A Letter of Intent in the Sale of a Medical Practice in California (LOI), also known as a “term sheet” or a “memo of understanding (MOU),” is a non-binding outline of a transaction. It’s frequently used in the sale of a physician’s medical practice.
A letter of intent is a brief notation of the main terms of what the parties believe will be a binding formal contract. Examples include a medical practice sale agreement. The letter of intent is designed to ensure that both parties are “singing from the same songbook” regarding the primary points of the agreement they are looking to form.
This letter of intent enables the Buyer and the selling physician to negotiate a deal before incurring expenses for lawyers, accountants, and due diligence. Better to have a transaction die an early death at this point than after you’ve paid some substantial expenses.
After the initial discussions to sell your medical practice in California, a letter of intent will be the first chance to memorialize specific ideas in writing. It will bring you and the Buyer closer to commitment.
The letter of intent should outline the key points of agreement that the parties wish to include in the purchase contract. Once the basic terms of the deal are agreed to by a letter of intent, the parties can more easily move the process forward and prepare a complete purchase agreement.
Arguably, the most critical negotiation happens at this point—before the deal is finalized. Once the terms are in a letter of intent, there’s less room for negotiation. Even though a letter isn’t binding, it still creates a moral obligation for the Buyer and Seller.
What’s in a Letter of Intent?
The letter of intent should cover all the essential details, including price and payment terms. This is also the time to specify which party will pay the expenses associated with the transaction. Typically, each party is responsible for its professional fees.
The letter should begin by explaining who will buy what from whom. This should describe the assets of the selling physician’s practice or the selling physician’s stock in the practice.
Further, a deposit should be considered. A selling physician in California may request a deposit to ensure that if the deal falls through, they can retain the deposit as compensation for lost time and expenses. Deposits are not common when purchasing a medical practice in California.
The Numbers
It is essential to structure the payment of the purchase price clearly and transparently. Additionally, the parties may agree to adjust the purchase price at or shortly after closing. This accounts for daily changes in circumstances.
This could be a modification for working capital on hand at closing or accounts receivable. These figures may have changed between the time of the price agreement and the closing.
The reason for doing an earn-out is to provide the Buyer with some security that they haven’t overpaid for the practice. Sacramento business consultant Andrew Rogerson says that selling physicians dislike earnouts because it places their purchase price at risk. The Buyer’s operation of the practice after closing determines this. If they operate the practice poorly, the Seller’s profit will decrease.
A Buyer can also request an escrow (a holdback of money from the purchase price). This is security for the Buyer in the event the Seller breaches the purchase agreement. Again, this is not to the Seller’s benefit, as the physician doesn’t want any of the sale price escrowed.
Another way to address escrow is to require that the escrowed amount be the Buyer’s maximum recovery from the Seller for any breach of the purchase agreement.
Other Terms
A letter of intent should also address the medical practice’s accounts receivable. There should be a clear separation of responsibilities. For example, all Accounts Receivable (A/R) for pre-closing work should belong to the Seller. Meanwhile, accounts receivable for post-closing work should belong to the purchaser. It’s also a good idea to address who will collect the Seller’s Accounts Receivable. If it’s to be the Buyer, specify the collection fee that they will receive.
The letter of intent sheet should detail how the parties will transition patients and referral sources. Additionally, it should specify the amount of transition assistance the Seller will provide to the Buyer after closing.
Typically, the selling physician will be asked to sign a non-compete covenant for a specific time frame, usually several years, within the geographic locality of the medical practice.
Finally, a contingency allows the Buyer to call off the deal if a required event doesn’t occur. This could involve obtaining financing for the purchase of the practice.
Andrew has found that contingencies are usually the most challenging component of negotiation.
Contingencies are not very common in the purchase of a medical practice. They only arise if the parties sign a binding purchase agreement before the closing. The contingency would let the Buyer walk away from the deal.
However, rather than battling over contingencies, the parties can finalize the purchase agreement before closing, but only sign it after the purchaser has received its financing.
Successfully Sell Your Medical Practice in California
The terms in a letter of intent are generally not legally binding, so it’s never too early to seek legal counsel.
Andrew Rogerson specializes in helping business owners sell their businesses, including medical practices and their associated steps. This includes a practice valuation, creating a marketing strategy to find qualified buyers, and handling all phases of the transaction, including third-party finance for the Buyer, due diligence, and escrow.
Andrew Rogerson is a certified business broker based in Sacramento, California. Call Toll-Free at (844) 414-9700. If you prefer, email him at support@rogersonbusinessservices.com. Andrew serves the whole state of California.