1.8M. There is usually an innocent explanation (cash basis vs accrual, timing of a large payment, or personal expenses run through the practice). But the buyer needs to see the reconciliation. When it cannot be reconciled cleanly, trust drops fast.
How to prevent it: Move to a dental-savvy CPA at least a year before you plan to sell. Ask them to clean the books to a standard a buyer will underwrite off of. Get everything on accrual basis. Separate personal expenses.
2. Add-Backs That Cannot Be Substantiated
When calculating the practice's EBITDA, sellers add back owner-specific expenses (owner's salary, personal car through the business, family member on payroll who does not really work). Buyers accept most reasonable add-backs. What they will not accept is add-backs that lack documentation.
How to prevent it: Keep a running list of every practice expense that would go away in a sale. Have documentation for each one. When you assemble your add-back schedule, have a source document ready for each line.
3. Undisclosed Lease Terms
Lease renewal options with dramatic rent increases. A lease that expires in 18 months with no renewal. A lease with a "landlord approval" clause on transfer that gives the landlord veto power over your sale. Any of these can kill a deal or drop the price significantly.
How to prevent it: Pull your lease and read it yourself before you go to market. If there are problems, address them first. Negotiate a lease extension. Ask the landlord to sign an estoppel. Get ambiguity resolved before a buyer discovers it during diligence.
4. Associate Contracts That Do Not Transfer
You hired an associate three years ago on a handshake, or with a contract that says "Dr. Smith DDS PLLC" but Dr. Smith PLLC is not the entity being sold. Or the contract has a non-transfer clause. Suddenly the buyer is looking at a practice where the associate producing 30% of revenue has no obligation to stay.
How to prevent it: Review every associate and staff contract. Understand what transfers automatically and what needs to be re-signed. If there are gaps, fix them before you go to market. Consider retention bonuses tied to close.
5. Undisclosed Compliance Issues
A past state board complaint. An unresolved malpractice claim. A HIPAA violation that was fixed but never documented. A supplier account that was closed with an unpaid balance. Small issues become deal-killers when they surface in diligence instead of being disclosed upfront.
How to prevent it: Every skeleton comes out in diligence. Every one. Disclose everything upfront in the LOI phase. Buyers will handle known issues. What they will not handle is being surprised.
What a Well-Run Diligence Process Looks Like
The good ones share a few common features. If your buyer's process does not look like this, ask why.
- Consolidated document requests. One master list of what they need, delivered upfront, not trickled in over eight weeks.
- A single point of contact. Not five different people from different teams asking for the same document.
- Clear timeline. You should know week by week what is being reviewed, what questions to expect, and when you will hear about next steps.
- Honest communication about what they find. If something concerning shows up in the numbers, you should hear about it quickly, not at the end.
- A willingness to share their own thesis. Good buyers explain why they are asking each question. Bad buyers treat diligence as a one-way information transfer.
Diligence is the phase where a buyer's real culture becomes visible. Pay attention. If they treat your team like a threat during diligence, they will treat your team the same way after close.
Where Bluetree Sits (Honestly)
I run business development for Bluetree Dental. Same disclaimer as always: I have a point of view.
The way we approach diligence has three principles. Not because we are more virtuous than anyone else. Because we have seen what happens when it is run the other way.
First, we share our thesis openly. Before we even start diligence, we tell you what we think the practice is worth, what we think the risks are, and what we would do differently. That way when we ask about a specific number, you know why.
Second, we consolidate document requests. You get one master list at the start. If we discover we need more later, that is on us to organize, not you to constantly re-scramble.
Third, we treat your team as an asset, not a variable to be assessed. Team conversations during diligence are always coordinated with you. Never behind your back. Never before you are ready.
None of that makes us the right buyer for every practice. What it does mean is that going through diligence with us does not feel like an interrogation. It feels like two parties working together to get to a close.
If you are thinking about selling and want to talk through what diligence might look like specifically for your practice, reach out. We can walk through your situation without any obligation to work with us.