The first step toward buying a practice: The letter of intent
Matthew Odgers, JD, explains the basics and "need to knows" about letters of intent.
Setting clear expectations early on greatly improves the chances of a successful and stress-free practice transition
A letter of intent (LOI) is a document that describes a purchaser’s intent to acquire the assets or equity of a business. It's also the first important legal step if you're serious about purchasing a dental practice. In this article, we'll review the basics and "need to knows" about LOIs for dental practices.
Use of a letter of intent
Most dental transactions begin with the parties negotiating and signing a letter of intent. The letter of intent allows the parties to ensure that they agree preliminarily with the fundamental terms of the deal before spending the time and money to draft a full-fledged agreement and without being legally bound to complete the transaction.
The basic idea is that a letter of intent starts out as a proposal from one party to the other, which is then negotiated and modified so that the final LOI reflects both parties’ overall expectations of the deal. If the parties cannot agree on the letter of intent, they will quickly realize that they are unlikely to be successful at completing the business transaction.
Structure and components
A letter of intent can be as short as one page or consist of multiple pages, but it is generally shorter than a definitive purchase agreement. In general terms, a letter of intent sets out the basic parameters of the practice transaction. It sets the stage for the buying dentist to begin the due diligence process in order to establish:
- if the buyer is interested in closing the transaction; and
- if the price the buyer is willing to pay is justified.
Subject to the buying dentist’s findings, both the buyer and the seller will either negotiate a firm purchase agreement or terminate the letter of intent.
Binding vs. non-binding provisions
It is generally best that a letter of intent have certain provisions that are non-binding (which allow for further negotiation), and certain provisions that are binding (which do not allow for further negotiation). Binding provisions include confidentiality and removing the practice from the market during the negotiations.
Details comprising the letter of intent
A letter of intent often contains very specific information pertaining to practice transition. Here is a list of the most common issues that should be addressed in a dental practice purchase letter of intent.
• The purchase price. Describe how much is being offered for the practice and whether it is for equity or assets. If it is a stock deal, it should include whether the buyer is acquiring 100% of the stock or some lesser amount.
• Accounts receivable (AR). Specify whether the accounts receivable will be purchased and if any discounts will be applied. If the buyer is not purchasing the accounts receivable, the letter of intent should specify the terms for collecting and submitting the incoming accounts receivable after the close date.
• Assets to be purchased. While it may be assumed that all assets used in the production of income are included in the sale, it is smart to have a general statement reaffirming that assumption in the letter of intent. The letter of intent should also specifically address any excluded assets.
• Debt, liability, and patient credits. It should be clear that the buyer is acquiring the practice debt free, that the seller will be responsible for any outstanding patient credits, and that there are no ongoing contractual obligations. In addition, include an indemnification clause stating that the buyer will not assume any of the seller’s liability’s prior to the close date and that the seller will not assume any of the buyer’s liability after the close date.
• Noncompete agreements. Specify the terms of any noncompete provisions such as geographical restrictions (miles from the practice) and time restrictions (years in which the noncompete will be valid).
• Lease agreement. Describe the general provisions of the current lease and provide that the sale of the practice is contingent upon successful assignment or execution of a new lease for the office space.
• Retreatments. This is one of the more sensitive provisions and it is recommended for both parties to agree to the terms for retreatments in the letter of intent. The basic terms should include who is responsible for retreating patients and how much the buyer will earn if the buyer performs the work.
• Access and due diligence. Detail the terms in which the buying dentist and the buyer's team will have access to the practice to conduct financial and clinical due diligence.
• Confidentiality. As the buyer, you may have already signed a confidentiality agreement. At this point, you are simply reaffirming your adherence to that confidentiality agreement. However, you should also require that the seller keep the terms of your letter of intent confidential.
• Exclusivity. The buyer wants to make sure that the seller is not negotiating to sell the business to someone else while the buyer is spending resources, doing due diligence, and arranging to finance the purchase. Therefore, the buyer should have the selling dentist and the seller's representatives agree to cease all conversations and negotiations with other potential buyers.
• Employment. If the seller is going to continue working for the practice as an associate, specify the general terms for the employment arrangement.
• Expense. The letter of intent should make clear that each party is responsible for its own expenses in terms of completing the business transaction.
• Closing date. Provide a “best effort” closing date. While it may be just an estimate, it will give you and the seller a goal to shoot for.
• Expiration date. Set an expiration date for your letter of intent. It is important to place a reasonably short expiration date on the letter of intent because both parties need to know whether or not a deal can be made and if they should be exploring other options. A week to ten days is reasonable.
Remember that each term agreed upon in your letter of intent is one less term that has to be negotiated in a later final agreement. Thus, the more detailed and specific the letter of intent is, the better off both parties will be in the long run. Setting clear expectations early on will greatly improve the chances of a successful and stress-free practice transition.
Matthew Odgers, JD, is the owner and founder of Odgers Law Group, a firm based in San Diego, California, that focuses on working with small business owners in the areas of dentistry, medicine, and entrepreneurship. The practice services health-care professionals in San Diego in both the dental and medical fields with an emphasis on practice transitions, employment agreements, office leases, practice compliance, and dispute resolution.