Dental and Medical Counsel Blog

Key Things To Consider When Drafting A Letter Of Intent

June 27, 2018
Buying a Dental Practice - Letter of Intent

Early in the process of buying a dental practice, before you formally purchase the practice, you'll start with a letter of intent. Your letter of intent is the first piece of legal paperwork in the practice-buying process, as it details your interest in buying the practice and sets out some of the basic business/economic terms. As you create this important document, make sure that you take it seriously! The terms in your letter of intent can help shape your purchase agreement and other important aspects of your purchase. 

The Advantages of a Letter of Intent

A letter of intent is traditionally finalized before you jump in and buy a new practice and it offers you a number of benefits. Your letter of intent:

  • Increases the odds that you'll be able to reach an agreement with the current owner of the practice since it sets out preliminary terms and gives you a chance to negotiate before making an offer
  • Saves money and time that might be spent drafting a full purchase agreement if you're unable to come to terms
  • Gives the initial information about your practice purchase and what you can expect from the purchase
  • Establishes your intent to purchase the practice

Typically, your letter of intent will cause the selling dentist to take their practice off the market during your negotiations--though it may require earnest money, or a small deposit on the amount of the practice, in order to do so. This is a critical step since it establishes you as the new soon-to-be owner of the practice and means that you're not competing with others who may also want to buy the practice. Once the letter of intent is written and signed by both parties, it indicates that you and the selling dentist are working toward an agreement. The practice isn't yours yet, but this is certainly the first step in the process!

Note that a letter of intent is not legally binding. At this stage of the process, your purchase is not guaranteed. Rather, the letter of intent establishes your intent to buy the practice and the selling dentist's intent to let you. 

What Goes in Your Letter of Intent?

Your letter of intent can vary in length based on the information you want to include. Some agreements are simple, with just a single page of information. Others are more complicated, with many of the terms of the agreement already written out. As you write the letter of intent to purchase a new dental practice, make sure you include these key details. 

What is the purchase price for the practice? It's important that you and the selling dentist come to an agreement about the price you'll pay for the practice. A well-drafted letter of intent with the full purchase price and sometimes the tax allocation of that amount--can help avoid significant conflict in the buying process further down the road. 

What assets are included in the price of the practice? Typically, your purchase price will include equipment, the patient list, and other key assets of the practice. Make sure to consider:

  • Dental instruments
  • Any technology used by the practice including the computers 
  • The website, phone number, and social media sites
  • Goodwill

Note that it's not necessarily the specific list that's important when you're drafting your letter of intent. Rather, it's important that you and the seller are in agreement about the terms of the sale. You don't want to be surprised later in the selling process by items that aren't included as part of the sale!

Are accounts receivable included in the purchase of the practice? Sometimes, the selling dentist will want to continue to collect their own accounts receivable. In a usual agreement where the selling dentist keeps their accounts receivable, the selling dentist will continue to collect on them for around 3 to 6 months following the purchase of the practice. In some cases, you may offer to help collect for a percentage of the collections. In other cases, the selling dentist is ready to walk away from the practice altogether, leaving you free to purchase the accounts receivable along with the rest of the practice.

Do you want to buy the property itself, or will you be renting it? If the selling dentist owns the property that the practice sits on, they may want to either sell the property or rent it to you for a period of time. If you have the option to buy this property, do you want to do so? Do you want first right of refusal when the property is put up for sale? Spelling this out in the letter of intent will help ensure that you know all the important details about the property itself. 

How will you handle the transition process? Do you want the selling dentist to help work for the practice for a period of time in order to help with the transition? How long will this last? Laying out the details of the transition will make it easier for both you and the selling dentist.

How will you deal with patients returning for retreatment? Suppose a patient comes back with concerns about the work the doctor did on a filling. Who is responsible for taking care of those issues? Will you fix them as part of your ownership of the practice, or will the selling dentist return to take care of them? You may want to include terms for using equipment and staff as part of those repairs. 

Are there any important details concerning the practice staff that needs to be covered? Chances are, you're planning to keep the practice staff when you purchase the practice. It can be important, however, to spell out any details, including whether or not any of those staff members will be retiring or changing jobs.

What restrictive covenants go along with the sale of the practice? Be sure to include information like how far away the dentist must be in order to open another practice and how many years the restrictive covenant will last. Make sure you check with your state laws to determine if the restrictive covenant is enforceable in your state.

Creating a solid letter of intent is one of the most effective ways to establish your plan to buy a practice and to start reaching an agreement with the selling dentist. While these terms aren't binding, they can help ensure that you're on the same page and ready to make your purchase. By working with legal counsel, you'll get a fair agreement that works for both you and the seller while making sure that you've laid out the most important details of your purchase plans.

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