Why Some Orthodontic Practices Look Profitable But Aren't: Understanding Contracts Receivable
Imagine finding the perfect orthodontic practice to purchase - strong patient base, established reputation, reasonable asking price. You're ready to sign. But hidden in the financials is a detail that could mean the difference between a profitable acquisition and years of financial struggle: contracts receivable. Before we dive into this critical concept, let's start with the basics.
What is Accounts Receivable?
Put simply, Accounts Receivable (AR) is money you've already earned, but haven't yet received payment on.
In most dental specialties, this is minimal. Here's why:
• Fee-for-Service (FFS) practices:
Patients pay in full the same day. A filling is done, the patient pays $200, and the transaction is complete.
• Insurance-based practices:
The treatment is completed, the claim is submitted, and when the insurance company pays (usually within 30-60 days), the AR is resolved.
In both cases, the work is finished quickly - often in one visit or over a few weeks - so money owed is typically collected within a month or two.
Why Orthodontics Is Different: Enter Contracts Receivable
Orthodontic treatment runs on a different timeline than most other dental procedures. Unlike a crown that can be placed in two visits, or even a root canal and restoration that can be performed in three, orthodontic treatment spans 18-24 months with 15-24 appointments. As treatment is performed over a longer period, and the cost can run thousands of dollars, many orthodontic offices allow for some flexibility with remuneration to make it easier for their patients to afford treatment. Let’s break down the two most common payment structures:
Example 1: The Pay-in-Full Patient
• Day 1: Patient begins treatment. Total cost: $6,000. Patient pays in full.
• Months 1-24: Treatment continues. No additional revenue from this patient.
• For the practice: All revenue received upfront, but work continues for two years.
Example 2: The Payment-Plan Patient
• Day 1: Patient begins treatment. Total cost: $6,000. Patient puts $1,500 (25%) down.
• Months 1-18: Patient pays $250/month ($4,500 total) while treatment continues.
• For the practice: Revenue comes in gradually as work is performed.
That remaining balance - the $4,500 still owed and being paid overtime - is called Contracts Receivable. It's a specific type of Accounts Receivable unique to practices with long-term treatment and payment plans.
While other dental specialists sometimes offer payment plans for large cases, the treatment is typically completed within weeks or months, meaning the acquiring doctor typically isn’t completing the expensive cases started by the previous owner. With Ortho, there can be a full year or more of treatment left, and the selling doctor typically only sticks around for a couple of months post-sale. These unfinished cases become the responsibility of the acquiring doctor to complete, hence why it’s a larger factor to consider when looking at an office to purchase.
Why This Matters When Buying a Practice: The Cash Flow Reality
When you acquire an orthodontic practice, you inherit all active patients - including the responsibility of completing their treatment. This creates a critical question: Has the practice already collected the revenue for these patients, or is money still coming in?
Scenario A: High Contracts Receivable (Good for Buyer)
Dr. Coy’s practice has $400,000 in contracts receivable - money that patients will pay over the next 12-18 months as you complete their treatment. This means:
• ✓ Predictable cash flow to cover payroll, rent, and your loan payment
• ✓ Revenue coming in while you perform the work
• ✓ Strong financial cushion as you build your new patient base
Scenario B: Low Contracts Receivable (Potential Red Flag)
Dr. Coy’s practice has only $50,000 in contracts receivable - most patients paid in full upfront. This means:
• ✗ You inherit 300 patients requiring 6-18 months of continued treatment
• ✗ All the revenue for these patients was already collected (and likely spent by Dr. Coy)
• ✗ You're performing $500,000+ worth of work with little to no income from these patients
• ✗ You must cover all practice expenses while completing "free" treatment
The Bottom Line:
In Scenario B, you could be operating at a loss for your first 12 months, even though the practice looks healthy on paper. Additionally, the practice revenue will be higher, potentially inflating the purchase price.
What You Should Do
Every practice acquisition involves some patients who have prepaid in full, meaning there will be work to complete that generates no immediate revenue. This is normal and expected and is part of the goodwill in the transaction. The ratio of how much of the revenue has been realized versus what is still in contracts receivable matters enormously, and should be accounted for during due diligence.
Before making an offer, work with a CPA or a buyer’s representative who specializes in dental acquisitions to:
1. Calculate the contracts receivable ratio: What percentage of active patients still owe money versus have paid in full?
2. Project first-year cash flow: Based on the existing patient base and payment plans, what revenue can you count on while completing inherited treatment?
3. Adjust the purchase price: A practice with low contracts receivable may need a price reduction to account for the "free" work you'll be performing.
4. Negotiate transition terms: Consider asking the seller to leave prepaid funds in the practice account or structure the purchase price to account for future revenue gaps.
