Whether negotiating the sale or purchase of a dental practice, or a buy-in by an associate dentist, the importance of preparing a written letter of intent (“LOI”) cannot be overstated. It is all too common for doctors to ignore the importance of a LOI, and instead proceed with informal discussions and a hand-shake. However, this approach often leads to miscommunication between the parties as to the buy-in or sale, and results in wasted time and money for both sides.
Benefits of Using a Letter of Intent
The use of a written LOI is beneficial in an associate buy-in or purchase of a dental practice for a number of reasons. First, it allows the parties to avoid misunderstanding concerning key terms and conditions of the transaction while negotiating a finalized contract, and before the buyer spends time and money performing due diligence. The LOI should summarize the key terms and conditions that were tentatively agreed to by the parties in the first round of negotiations. This will ensure the parties are “on the same page” before proceeding with further negotiations and performing due diligence. A LOI is also important at this stage in order to identify any deal-breakers that would prevent the parties from reaching a final agreement. For instance, imagine the parties are on the same page with regard to the purchase price, but have diametrically different views as to how the purchase price should be paid (i.e., the payment terms). Or, what if the selling dentist is nearing retirement and wants to stay on as a part-time associate for a period of time, but the buying dentist has other plans? A LOI would identify these types of issues at an early stage of negotiation, before the parties incur additional legal fees for the preparation and negotiation of the final transaction documents. If the parties are unable to agree on key terms and conditions at this early stage, then it is unlikely they will be able to reach a final agreement.
Furthermore, a written LOI will give the buying dentist the confidence to begin performing due diligence, knowing that the parties are in agreement with respect to the key terms and conditions of the sale or buy-in. It may also assist the buying dentist in obtaining financing for the acquisition from a lender, as many lenders will require a written LOI between the parties before issuing a loan commitment to the buyer.
Binding Nature of Letters of Intent
While there is no doubt that a written LOI can save both parties additional headaches and unnecessary costs that could result from the failure to use a LOI, it is important that the parties use clear language to avoid any ambiguity as to which provisions are binding. Some doctors are hesitant to use a LOI because they do not want to risk being bound by provisions that the parties intended to be non-binding. This concern is easily addressed by the use of clear and concise language as to which terms are binding, and which are not. Dentists should discuss their intentions as to the binding nature of certain terms openly with the other side, and with their legal counsel.
The benefits of using a LOI in a dental practice sale or buy-in far outweigh the concern some doctors may have about the binding nature of such documents, especially when those concerns are easily addressed with a well-drafted LOI. It is important that dentists engage legal counsel not only to assist in the negotiation of a sale or buy-in, but also to prepare a LOI that summarizes the key terms and conditions of the transaction.