The Top 5 Components of a Letter of Intent

Introduction

Transitioning a dental/medical practice involves careful planning, negotiation, and clear communication. The first step in the process should be a Letter of Intent (“LOI”),a crucial document that outlines the terms and conditions of the transition. TheLOI, also referred to as a “term sheet” or “offer letter” provides a blue print for the transaction as well as a timeline for certain events including the closing date, due diligence schedule and closing conditions (i.e. financing approval). The LOI is largely non-binding in the sense that there is noobligation for either side to close on the transaction. However, barringa nything unforeseen and so long as the closing conditions are satisfied, the parties are expected to honor the terms of the LOI and proceed forward to closing. After the LOI is signed, a more detailed purchase agreement will be prepared which will be binding on the parties.

Whether you're selling your practice or acquiring a new one, here are the top 5critical components of a LOI to consider:

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1. Purchase Price and Payment Structure

It may sound obvious, but the most critical part of a LOI is the purchase price and payment structure, since if there is no “meeting of the minds” on the money, there is no chance of a deal coming to fruition.  For some deals, the entire purchase price is paid in a lump sum at closing, in which case this provision of the LOI is short and simple.  However, if there is a portion of the purchase price being paid through seller financing, it’s critical to make sure the terms of the financing (interest, amortization, maturity date, etc.) are specified. Likewise, if there is a portion of the purchase price being paid through an earnout, it’s critical to make sure the terms of the earnout (timing of the earnout, conditions for achieving the earnout, etc.) are detailed.

2. Exclusivity

From a purchaser’s standpoint, “exclusivity” is a close second place in terms of importance.  An “exclusivity” provision prevents the seller from entertaining competing offers from, and negotiating with, other potential buyers for a period of time after the LOI is signed.  The last thing a purchaser wants is to be working in good faith to get a deal closed, and spending time and money in the process, only to get a call from the seller saying that they got a better offer and are terminating the LOI.  From a seller’s standpoint, it’s a normal provision and not something that should be controversial so long as the time period for exclusivity is reasonable.  Limiting the time period prevents a situation where the practice is off the market for too long of a period and encourages the prospective purchaser to move quickly toward signing a purchase agreement.

3. Confidentiality

A“confidentiality” provision is critical to protect sensitive information shared during negotiations. Both parties should agree not to disclose details of the transaction, or even the simple fact that a transaction is being contemplated, to third parties.  This is something the seller is often more sensitive to since word of a prospective transaction leaking to patients, referral sources or employees could have major negative ramifications.

4. Accounts Receivable

Addressing how a seller’s accounts receivable as of closing (“Closing A/R”) will be handled in the transaction is also important as it is tied to money. At a very basic level, Closing A/R is either (i) included as part of a sale (meaning the purchaser owns the Closing A/R as it comes in after closing) or (ii) excluded from a sale (meaning the seller retains all rights to the Closing A/R as it comes in after closing).  If Closing A/Ris included, then the question becomes whether the purchaser is paying for theClosing A/R (usually based on a weighted aging-based scale) or whether it’s just included as part of the purchase price. If Closing A/R is excluded, then the question becomes whether the purchaser is receiving an administrative fee for processing the Closing A/R and for how long the purchaser is required to do so.  

5. Non-Competition

Non-competes have long been a cornerstone of practice transitions in order to protect the purchaser’s investment and preserve patient relationships. While the existence of a non-compete should not be controversial, the scope (geographical area) and duration should be detailed in the LOI to ensure there are no surprises later on in the process.  The new Federal TradeCommission (FTC) regulation banning non-competes has created a bit of confusion for purchasers and sellers alike, but it is important to know that non-compete agreements directly related to the sale of a practice remain valid, provided they are reasonable in scope (geographical area) and duration.

Conclusion

Crafting a comprehensive LOI is a pivotal step in the practice transition process. It sets the foundation for negotiations and ensures that both parties have a clear understanding of the terms and conditions before proceeding with a more detailed purchase agreement. By addressing these critical components thoughtfully and clearly, you can pave the way for a smoother transition and mitigate potential disputes down the road. Seeking legal and financial advice specific to practice transitions is advisable to ensure all aspects of the LOI properly align with the goals and protect the interests of both parties.