Key Questions to Ask:
• What is the total contracts receivable balance?
• What percentage of active patients are on payment plans versus paid in full?
• How many months of treatment remain for the average active patient?
• Will any prepaid patient funds remain in the practice account after closing?
Understanding contracts receivable isn't just about numbers - it's about ensuring your first year of practice ownership is financially viable, not just on paper, but in reality.
Written by: Conor DePalma and Eric J. Coy, DDS
What is Business Overhead Expense (BOE)? BOE is a type of disability insurance specifically for business owners. It is designed to reimburse an owner's practice for fixed expenses associated with the business if the owner becomes disabled. It is very important to know that BOE insurance does not replace your personal disability income. These policies are designed to help keep the business afloat while you recover. If you have a personal disability insurance policy and own a practice, it is very important that you get a BOE policy in place. If you own a business and just have a personal disability policy in place, then you’re going to have to dip into your personal benefit to help keep the business afloat while you’re out of work. Having the two policies in place allows you to keep your business and personal benefit income separate. As a dental practice owner, you are solely responsible for keeping your business running. So, if you become injured and are unable to work, your income might stop but the operating costs of your practice will continue. This is where BOE insurance becomes a very important piece of financial and practice management strategy. What expenses does BOE typically cover? Employee Salaries: Wages, payroll taxes, benefits for your staff Rent or Mortgage Payments: The cost of your office space Utilities and Maintenance: Electric, gas, water, internet, phone services Insurance Premiums: Malpractice, general liability, property insurance Professional services: Accounting, legal and billing services Lease Payments: dental chairs, x-ray machines Features and Things to consider: Monthly Benefit - Determining the benefit amount is one of the first steps for getting BOE. The monthly benefit amount should match or slightly exceed the average monthly eligible expenses. Increase Options - Increase riders are extremely important to have in these policies for a couple of reasons. One, if you’re just starting your business you may not want to pay for a large benefit of BOE up front so, you are able to get a smaller benefit to lock your health and rates and then increase the benefit later on when the practice is doing well. Two, As your business starts to grow so will your expenses and it is important to make sure you increase your BOE to properly cover you throughout the years. Tax Deductible - The premiums you pay on BOE insurance are generally tax-deductible as a business expense. In some cases, a Business Overhead Expense policy may be required when obtaining a loan but whether it’s required or not, it is a policy that every owner should have. When you get Business Overhead Expense insurance, you are implementing a safe guard for your practice, protecting your staff, and protecting your financial future against any unexpected accidents. Written by: Michael Dougherty
When it comes to opening a Start-Up Dental Practice, making sure you are properly insuring your business is one of the many tasks on your to-do list. Thankfully, we can help take that burden off your back by not only providing these insurances for you but educating you along the way, so you feel comfortable and knowledgeable in what you are carrying to protect yourself and your business. Start-Up practices come with a time period where you have physical possession of your leased or owned space, but you are not operating your business yet. During this period your business is being built to bring your design vision to life. Once the lease or your property closing documents are signed, two important insurances that you will be required to have by the landlord and/or bank is General Liability and Builders Risk Insurance. General Liability Insurance ensures protection against any outlying claims that are not related to direct dental work. For example, if someone were to get injured on your property, General Liability Insurance would provide coverage related to bodily injuries, property damage, and reputable harm. This type of policy protects you and your practice from legal costs, settlements, and judgements arising from such claims. Builders Risk Insurance is a property insurance policy that is designed to cover property during construction. This policy protects buildings and structures as well as materials and supplies from numerous risks. Some examples of those risks are fire, lightning, hail, theft, vandalism, explosions, etc. This type of coverage is often needed to be supplemented by a General Liability policy to fully cover a renovation of construction project. Once construction is complete and equipment begins to arrive at your practice, these policies get cancelled and transitioned into a new comprehensive policy called a “Business Owners Policy.” What is a Business Owner’s Policy and How Does It Work? A Business Owner’s Policy is built of 5 major components • Business Personal Property Insurance – coverage for your equipment, furniture, fixtures, computers, etc. • Cyber Liability and Data Breach Coverage • Employment Practices Liability Insurance • Business Income Interruption Insurance - coverage for lost income for the practice if there is property damage that prevents the office from being open and operational. • Workers Compensation- a state-mandated insurance that provides your employees with medical, wage, and other benefits if a work-related injury and/or illness occurs while on the job. Now that we have simplified insurance, you can start your journey on building your plan by contacting your local CFS Representative to learn more! Written by: Nick Cepparulo
