Managing AR’s in a Dental Transition Could Cost You More Than Just Money.
Buying a dental practice is often the culmination and pinnacle of a lifelong dream! You picture the freedom of ownership and running things the way you always wanted. What you rarely picture is the forensic accounting nightmare waiting for you as you manage the books! Managing the ARs in a dental transition is a delicate situation that makes or breaks a deal.
While most buyers obsess over staff retention and clinical continuity, a recent episode of the Dental Unscripted podcast revealed a more crucial and less obvious danger zone in a practice transition – Accounts Receivable (AR).
According to Mike Dinsio, co-founder of Next Level Consultants, attorneys consistently cite disputes over ARs as a “number one reason for lawsuits post-sale.” It isn’t a malpractice suite or lease dispute that drag new owners into court, it is the chaotic “hot mess” of trying to determine whose dollar is whose when the checks start rolling in.
For dentists currently navigating a transition, understanding this financial minefield is crucial. Drawing upon the real-world “war stories” in the trenches. Next Level Consultants coaches break down the biggest challenge you will face managing those ARs post close. But they also have options for resolving it. There are strategic safeguards necessary to protect your new business investment.
1. The “First In, First Out” Nightmare!
The core friction arises in the majority of deals where a buyer purchases the practice BUT… does not purchase the seller’s existing Accounts Receivable (ARs). In this scenario, the seller retains the right to collect money owed for work done prior to closing, while the buyer is entitled to income from new production.
The problem? Your practice management software,(whether Dentrix, Eaglesoft, or Open Dental) doesn’t care about your legal contract. It is generally designed with a “First In, First Out” (FIFO) accounting principle, as it should!
The Challenge
Imagine a patient has an outstanding balance of $200 from a hygiene visit done by the Seller six months ago. The patient comes in today (Day 2 of your ownership) for a $1,000 crown. They swipe their card for $1,000 at the front desk.
The Glitch
The software automatically applies that $1,000 to the oldest debt first. The Seller gets their $200 paid off instantly, and you, the Buyer, are left with only $800 credited toward your $1,000 procedure. Without line-item reconciliation, you are inadvertently financing the seller’s exit.
The “Loyalty” Dilemma
Compounding the technical issue is a profound human element. Paula Quinn, co-host of Dental Unscripted, explains that front office staff often harbor deep loyalty to the selling doctor—their employer of 10 or 20 years. When a new owner steps in, these employees often feel a moral obligation to “get the doctor their money.”.
Dinsio and Quinn have documented cases where staff members held checks for the seller, prioritized old collections over new production, or communicated financial details to the seller behind the buyer’s back. This creates a toxic dynamic where the new owner feels they are competing with their own team.
2. Your Options: Three Paths to Resolution
When structuring the Asset Purchase Agreement (APA) and transition plan, you generally have three options to handle the AR. Each comes with distinct outcomes.
OPTION A : A Buyout (The Cleanest Break)
The buyer purchases the ARs upfront, usually at a discounted rate based on the age of the debt (e.g., paying 90 cents on the dollar for accounts under 30 days, and 50 cents for accounts over 90 days).
- Outcome: Total separation. The seller walks away with a lump sum, and every dollar that enters the practice post-closing belongs to the buyer.
- Risk: The buyer assumes the risk of uncollectable debt. As Dinsio notes, “Patient AR” is often much harder to collect than “Insurance AR,” meaning you might pay for debt you can never recoup without alienating your new patients.
OPTION B : Internal Collections (The “Status Quo”)
The buyer’s team collects the seller’s money for a fee (usually 5-6%) and remits it to the seller monthly.
- The Outcome: High friction. This often leads to the “hot mess” Paula Quinn experienced, where the seller demands access to the software to “audit” the books, micromanages the front desk, and disputes line items. It forces the new owner to police their own staff against FIFO errors daily.
OPTION C : A Third-Party Firewall (External Billing Service)
The practice hires an external billing entity to manage the reconciliation and separation of funds.
