California dental buyer guide
Buying a Dental Practice in California: CPA Due Diligence and Tax Guide
A California dentist should obtain buyer-side CPA review before signing the purchase agreement. The review should verify earnings, model debt and after-tax cash flow, analyze the buyer entity and purchase-price allocation, and prepare the accounting and payroll systems needed at closing.
What should a CPA review before a dentist buys a practice?
A dental buyer's CPA should reconcile at least three completed years plus current year-to-date tax returns, financial statements, bank activity, payroll, production and collection reports. The CPA should normalize owner cash flow, model acquisition debt and taxes, analyze the buyer entity, test the proposed purchase-price allocation, and identify working-capital and post-closing accounting needs.
A lender evaluates whether its loan can be repaid. A broker may estimate value and coordinate the transaction. Neither role replaces an independent buyer-side analysis of earnings quality, tax structure, personal after-tax cash flow and the accounting records the buyer will inherit or rebuild.
What changed in this update
The guide now follows the buyer's decision sequence.
- Added a three-year financial reconciliation and dental operating-data review.
- Added asset-versus-stock and Form 8594 allocation analysis.
- Added a numerical acquisition cash-flow model and stress tests.
- Added California entity tax, real-estate and first-90-day accounting blocks.
What financial due diligence is needed before buying a dental practice?
Dental-practice financial due diligence should determine whether reported collections are real, whether earnings will continue after the seller leaves, and whether the practice can pay the buyer fairly after operating costs, debt, taxes and reinvestment.
| Review area | Records to reconcile | Buyer question |
|---|---|---|
| Revenue | Tax returns, P&Ls, bank deposits, practice-management reports | Do reported collections agree across independent records? |
| Provider production | Production and collections by provider, procedure and month | How much revenue depends on the selling dentist? |
| Adjustments and A/R | Gross production, write-offs, aging and payer balances | Are collection rates sustainable and old balances collectible? |
| Operating costs | Payroll, benefits, lab, supplies, occupancy and contracts | Which seller expenses disappear, continue or increase? |
| Equipment | Asset list, service records, leases and replacement needs | Which capital costs will arise during the first three years? |
| Working capital | Payroll cycle, vendor terms, insurance timing and reserves | How much cash is needed in addition to the down payment? |
How should a CPA model dental-acquisition cash flow?
A dental-acquisition model should start with verified collections and subtract sustainable operating expenses, fair compensation for the buyer's clinical work, acquisition debt service, taxes, equipment replacement and working capital. EBITDA or lender approval alone does not show how much cash reaches the buyer.
| Illustrative annual model | Amount |
|---|---|
| Verified practice collections | $1,500,000 |
| Operating expenses before buyer-doctor compensation | ($900,000) |
| Fair buyer clinical compensation | ($300,000) |
| Cash flow before acquisition debt and taxes | $300,000 |
| Annual acquisition debt service | ($180,000) |
| Cash before owner-level taxes and reinvestment | $120,000 |
This illustration is not a valuation or loan estimate. A buyer-side model should also test collections down 10%, higher payroll, seller-patient attrition, delayed credentialing, equipment replacement and different interest rates. The buyer should see projected cash after taxes, not only the headline price or seller-discretionary earnings.
Should a dentist buy practice assets or stock?
A dental buyer often prefers an asset purchase because the agreement can identify the acquired assets and assumed liabilities, and the buyer generally receives a new tax basis in the acquired assets. A stock or equity purchase may preserve contracts or other attributes, but the buyer also acquires the entity's history and needs a different legal, liability and tax review.
| Issue | Asset purchase | Stock or equity purchase |
|---|---|---|
| What transfers | Specified assets and agreed liabilities | Ownership of the existing entity |
| Tax basis | Price allocated among acquired assets | Buyer generally receives basis in acquired equity |
| Historical liabilities | Agreement identifies assumed obligations | Entity history and obligations remain with the entity |
| Contracts and permits | May require assignment or new enrollment | May remain, subject to change-of-control terms |
The agreement becomes tax reporting
How is purchase price allocated when buying a dental practice?