When looking to own a dental practice or dental specialty office a Dentist/Dental Specialist is faced with this daunting choice: ‘Do I buy an existing office or build my own?’ Well, I am hoping to help people interested in their journey bridge this gap and find out what is best for them. To start, let’s acknowledge some facts here: Start Ups are not bad. Every office in existence started somewhere. Buying an office is not bad, there are a lot of good offices that have strong inspiring values that people want to emulate. There are start ups that do not do too great and have a lot of problems. There are acquisitions that are overvalued and overpromising you. Either option can make you a lot more income and seg-waying into ownership will in almost every instance up your income ceiling if done properly. With this baseline knowledge let us dive into how we can find what is best for YOU. We will start with buying an office since as of October 2025 we have had more acquisitions in play than the last two years combined and there is clearly a shift in the market. Now there are two main strategies in buying a dental office and today I am going to focus on one strategy that has become very popular, The Jump-Start Practice. Now, purchasing a Jump-Start is basically any office under $600,000 in value. These offices are unique in that they typically carry a lot of hygiene and/or refer a lot of patients away. The income is low but it is normally due to low amounts of active cases or limited availability in the true schedule of the office. The reason these offices are called Jump-Starts are that they require working and human capital to bring the bulk of the value to the new buyer. You are not buying this office to leave it as is or just do what the existing owner is doing. These offices need TLC (not the TV channel) , but true Tender Love and Care. When buying a Jump-start you are committing to increasing hours, potentially bringing on more staff or paying overmarket to keep on more doctors than the current work load needs. All of this is done for a very intentional reason. You are buying this office to expand and grow and this will require a modest working capital loan from your lender to invest in Marketing, Overstaffing and most importantly revamping the office (typically equipment in this office has been around since you were born and the look will not always appeal to today’s age of patient.) With all of these hurdles in mind, You might wonder, is this even worth it? The answer I am going to give isn’t the best. The answer is Maybe? We need to check a few items and pass a few tests to make sure you are on track: 1. Run demographics on the area: Does this area support your procedures you want to perform? Is there a lot of competition? Sometimes it seems saturated in an area but dentists are tricky. A lot of people have different selling points to their offices. You need to find a region that supports your preferred market where you can grab strong referral partners and make strategic alliances for a better future. 2. Apply for Funding Are you lendable? It is important to speak with a Dental Lender to understand where you stand as a borrower. Make sure you will be eligible for working capital and even the offices you are looking at. A lot of people make the mistake of doing this last and this is the most crucial step because if a bank refuses to lend then you probably do not want it. Find out the maximum you qualify for, this will allow you to hone in on the right parameters of office and keep your goals tangible. Nothing worse than putting in all of this effort and finally getting a great deal to be told you need to wait a year and do it all over again ☹ 3. Hire a team This seems easy but a team needs to be people who jive with your goals and interests. You need a few people in almost every scenario. These people include but are not limited to the following: A financial advisor, Insurance team, Accountant, Banker, Real Estate Agent, Lawyer, and even potentially a consultant! Some of the team may overlap on duties but the main point is to start building this and pick one of these people to be your quarterback to run the deal. This typically falls on the advisor to run the show and make sure all is going according to plan. 4. Get a valuation Now I tell all of my clients that you probably want to do a shorthand valuation to start. This means hiring an advisor to tell you if the price is even in the right range! Here at CFS we do it for free within reason and I will tell you why. The main reason is if you buy an office that grows too slow, you will be faced with challenges to offload the office if needed and will most likely be ineligible for future lending until it grows for at least TWO YEARS! This is the most crucial part as everyone tries to low ball or high ball a practice. Brokers will do it to help their clients on both sides and my advice is to try and buy the office for as fair as you reasonably can. This means being okay with overpaying sometimes as high as 25% on value. Now this does not mean to get ripped off but it means if we have a solid plan to grow than it is okay to overpay sometimes. You can also win in other ways by negotiating better lease terms, locking in the selling doctor on a good rate / longer time frame, maybe even getting other concessions later on. Sometimes the people who underpay for an office get what they pay for: The doctor could bail early, staff doesn’t care / is not bought in, patients do not get a letter, the list goes on and on. 5. Do not get greedy and do not fixate on one office Just like dating , there are a lot of offices out there and people often feel committed before the process even starts. I would highly recommend reviewing 3-5 offices at a time. Even the less than desirable ones so you can learn how to negotiate and try out the effectiveness of your selected team. I hope this small article helps anyone in this situation. Please write in if you want other topics to be discussed here or even on the Dental Dummies Podcast! We will be releasing an article every week! Thank you for your time and good luck on your journey! Make it your own but do not be scared to ask for help. We are fortunate that dentistry has less than a 1% fail rate so do not be discouraged or scared to pursue your dream and be an owner! Written by: Joseph DiMarco