Oftentimes, we are asked these questions by a selling or acquiring Doctor. A Letter of Intent’s purpose is to provide an outline of the essential terms under which parties are willing to proceed with negotiating and reaching a definitive agreement.
Letters of Intent are designed to be non-binding agreements on the most important terms of the proposed transaction.
The terms typically include, among other things, the following:
- The Purchase Price. This entails delineating the price and the structure of the payments (all cash at closing or will the seller provide financing). This section would also include the all important allocation of the purchase price.
- Designation of the assets to be included in the proposed transaction. This is a specific list of items included or excluded from the sale such as accounts receivable, software programs, and personal property items.
- Due diligence period. This details the timeframe and parameters under which the parties will have time to investigate and inquire about various aspects of the practice.
- Allocation of expenses. This line items details the expenses for which each party is responsible.
- Governing law. It is important to specify the state laws that will apply as well as the venue for any possible dispute resolution.
- Confidentiality provision. This explains each party’s obligation to keep information they acquire during the negotiations confidential. Often times, this provision will allow the parties to share this information with their trusted advisors.
- Contingencies for completing the deal. This may include items such as financing, completion of the above-referenced due diligence, and continued contractual employment or consulting arrangement with the exiting owner.
- Target date for the closing.
An additional and oftentimes undervalued component of the Letter of Intent is the exclusivity period they typically establish. By entering into a Letter of Intent, the parties are agreeing to exclusively deal only with one another, and to not entertain other potential opportunities. This ensures involved parties are focused on fulfilling contingencies and conducting due diligence without concern that others are trying to interfere with the opportunity before completion.
Although Letters of Intent are typically non-binding and the obligation of the parties are subject to a successful negotiation and execution of a definitive binding agreement, that process is made easier by having an upfront mutual understanding of the major terms of the deal. Furthermore, the confidentiality and exclusivity provisions of a Letter of Intent are almost always binding on the parties.
The terms of a Letter of Intent should be carefully considered as they not only set the tone for future negotiations, but by executing the Letter of Intent, parties signify their comfort level with the terms. This will also set an expectation that the terms won’t be significantly modified. By having a well drafted Letter of Intent in place, you are setting yourself up for a smoother path to the successful closing of your practice sale or acquisition.
King Legal Group, S.C. and Attorney Mark F. King have been representing clients throughout Southeastern Wisconsin for the past twenty plus years in matters related to Estate Planning, Taxation and Corporate Law with a focus on dental practice transitions.
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