By Allan Finnegan
After you have found a buyer or seller for your OMS practice, the next step is to have a Letter of Intent (“LOI”) drafted and reviewed by both parties. This article will guide you through the major sections of an LOI. Not all LOIs are laid out precisely the same, but all will contain similar information.
Section 1 – Purchase and Sale
This section states how the sale is structured. In most cases, the buyer and seller will structure the sale as an asset purchase instead of a stock purchase. We want to highlight the major difference between the two. In an asset purchase, the buyer buys and the seller sells all the non-cash assets and other rights (including intellectual property and goodwill) owned by the practice, free and clear of all liens, encumbrances, and other interests of third parties. The buyer does not assume any obligations or liabilities of the practice, including, but not limited to, indebtedness for borrowed money, salaries and severance payments to current employees, capitalized leases, negative cash, related party obligations, employment contracts, and deferred compensation (unless specifically assumed). Whereas in a stock purchase, the buyer will generally assume all the above liabilities.
Section 2 – Purchase Price
This section states the purchase price. The purchase price consists of two major components: tangible assets and goodwill. Tangible assets include equipment, fixtures, furniture, etc. Goodwill is an intangible asset comprised of the value of a practice’s brand name, solid customer base, good customer relations, good employee relations, and any proprietary technology. Generally, goodwill will constitute a much larger portion of the overall purchase price than tangible, fixed assets. This breakdown will not usually be explicitly stated in the LOI but will be agreed upon and finalized after the due diligence period. Know that there are significant differences in tax implications for the buyer and seller on how the purchase price is allocated. The buyer will want as much as possible of the purchase price to be allocated towards tangible assets, and the seller will want as much as possible of the purchase price to be allocated towards goodwill. Since the tax implications are at odds for both parties, the allocation of the purchase price is something that may take some time to negotiate.
Section 3 – Financing
The section is usually the shortest and lays out the proposed financing terms the buyer anticipates receiving from the bank. The loan for the practice will typically be ten years, containing a market interest rate and monthly amortization of principal and interest.
Section 4 – Definitive Agreement
This section expounds on some major items of the subsequent purchase agreement so that both parties are on the same page before negotiations start.
Two important dates are listed in this section. The anticipated closing date (the date the practice and assets officially transfer from seller to buyer) and the anticipated date of executing the asset purchase agreement. The average OMS practice takes around nine months from the signing of the LOI to the closing date. Finalizing the purchase agreement is the last thing you want to be worried about; that is why most LOIs will have a date, three to six months prior to closing, where both parties agree to have the asset purchase agreement finalized and executed.
Additionally, this section outlines other agreements that will be signed along with the purchase agreement. One of those agreements is for professional services to be rendered by the selling doctor, and another is for transition services to be rendered by the selling doctor. The LOI should not get into much detail on either of these, but it should lay out the major terms of each. For the transition services, it is best both parties agree in the LOI as to the expectations for how many days per week, weeks per month, and how many months the selling doctor is expected to work with the buyer to help them transition the practice. Additionally, the parties should be clear on how the selling doctor is paid, whether a flat rate or a percentage of collections. Similarly, the two doctors should agree in the LOI on the expectations for how much time the selling doctor will spend introducing and cultivating relationships between the buyer and their referral sources.
Section 5 – Due Diligence
This section details the period of time, which could be anywhere from 30 days to 90 days depending on the closing date, when the buyer will be allowed access to the business records and premises of the practice. During this time, the buyer evaluates the financials and business assets and comes up with their valuation of the business to counter what the seller believes the practice is worth. In almost every deal we have worked on, these valuations are usually similar, so negotiating the final sales price has never been a stumbling block.
Section 6 – Conduct of Business
This section assures that the seller operates their business in the ordinary course, consistent with past practice between the date of the LOI and the closing date. Additionally, this section assures that the practice does not enter any transactions other than in the ordinary course of business. Specifically, the practice will not terminate any contractual agreements with current participating insurance companies.
Section 7 – Exclusivity
This section specifies a period of time, usually around 30 to 60 days (unless the buyer decides to terminate the deal based on what they found during the due diligence period), when the seller agrees not to negotiate or have any discussions with any other party, or solicit or accept any offer from any other person concerning any financing of the practice or a possible sale of all or any portion of the practice’s assets or securities, whether structured in the form of a sale of assets, a sale or issuance of membership interests or other equity, or a merger, consolidation, recapitalization, business combination, loan or otherwise. Additionally, the buyer agrees that if the parties end up not consummating a deal, they will not buy, open, or be employed by an oral surgery practice within a certain mile radius for an agreed upon amount of time.
Section 8 – Confidentiality
In this section, the buyer agrees that they will keep the due diligence material strictly confidential. The buyer agrees to disclose the due diligence information only to their representatives who need to know such information to consummate the acquisition. These representatives include the buyer’s consultant/broker, attorney, and accountant.
Section 9 – Expenses
This section states that each party will pay their respective costs and expenses incurred in connection with the LOI (including fees and expenses of attorneys, accountants, brokers, and other representatives and advisors).
Section 10 – Binding Effect
This section details any binding on non-binding clauses associated with the purchase/sale. Generally, LOIs are non-binding, meaning that just because both parties sign the LOI, the transaction does not have to be completed. In fact, the parties will often decide to part ways after the due diligence period because the buyer finds something they were unaware of before looking at the financials and assets. However, it is essential to note that while the acquisition does not need to be consummated, several items in the LOI will remain binding. Specifically, the sections regarding exclusivity, confidentiality, and expenses will remain binding, even if the purchase agreement is never executed. Breaking these agreements could have severe implications for both parties, but especially the buyer, so it is advised to contact an attorney before signing an LOI so you know what you might be liable for if the parties decide to part ways.
LOIs contain a lot of information and agreements to protect both parties and address all details and concerns with the sale/purchase. Again, not all LOIs will have these sections or follow this order, but the information in this article should be found somewhere in the document. Contact your attorney, accountant, or other representatives when in doubt. As always, OMS Consulting Firm is here to help, and please feel free to contact us for clarification, guidance, and services.
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