Term Sheets, LOIs, and MOUs Demystified

You’ve spent a lifetime building your practice and the time has come to put it on the market. You engage a qualified transition specialist who has located a buyer, and are ready to begin negotiating the deal. Most likely, the buyer or the buyer’s representative will submit to you a document setting forth the business terms of the proposed transaction. Called a “term sheet”, “letter of intent”, or “memorandum of understanding”, this document is generally a non-binding outline of the business terms of your sale. For purposes of our discussion, we’ll refer to this document as an “LOI”, the intent of which is to determine if the purchaser and seller can agree on the business terms of the deal before plunging head first into the transaction, which leads to the engagement of lawyers, accountants, bankers, and other advisors, all of which can be costly to both the purchaser and the seller. That being said, and although LOIs are generally non-binding, we always recommend that our clients have the LOI reviewed by counsel prior to execution as it does establish parameters for the deal that can be difficult to renegotiate at a later date.



So how is an LOI structured, what does it look like, and what terms should it address? An LOI can take many forms, but essentially it’s just a letter from the buyer to you, the seller, outlining the essential terms of the deal. What follows is a summary of the sections you should be sure are addressed in your LOI:

Purchase Price and Terms of Payment: For most sellers the most important term in any LOI is going to be the purchase price…how much is the purchaser going to pay you for the practice and how will that purchase price be paid? Will there be a deposit and if so, who will hold it and when does it become non-refundable? Is the full purchase price paid at Closing or will a portion be held back pending some sort of performance review post-Closing? Is the purchase price fixed or will it be adjusted based on pre-Closing metrics? Is the purchase price payable in all cash or is there some sort of seller financing? All the foregoing questions should be answered in this section of the LOI.

Assets to be Acquired: While a detailed list of assets will be included with the definitive purchase agreement for the practice, the LOI should include general categories of practice assets the buyer intends to purchase, including tangible assets like dental equipment, office furnishings, supplies, business equipment and leasehold improvements, as well as other intangible assets such as patient lists, phone numbers, websites and goodwill. Cash is almost always excluded, but should certainly not be overlooked. Any other excluded assets, including personal effects, should be indicated here though will be detailed in the definitive purchase agreement. This section will also include a plan for handling the accounts receivable of the practice. Will the buyer be purchasing them, and if so at what percentage? Will the seller retain them but with assistance in collection from the buyer (usually for a nominal administrative fee)? If a patient owes money to both the seller and the buyer, who gets paid first? Addressing accounts receivable is never as simple as stating that the seller retains all accounts receivable or the buyer will purchase the accounts receivable. Complicated issues about ownership, collection, and administration should be addressed before the parties proceed.

Allocation of Purchase Price: While this may not be definitively known at the LOI stage, you as the seller should be aware and should discuss with your accountant what the tax allocation of the purchase price should be. While even more important for dental practitioners still utilizing a corporate tax as opposed to a pass-through structure, the allocation of the purchase price between tangible assets such as equipment and intangible assets such as goodwill can have significant financial consequences if not planned efficiently.

Post-Sale Transition: Most buyers will be looking for you to continue on in the practice for a period of time to ensure the smooth transition of the patients to a new dentist. While specifics will be detailed in both the definitive purchase agreement and possibly a post-sale employment agreement, it would be wise to set forth in the LOI the agreed upon term of any such engagement, such as how long the buyer expects you to maintain your current schedule and when you can start throttling back your hours, as well as the compensation for your services. If you have associates and key staff, there may also be language addressing the seller’s obligation, if any, to ensure the associates and staff stay with the practice as they may be integral to the profitability and successful transition.

Restrictive Covenant: Almost every practice transition I’ve assisted with has included a restrictive covenant imposed on the seller prohibiting the seller from competing with the practice after the sale. A fairly straightforward and industry standard provision, most restrictive covenants address both the period of time the restrictions will be in place as well as a radius in which the selling dentist is prevented from practicing. Restrictive Covenants may also include non-solicitation provisions preventing the buyer from soliciting patients and staff from the practice after the sale.

Earn-outs: While perhaps a bit less common than a simple all-cash purchase, some transitions will be structured in such a way where the selling dentist is paid a portion of the purchase price up-front with post-closing payments based on performance of the practice. These payments may be made over a period of years following the closing, aligning the future success of the practice with the selling dentist’s performance. While an entire article could be dedicated to the merit and risk of deals structured with earn-out components, needless to say that they should be described in detail in the LOI to ensure the parties are on the same page before they move forward. Earn-outs can provide a seller with an opportunity to receive a higher overall purchase price for their practice, but they can also result in conflict with the buyer and should be fully vetted by the seller’s advisors before they are agreed to.

Exclusive Dealing: While LOIs are non-binding, certain provisions can by agreement be made to be binding in the LOI. Exclusive dealing is one of those provisions that a buyer may request to be binding on the parties and will effectively require the seller to remove the practice from the market while the parties are negotiating the deal. Practice transitions can be expensive. Even at the LOI stage the parties may engage consultants, accounting firms, attorneys, and other advisors to assist in the evaluation of the transaction. Buyers don’t want sellers continuing to market the practice only to find another deal while the buyer has invested substantial financial resources in evaluating and negotiating the transaction. To induce you to remove your practice from the market though, a buyer may be required to put up earnest money as a sign of good faith to show that the buyer is serious about the acquisition. The LOI should indicate the amount of the earnest money, whether it is refundable, who will hold it, and under what conditions.

Confidentiality: Another binding aspect of the LOI, both parties should agree to keep their negotiations and any information or documentation they receive during the negotiations and due diligence period prior to execution of a binding purchase and sale contract confidential.

Lease: While glossed over in many an LOI for the purchase and sale of dental practices, the parties should certainly come to a meeting of the minds to ensure everyone is on the same page regarding the physical plant. Buyers will often have specific requirements driven by their lender as to the terms of the lease for any practice they intend to buy. Questions that should be addressed include whether the lease will be assigned to the buyer, whether the deal is conditioned upon negotiation of an extension or renewal of the lease term, and whether a seller’s guaranty, if a guaranty was provided to the landlord, will be released at closing.

Other Conditions and Contingencies: Other terms and conditions that may be addressed in an LOI include, among others, timing of closing, due diligence, financing, access to information and staff, governing law, responsibility for expenses, and broker’s fees. As LOIs reflect the terms of a particular transaction, each will be a bit different and there is no standard form. The key is to ensure that each LOI sufficiently describes the terms of the business deal between the parties such that they can proceed toward a definitive purchase agreement and eventually a closing. If you need assistance preparing a letter of intent for your practice, or have questions about purchasing or selling a dental practice, the attorneys at Grogan Hesse & Uditsky, P.C. are here to help. Visit us at www.chicagodentalattorney.com for more information.

Jordan Uditsky is an attorney and business advisor serving businesses in the Chicagoland area and throughout the country. Mr. Uditsky advises businesses and entrepreneurs from startup to sale, and strives to be a trusted advisor to his clients by delivering practical and efficient counsel on a wide range of matters. His combination of legal and business experience provides a unique perspective when counseling clients, giving him an understanding of the true value and application of his advice to their organizations. To learn more about Mr. Uditsky, visit www.ghulaw.com.