The Audit Comes Either Way: The Three Readers Who Open a Dental Practice's Ledger Whether or Not It Sells

Most of what I write is read by owners who are selling. Most of the owners who read it aren’t.

I know because they tell me. The note usually says some version of the same thing: good piece, glad I’m not in that position, I’m keeping the practice. And underneath it sits an assumption I’d like to take apart, because it’s the most expensive one an independent owner can hold: that the audit is a seller’s problem. That the rebuilt EBITDA, the ledger read, the coding patterns, the credit balances, all of it belongs to the owner who takes a buyer’s call, and the owner who never takes the call never gets read.

The owner who never takes the call gets read three times. By three different people, on three different schedules, each with a financial reason to find what the P&L doesn’t show. None of them is a DSO. All of them open the same ledger a DSO’s diligence team opens, and none of them starts with the P&L.

The First Reader Is the Lender

A practice built to stay still borrows. The second location, the refinance when the first lease ends, the build-out, the partner buyout. Every one of those is an application, and the bank underwrites it the way a buyer underwrites a purchase: it rebuilds the earnings, then asks whether they cover the debt with room to spare.

On October 1 that got formal. The SBA’s new standard operating procedure requires an independent quality of earnings report on 7(a) acquisition loans where the business purchase price is $3 million or more, including the purchase of a second practice.

Cash proof on the trailing twelve months and two fiscal years. Debt service coverage tested at 1.25 times. The owner’s own CPA letter does not satisfy it, and neither does a report the owner commissioned for himself.

Read that as a Stay-path owner. The loan to buy your third office now comes with the same audit a buyer would run on the practice you’re buying, paid for by you, and the lender still rebuilds your own earnings to decide whether the combined business carries the debt. Its only question is whether the number holds.

The practice I’ve written about all year reported about $720,000 of EBITDA on $10 million of collections. The lender’s reader does what the buyer’s reader does. The owner’s pay comes up to replacement cost. The associates and hygienists on 1099s doing employee work get re-costed as employees, which on that practice was about $155,000 of payroll tax and benefits the P&L never carried. The rent to the owner’s own building goes to market. Normalized EBITDA lands near $595,000, and the margin lands near seven percent, and a practice at seven percent does not carry a $3 million note at 1.25 times coverage.

A buyer who finds that re-prices the deal. A lender who finds that declines the loan. Nobody calls it a re-trade, and the owner never learns what the number was, only that the expansion isn’t happening this year.

The Second Reader Is the Payer

The second reader has already paid you. That’s the part owners miss.

Insurance carriers pay claims first and audit the pattern later, often twelve to eighteen months later, inside whatever look-back window your state and your contract allow. The selection is statistical, not clinical. Nobody reads your notes to put you on the list; the payment-integrity team reads your ratios against your peers: buildups per crown, scaling and root planing as a share of hygiene visits, radiograph frequency, same-day and quadrant patterns by provider, the adjunctive codes that attach to everything. Once a ratio sits outside the band, the audit becomes clinical. The carrier pulls records on a sample of claims, a consultant reads the charts and radiographs, and the overpayment rate found in that sample gets extrapolated, where the contract and state law allow it, across every like claim in the window, and taken back out of your future remittances.

The same practice from earlier collected 107% of its insurance estimates with under $500 of rejected claims in its history. By every revenue-cycle screen the office ran, it was excellent. Underneath that sat about $680,000 of coding patterns a payer can claw back. The clean-claim rate wasn’t a defense. It was the reason nobody looked.

In a sale, a buyer’s clinical diligence finds that number and sizes a holdback to it, and the seller at least gets to argue about the holdback. The owner who keeps the practice meets the same number as an offset against next quarter’s checks, with no buyer across the table and no escrow to negotiate. The sale version of this finding costs you part of the price. The Stay version costs you the cash flow, and it arrives after you’ve already spent the money it’s recovering.

The Third Reader Is the Successor

The third reader is the one most independent owners invite in themselves.

“Potential for ownership” is the most common sentence in a dental job posting right now, and for good reason. The associate who buys in is how an independent practice stays independent. But a buy-in has a price, the price has to come from a number, and the number gets read by the successor’s lender and their advisor before anyone signs. The owner who plans to stay has just become a seller, to a single buyer, with no competing bids and no exit.

Here is what that advisor usually hands over. I have one on my desk, prepared for an associate buying into a $1.3 million general practice. It is fifteen pages and it is not careless. Production by provider for three years. Procedures per month. UCR fees against the 80th percentile. Accounts receivable aged in four buckets. Recare retention, 84 percent. New patients per month. A marketing checklist, a staff roster with hire dates, the age of the patient base. Everything in it came off the dashboard, and everything in it is true.