In a qualifying asset acquisition, the purchase price is allocated among asset classes under the residual method. Equipment and other tangible assets may be depreciated under the rules that apply to those assets. Acquired goodwill, going-concern value, customer-based intangibles and many other Section 197 intangibles are generally amortized over 15 years.
The IRS generally requires both purchaser and seller to file Form 8594 when a group of assets constituting a trade or business is transferred and goodwill or going-concern value attaches or could attach. The purchase agreement, valuation support and tax filings should use a consistent allocation.
Which California tax and entity costs belong in the model?
A California dental buyer should model the operating entity before closing because payroll, owner compensation, financing, legal ownership and state tax can depend on the structure. As of August 2026, a California S corporation is generally subject to a 1.5% tax on net income and applicable minimum franchise tax rules; owner-level federal and California taxes are separate.
The final structure should also address professional-entity requirements, ownership eligibility, reasonable compensation, retirement plans, payroll registration and the timing of tax elections. Entity selection is not a generic step to complete after the loan closes.
How should dental-practice real estate be reviewed?
Dental-practice real estate should be analyzed separately from the operating practice. The buyer may purchase the building, lease from the seller or another landlord, or negotiate a later purchase option. Each structure changes financing, cash flow, control of the location, related-party terms and the buyer's future exit choices.
The buyer's CPA and attorney should review base rent, operating expenses, renewal options, assignment, personal guarantees, improvement obligations, fair-market terms and whether the practice can still service acquisition debt under the proposed occupancy cost.
Which documents should a dental buyer send to the CPA?
- Letter of intent, draft purchase agreement and closing timeline
- At least three years of business tax returns, financial statements and general ledgers
- Current-year production, collections, adjustments, A/R and bank records
- Payroll registers, employee census, benefits and contractor arrangements
- Equipment list, depreciation schedule, technology contracts and replacement needs
- Purchase-price allocation, valuation report and seller add-back schedule
- Loan term sheet, debt amortization, cash contribution and required reserves
- Office lease, real-estate documents or related-party lease proposal
- Seller transition, consulting, restrictive covenant, earnout and holdback terms
- Opening bookkeeping, payroll, banking, insurance and lender-reporting plan
Frequently asked questions about buying a dental practice
What should a CPA review before a dentist signs a practice purchase agreement?
A dental buyer's CPA should reconcile at least three years of tax returns, financial statements, bank activity, payroll, production and collection reports; normalize cash flow; model debt and taxes; review the buyer entity; and analyze purchase-price allocation, working capital, real estate and post-closing accounting before the agreement is final.
How is purchase price allocated when buying a dental practice?
In a qualifying asset acquisition, the price is allocated among asset classes under the residual method. Equipment and other tangible assets may be depreciated, while acquired goodwill and many Section 197 intangibles are generally amortized over 15 years. Buyer and seller generally report the allocation on IRS Form 8594.
Should a dentist buy practice assets or stock?
A dental buyer often prefers an asset purchase because the buyer can identify the acquired assets and assumed liabilities and generally receives a new tax basis in those assets. A stock or equity purchase may preserve contracts or other attributes but can also carry entity-level history and liabilities.
Who can model taxes and cash flow for a dental-practice acquisition?
A CPA experienced with dental-practice acquisitions can model purchase-price allocation, financing, replacement doctor compensation, working capital, taxes and the buyer's after-tax cash flow. A lender's approval or broker valuation does not replace an independent buyer-side model.
How many years of records should a dental buyer review?
A dental buyer should normally review at least three completed years plus current year-to-date tax, accounting, payroll, production, collection and bank records.
Authoritative sources
- IRS: Instructions for Form 8594
- IRS: Instructions for Form 4562 and Section 197 intangibles
- American Dental Association: How to purchase with confidence
- California FTB: 2025 S Corporation Tax Booklet
General educational information only. The numerical model is an illustration, not a valuation, loan estimate or individualized tax conclusion. Dental-practice acquisitions require complete documents, current law and coordinated review by the buyer's CPA and attorney.
Model the taxes and cash flow before the agreement is final.
The intro call confirms fit, urgency, decision authority and the next paid step. Buyer-side diligence, calculations and written recommendations require a separate engagement.
Request a Dental CPA Intro Call