Accounts Receivable Due Diligence: Complete Buyer's Guide

Updated March 2026 | Due Diligence | 30 min read

Accounts receivable (AR) represents money owed to the practice by patients and insurance companies. For dental practice buyers, AR quality directly impacts cash flow, purchase price, and the risk you're assuming. A practice with $200,000 in AR might actually be worth $160,000 (if collections are poor) or $190,000 (if collections are excellent). This comprehensive guide teaches you how to analyze AR aging, assess collectability, structure the purchase, and protect yourself from bad debt.

Why AR Due Diligence Matters

When you buy a dental practice, you're typically buying the assets—not the legal entity. This creates a fundamental question: What happens to the money patients owe? If Dr. Smith collected $50,000 last month but only $40,000 was paid (with $10,000 still outstanding), who gets that $10,000 when you take over?

The answer depends on your purchase agreement structure. But before you can negotiate that structure, you need to understand what you're actually buying. Poor AR analysis has caused buyers to overpay by tens of thousands of dollars or assume collection burdens that should belong to the seller.

Understanding AR Aging Reports

The AR aging report is your primary due diligence tool. It categorizes outstanding balances by how long they've been unpaid. Healthy practices have most AR in the current (0-30 day) bucket, with progressively less in older categories.

The Standard Aging Buckets

How to Read the Aging Report

Request AR aging reports for the past 12 months. Look for these patterns:

Month-over-Month Trends:

• Increasing AR without increasing production = collection problems
• Spikes in 90+ day AR = recent billing issues or staff changes
• Consistent patterns = stable (good or bad) collection processes

Seasonal Patterns:

• January AR spikes (patients delaying payments after holidays)
• December AR increases (insurance benefits expiring)
• Summer slowdowns (families delaying non-urgent care)

Analyzing AR Quality by Payer Type

Not all AR is equal. Insurance receivables behave differently than patient balances, and government programs (Medicare/Medicaid) have their own patterns.

Insurance AR

Insurance AR typically has higher collection rates but longer collection cycles. Here's what to analyze:

Key Metrics:

• Days in AR: How long from service to payment? Industry average: 14-18 days for electronic claims, 30-45 days for paper
• Clean claim rate: What percentage of claims are paid on first submission? Target: 95%+
• Denial rate: How often are claims denied? Target: Less than 5%
• Write-off percentage: What percent of AR is ultimately written off? Target: Less than 2%

Patient AR (Self-Pay)

Patient balances are riskier than insurance AR but often collected faster when practices have good financial policies.

Key Metrics:

• Payment at time of service rate: What percent of patient responsibility is collected at checkout? Target: 70%+
• Payment plan success rate: If the practice offers payment plans, what percent are completed successfully?
• Collection agency placement rate: How often does AR go to collections?

Government Program AR (Medicare/Medicaid)

Government AR has unique characteristics:

• Predictable payment timelines (usually 14-21 days for Medicare)
• Strict billing requirements (denials often due to documentation)
• Lower fee schedules mean smaller balances
• Minimal bad debt (government always pays valid claims eventually)

Calculating AR Collectability

To determine what AR is actually worth, apply collection probability by age bucket:

AR Purchase Structure Options

There are three primary ways to structure AR in a practice purchase. Each has pros and cons.

Option 1: Buyer Purchases AR at a Discount

The buyer pays the seller a percentage of the AR balance (typically 70-90% depending on quality). The buyer then collects 100% of the AR and keeps the difference as profit.

Advantages:

• Buyer controls collections and patient relationships
• Seller gets immediate cash at closing
• Clean break for seller

Disadvantages:

• Buyer assumes collection risk
• If collections exceed expectations, seller doesn't benefit
• Buyer must have systems to collect old AR

Best for: Buyers with strong billing/collection systems and AR with good collectability

Option 2: Seller Retains AR

The seller keeps ownership of all AR and continues collecting after closing. The buyer starts fresh with zero AR.

Advantages:

• Buyer has no collection burden or risk
• Clean start with new patients
• No billing staff time on old accounts

Disadvantages:

• Patient confusion about who to pay
• Seller incentive to collect may diminish post-sale
• Insurance companies may send payments to wrong office

Best for: Poor quality AR or buyers who want simplicity

Option 3: Escrow with True-Up

The AR is held in escrow after closing. As collections come in, they're distributed between buyer and seller according to a formula. After 6-12 months, any remaining AR is returned to seller or purchased at an additional discount.

Advantages:

• Fair to both parties based on actual collections
• Buyer doesn't overpay for uncollectible AR
• Seller benefits if collections exceed expectations

Disadvantages:

• Complex to structure and administer
• Requires ongoing cooperation between buyer and seller
• Can delay full resolution for months

Best for: Large AR balances or uncertain collectability

Red Flags in AR Analysis

Negotiating AR in the Purchase

When to Walk Away

Some AR problems indicate practice-wide issues that make the purchase risky regardless of price:

• AR over 120 days exceeding 10% of total
• Collection rate below 85% without explanation
• Evidence of insurance fraud or upcoding
• Patient complaints about billing exceeding 5% of visits

Negotiation Strategies

If AR Quality is Good:

• Offer to purchase at 85-90% of face value
• Structure with 6-month escrow for disputed accounts
• Get seller commitment to assist with collections for 30 days

If AR Quality is Poor:

• Offer to purchase current AR (0-30 days) only
• Purchase at 60-70% discount
• Or insist seller retains all AR
• Request AR clean-up as closing condition

Post-Purchase AR Management

If you purchase AR, implement these best practices immediately:

1. Send introduction letters explaining the transition and directing payment to your office
2. Call all patients with balances over $500 within 48 hours of closing
3. Set up payment plans for patients with large balances who express willingness to pay
4. Send statements immediately to all 31-60 day accounts
5. Place 120+ day accounts with collections within 30 days if not responsive

Conclusion

Accounts receivable analysis is one of the most important—and most overlooked—aspects of dental practice due diligence. A practice with $200,000 in AR isn't necessarily worth $200,000 more than a practice with no AR. The quality, age, and collectability of that AR determine its true value.

Take time to thoroughly analyze aging reports, calculate collectability, and structure the purchase to protect yourself. The hours you invest in AR due diligence can save you tens of thousands of dollars and prevent collection headaches during your critical first year of ownership.

Remember: Bad AR isn't just a financial problem—it's often a symptom of deeper practice management issues. Use AR analysis as a window into the practice's operational health, not just a balance sheet line item.

Related Resources

• Complete Due Diligence Checklist for Buyers
• Dental Software and Records Evaluation
• Dental Practice Valuation Guide
• Buying vs Starting a Practice