Wes Read (CPA, CFP®) explains financial due diligence for buyers of dental practices: verifying that reported collections and overhead on a presented P&L reflect economic reality. He warns that accounting software (e.g., QuickBooks) can be used to fabricate transactions (inflated collections), so buyers must obtain supporting documentation to validate financial statements.
Financial due diligence is validating that the collections and overhead is true based on the P and L that's presented to you. Most people have heard of the term cook in the books. Back in the day, when I was in college, you had Enron and you had WorldCom, and you had these big frauds that took place. And let me tell you, it's extremely easy to go into QuickBooks or any accounting software and just make up some fake transactions. Yeah, I had an extra collections of $50,000 in June and $80,000 in August. Sure, you can book that really easily and then present a financial statement that' amazing. But it's not accurately reflecting the economic reality of that practice. So due diligence is getting supporting documents to validate the accuracy of the P and L.