- Outcome: Neutrality. A professional third party serves as the arbiter, ensuring the software is managed correctly and removing the emotional burden from the front desk team.
3. The Recommendation from Next Level Consultants
Drawing on decades of experience in transitions, the team at NEXT LEVEL CONSULTANTS (NLC) strongly advises against “OPTION B (Internal Collections).” The risk of letting the billers that worked for the seller plus didn’t collect the first time around is too much margin for error. Take the emotion out of it. The risk for conflict with your new team is simply too high.
“You need a neutral party… it’s just fair.” — Paula Quinn.
To protect the buyer’s cash flow and legal standing, Next Level Consultants recommends a comprehensive strategy involving three specific safeguards:
Third-Party Bill Service
You must remove the burden from the internal team. Stafani Sandoval, a billing expert featured on Dental Unscripted, highlights that funds enter the practice in over six different ways—Virtual Credit Cards (VCCs), EFTs, physical checks, and cash.
By utilizing a service like Next Level Billing, you ensure that a neutral expert is tracking every payment based on the Date of Service, not the software’s default logic. This prevents the seller from demanding access to your practice management software post-close—a major security risk and a source of significant animosity.
IThe “15th of the Month” Rule
Sellers, often anxious about their loss of control, have a tendency to badger the front desk weekly (or even daily) for updates on their money.
- Strategy: Michael Dinsio, MBA advises establishing a firm rule in the contract – The seller is paid once a month, typically 15 days after the month closes (e.g., February 15th for January collections).
- Outcome: This creates a necessary buffer for your third-party biller to reconcile the accounts, fix FIFO errors, and present a clean report. It stops the daily harassment of your administrative team.
The “90-Day Hold” Provision
The first few months of ownership are financially precarious with patients and team adjusting to the changes. Also, credentialing delays can mean insurance checks don’t arrive for weeks, yet overhead must be paid.
- Strategy: Paula Quinn, BSDH, FADH proposes a clause where seller payments are held for 90 days post-close before the first disbursement.
- Outcome: This allows the buyer to build up working capital. Instead of draining your operating account to pay the seller while waiting for your own claims to process, you hold the funds in a “lockbox” style arrangement. This stabilizes the business during the most turbulent phase of the transition.
4. Technical Due Diligence: The Hidden Trap of “Phantom Credits”
Beyond the standard AR disputes, there is a hidden liability that legal experts warn about
Patient Credits, Post Acquisition, Transition
According to transition experts on the Dental Boardroom podcast, “phantom credits” occur when patients have sometimes overpaid or insurance adjustments were missed. This can leave positive balances on patient’s ledgers.
- Danger: If these aren’t addressed in the Asset Purchase Agreement (APA), the Buyer inherits the liability. You could be legally obligated to refund thousands of dollars to patients for overpayments made to the seller years ago.
- Fix: NEXT LEVEL CONSULTANTS advises ensuring your transition team audits the ledger for credits and stipulates that the seller must clear these balances to $0 or provide a dollar-for-dollar credit in escrow at closing.
5. Trusted Authority in Transitions
At NEXT LEVEL CONSULTANTS, advice isn’t theoretical, it’s born from the scars of first-hand experiences. Paula Quinn openly shares her experience and the “hot mess” when she bought her practice. The seller was still accessing her software to do billing, a mistake that caused confusion and distrust.
We help buyers avoid these pitfalls by implementing rigorous systems. Whether it is Stafani Sandoval’s billing team meticulously tracking the seven different ways money enters a practice, or Mike Dinsio, MBA negotiating the “15th of the Month” clause into your Asset Purchase Agreement (APA), we ensure you start your ownership journey protected.
The Verdict:
If you leave AR reconciliation up to the systems that be, you are inviting risk for contention with staff, seller, and at worse a lawsuit. By implementing a third-party firewall and strict contractual payment cadences, you don’t just protect your bank account, you protect your peace of mind.