When a dentist negotiates the purchase of a dental practice, a popular question is: should the Attorney, Broker or Buyer submit a Letter of Intent before negotiating the final Purchase Agreement?

The answer is.... it depends.

The reason and purpose to offer the Letter of Intent (LOI) is to prepare the Buyer and Seller mentally and financially for the process leading to the Purchase Agreement (the contract). Do they agree on basics? Do they have the same vision? Will they be able to work together towards a result that is satisfying to both?

It is critical that each party's attorney reviews the LOI and clarifies what is non-binding and what is binding. Most of the areas in the LOI are non-binding, meaning that the parties agree on basics that can be negotiated in more detail later. When an area is binding, it means that once it is agreed upon, it is no longer negotiable.

Generally, the Letter of Intent (LOI) is about two pages long and covers the following areas:

Non-Binding

• Purchase price and financial terms

• Escrow Accounts

• Timeline of negotiations up to the Closing Date

• Agreement on Assets to be sold

• Handling of Accounts Receivable

• Restrictive Covenant

• Employees

• Real Estate/Lease

• Re-treatments

• Transition and if the Seller will stay

Binding

• If the practice will be taken off the market during the process

• Both parties to keep the negotiations and documents confidential.

Here are the stories of two negotiating teams, each illustrating a different outcome from a Letter of Intent.

In the first example, the Buyer started a dialogue with the Seller regarding the purchase price amount and financing. The Buyer knew right away the Seller did not wish to finance any of the purchase, however the Seller did wish to stay as a part time associate. The two parties discussed and came to agreements on many issues, and in the process streamlined the drafting of the final Purchase Agreement. Additionally, the Buyer and Seller created an understanding and a good foundation for their relationship, which survived beyond the Closing Date.

In the second example, the Seller was a relatively young doctor, therefore the Buyer and Seller could not agree on the Restrictive Covenant. Neither could they agree on the handling of the Accounts Receivable. After spending significant time on side-tracked conversations, where neither had "skin in the game," both Buyer and Seller decided to move on. Starting with a Letter of Intent was beneficial, because the two parties realized early on they did not share the same vision or philosophy before they spent significant time or money.

Whether you are the Buyer or Seller, discuss with your attorney the offer of a Letter of Intent.

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Dr. Gilman, Esq. is available for presentations to Component Societies and Study Clubs to speak about Dental Ethics and other dental-legal related matters.