When looking to purchase a dental practice, it is customary for both parties to start the transaction by signing a letter of intent. The letter of intent, often referred to as an “LOI” or deposit agreement, outlines the major deal points of the transaction. It also sets out a timeline of steps the parties must take before closing their deal.
A well-drafted LOI can save the parties considerable time and expense by settling the major deal points and giving the deal attorneys a clear roadmap for drafting the transaction documents.
So what should be included in a dental practice LOI? Here are some points to consider:
Deposit or Earnest Money
Not all, but most LOIs require that a buyer include a deposit of around 1% of the purchase price in an escrow account to show the good faith of their intentions to proceed with the transaction. The deposit or earnest money will usually be refundable if the buyer cancels the deal before the contingencies expire. However, some LOIs will state that the deposit will be non-refundable or “go hard” if the buyer fails to satisfy the contingencies.
Of course, the most important term of the transaction is the purchase price. How much is the buyer paying for the assets being purchased? The purchase price may have some nuances that the parties must agree to.
Will the seller finance all or any part of the purchase price (usually called a seller-carryback)? If so, what are the terms and conditions of the seller’s loan to the buyer? In addition to a seller carry-back, the parties will have to consider whether there will be a holdback amount to cover any post-Closing seller liabilities. It’s also important to determine whether part of the purchase price will be a contingent payment dependent on the success of the practice post-Closing.
While these last two points are rare in most dental practice sales, they are common in larger sales, especially where a dental service organization is purchasing several practices and keeping the selling doctor on board.
The parties will need to define what asset classes are being purchased and which assets are being excluded. Typically, all of the patient records, tangible and intangible assets of the dental practice, telephone numbers and websites, material contracts, and an assignment of the lease are transferred to the buyer. Excluded assets usually include the seller’s accounts receivable, any cash the seller has on hand as of the closing date, refunds owed to the seller, and the seller’s personal items.
While non-compete covenants are not enforceable in California, as in many states, an exception is made in the purchase of a business. California permits the buyer of a seller’s business to restrict the seller from competing within a geographic area after the closing. As such, the parties want to clearly define these restrictions in the LOI. These covenants should prevent the seller from opening up or working for another dental practice for a number of years after the sale and within a certain reasonable geographic radius.
The sale of a dental practice, while occurring at a certain time and place, must consider the parties’ obligations to each other post-closing. After all, running a business is a fluid enterprise.
The LOI should at minimum settle some of the more important post-Closing issues. Questions on this matter include:
- Who must complete the treatment in progress (usually the seller) and how (usually at the practice at the seller’s cost)?
- Who must complete any of the seller’s repair work (usually the seller, at least for a limited period)?
- How are the seller’s accounts receivable collected post-Closing (usually by the buyer for a short period so as not to disturb the buyer’s ownership of the practice)?
The parties should pin down a closing date early in the transaction to work toward a shared goal. Typically, most dental practice sales close between 30 and 60 days after the parties’ sign the LOI. Sellers will want a short timetable to keep the buyer’s feet to the fire. Of course, buyers may want a longer period of time to take care of all of their pre-Closing due diligence and secure lending.
Typically, there are four major contingencies that must be satisfied before the parties may close their transaction.
- The buyer must complete her due diligence of the practice and feel comfortable that they are purchasing what was advertised.
- Most buyers will need to secure financing for the purchase price and will need time for a lender to underwrite the deal.
- The parties will need to draft and agree on the terms of an asset sales agreement.
- The buyer will have to have the office lease assigned to their corporation.
The LOI should set forth these contingencies and the dates by which the buyer must satisfy them. Again, the seller may be motivated to make these contingency timelines as short as possible while buyers will try to give themselves some breathing room.
During the contingency periods, the buyer will expend both time and consultant fees in order to conduct their due diligence and prepare for closing. To this end, the buyer should add a “no-shop” clause in the LOI that prevents the seller from selling, or entering into discussions to sell the practice, before the parties’ intended closing date.
Not all dental practice letters of intent are created equal. The good ones settle the major deal terms clearly, lay out the major post-closing obligations, have a definitive timetable for the contingencies and closing. All these factors create a roadmap for success for both parties.
If you would like to have a California dental attorney with 10+ years of experience review your letter of intent or answer your questions about your dental practice sale or purchase, please schedule a free 15-min phone consultation today.