Table of Contents
Buying or selling a dental practice is a significant step, and one of the earliest documents in the process is the Letter of Intent (LOI). While not the final contract, the LOI lays the groundwork for the deal. It spells out the big-picture terms, helps avoid misunderstandings, and sets expectations before attorneys draft the formal purchase agreement. In many ways, it acts as the roadmap for the acquisition.
What Is a Letter of Intent?
A Letter of Intent is a preliminary agreement between a buyer and a seller. In a dental practice acquisition, it outlines the key business terms both sides have discussed and agreed upon in principle.
It is typically signed after the buyer has completed initial due diligence, such as reviewing basic financials, patient count, and location factors, but before the buyer conducts any in-depth due diligence and the parties invest time and money in drafting the final contracts. While most provisions in an LOI are not binding, certain sections (like confidentiality or exclusivity) often are.
In short, the LOI helps move the deal forward while protecting the interests of both parties.
Why an LOI Matters in a Dental Practice Sale
Without a Letter of Intent, buyers and sellers risk miscommunication or mismatched expectations. An LOI provides:
- Clarity: Both sides agree on the main terms upfront.
- Efficiency: Lawyers and advisors draft contracts based on agreed deal points.
- Confidence: The seller knows the buyer is serious, and the buyer knows the seller is committed.
- Protection: Confidentiality and exclusivity clauses can safeguard sensitive information.
By addressing these points early, the LOI helps ensure the acquisition process runs smoothly.
Key Components of a Dental Practice LOI
While every transaction is unique, most LOIs in dental practice acquisitions cover similar topics. These include:
1. Purchase Price and Payment Structure
The LOI should specify the proposed purchase price and the method of payment. Will it be all cash at closing, financed over time, or structured with an earn-out based on future performance? Clear terms here set the tone for the deal.
2. Assets vs. Stock Purchase
For dental practices, most transactions are structured as asset purchases rather than stock or membership interest purchases. The LOI should specify which assets are included, such as equipment, patient records, goodwill, and, in some cases, accounts receivable.
3. Real Estate Arrangements
If the dentist owns the building, the LOI should clarify whether the property is being sold with the practice or leased back to the buyer.
4. Transition and Employment Terms
Will the selling dentist continue working for a period after closing to ensure a smooth transition? If so, the LOI may outline the basics of an employment or consulting agreement, including duration and compensation.
5. Due Diligence Period
The LOI should set a timeline for due diligence. During this period, the buyer reviews detailed financial statements, legal documents, staff contracts, and compliance issues before proceeding to final contracts.
6. Confidentiality and Exclusivity
Most LOIs include binding provisions requiring both parties to keep deal terms confidential. They may also include a “no shop” clause, preventing the seller from negotiating with other buyers during the exclusivity period.
7. Target Closing Date
Finally, the LOI should set an expected timeline for closing. While not set in stone, this helps both parties plan around key milestones.
How the LOI Fits Into the Acquisition Process
Think of the LOI as the bridge between initial discussions and the binding purchase agreement. Once the LOI is signed:
- The buyer conducts detailed due diligence.
- The buyer will obtain financing for the deal.
- Attorneys draft the Asset Purchase Agreement and other legal documents.
- The parties finalize a transfer of the seller’s lease, or a new lease is negotiated.
- The deal moves toward closing.
Without an LOI, these steps can become disorganized, leading to delays or disputes.
Why Legal Guidance Matters
A well-drafted LOI saves time, money, and stress by setting clear expectations from the start. For dental practice acquisitions in California, working with an attorney who understands both the legal and practical aspects of these transactions is vital.
At Polished Legal, we help dentists structure fair, effective Letters of Intent that protect their interests and set the stage for a successful closing. If you are buying or selling a dental practice, contact us today to get started with the right foundation.