Read it for where it stops. “Credit balances requested,” and no number ever follows, because the report was finished before the balances arrived. “Unscheduled treatment report: $1.19 million, data appears inaccurate,” and then nothing, because the number looked wrong and nobody reconciled it. “No procedure data available on dashboard,” which is the sentence that tells you the detail reports were never opened. And the owner produced 61 percent of the dentistry, which the report records as production by provider and leaves there. It never asks who diagnosed the other 39 percent.

Those three doors are where the buy-in price lives, and I know what’s behind them because I open them for a living. Take the $10 million practice I’ve written about all year and read it twice: once the way the fifteen pages would, once the way the ledger does.

Production by provider shows an owner doing 4.8 percent of the dentistry, a replaceable dentist. The treatment-plan provider field shows the same owner originating 24.6 percent of everything diagnosed on 4.4 percent of the exams: a pipeline that stops being diagnosed the day he slows down, which is exactly when he intends to.

The recall report shows a recare percentage, the share of active patients with any future appointment on the books. The ledger measures what the next owner is actually buying: the share of patients who left an eligible hygiene visit with the next one already booked. The standard is 90 percent. The average across the practices I read is about 78. This practice was reappointing 61 percent, and the gap is next year’s hygiene revenue someone has to go find.

The credit balance report, the one a standard evaluation requests and rarely waits for, carried $390,000 of patient and insurance refunds against $150,000 on the P&L: balances that become reportable to the state as unclaimed property two or three years after they stop moving, with penalties and interest for the years they sat.

None of that was in the fifteen-page report, and none of it is on the P&L the lender reads. All of it is in the practice software, in reports the standard evaluation names and does not open. Price a buy-in off the dashboard and every one of those findings becomes a renegotiation eighteen months later, between two people who have to work together the next morning. More often it becomes the associate who leaves, which is the retention problem the owner was trying to solve by offering ownership in the first place.

All due diligence is not the same diligence. The report that reads what the software summarizes and the read that opens what the software recorded produce the same confident tone and different numbers, and the associate’s lender can’t tell which one it’s holding.

One Instrument, Three Hands

Put the three readers side by side and the thing they share is the thing that should bother you.

The lender rebuilds the earnings from the ledger, the production report, and payroll. The payer reads procedure utilization by code and provider. The associate’s advisor reads the treatment-plan provider field, the recall report, and the credit balance report. None of them starts with the P&L, because the P&L records what the practice reported and all three of them are paid to find out what it did.

That’s the same read a DSO runs between the LOI and the wire, and sellers at least know it’s coming. Eighty-five percent of them get re-priced by it. The owner who stays meets the same read with no warning, no exclusivity clock, and no advisor on retainer, and the outcomes have duller names: the loan that didn’t fund, the remittance that came in light, the associate who took the job across town.

The seller who prepared for diligence and the owner who never sells have done the same work. Only one of them knows it.

What Built to Stay Actually Requires

I’m on a panel in a few weeks called Built to Stay, and this is the argument I’ll be making there, so I’ll make it here first. A practice built to stay has to pass the same audit as a practice built to sell. Not because a buyer is coming, but because the readers who aren’t buyers are already on the calendar.

The work is the same four moves whether or not you ever take a buyer’s call. Pay yourself market for a year so there’s nothing for a lender to normalize. Refund the credits and put the dormancy clock on someone’s job description. Measure who the diagnosis depends on and start distributing it while you still have the years to do it. Read your own ledger the way all three of them will, before any of them has a reason to.

That read is the same engagement for a Stay-path owner as for a seller, and it costs the same, and it finds the same things. The difference is what you do with the findings. The seller fixes them to defend a price. The owner who stays fixes them to keep the loan, keep the remittances, and keep the associate.

Independence is a decision you get to keep making only while the number holds. The audit happens to everyone eventually. The only variable is whether you run it first.

The three places the number fails, and which reader finds each one, are laid out in The Three Faces of Phantom EBITDA.

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About the author — James DeLuca is the founder of Precision Dental Analytics and works in clinical data forensics and M&A defense: the independent Clinical Quality of Earnings for sellers, buyers, and lenders, run before the buyer’s team runs theirs. He is the author of Phantom EBITDA, The Dental Data Playbook, Hidden Levers, and Spartan Leadership. Meet the team →