The Letter of Intent (LOI) is the foundation of an agreement between the Buyer and Seller that outlines specific business and contractual terms. This document is given by the Buyer to formally submit an offer to purchase the practice.
Both parties enter into the LOI with the intention of following the purchase of the practice through in good faith. Typically the LOI states that the Purchaser has the appropriate time to obtain financing and lock-down an office lease. Although not binding in its entirety, the LOI is binding when it relates to the confidentiality provision and handling of earnest money.
Take a look at the helpful recommendations below for Buyers beginning to prepare a Letter of Intent.
This value is typically determined by an experienced dental practice appraiser and serves as the most critical point in the LOI.
When breaking down the purchase price, the majority is comprised around the goodwill of the practice. This means the Buyer is purchasing the intangible cost of the organization, support, and recommendation of the Seller to the patients, staff, and community. If the purchase price is appraised accurately, it will usually lead to 100% financing by lenders because they have determined the practice to have a healthy level of cash flow. While price is often negotiated, it is dangerous for the Buyer to offer lower than the appraised value. This often leads to a rift between the goodwill of the Buyer and Seller.
When making an offer for the practice that is less than the full appraised value, a Buyer must be ready to explain why. Typically, most factors that affect the practice are included within the appraisal and therefore cash flow is the largest determining factor when the Buyer is deciding to purchase a practice.
This is used to demonstrate the Buyer’s promise to purchase the practice and follow through towards closing in good faith. On the reverse, the Seller commits to taking the practice off the market and to allowing the Buyer time to prepare for closing. The LOI typically states that the Seller is now closed to other offers from prospective buyers.
The Letter of Intent and earnest money are submitted by the Buyer together. Earnest money is often then used toward the down payment or returned back to the Buyer at closing. If the sale never closes, the earnest money is returned to the Buyer. The only exception is if one of the contingencies are not satisfied the Buyer may not receive the earnest money back.
Although the exact amount of earnest money varies with different practices, the range is typically between $1,000 - $10,000. The determinant is often the length of time requested by the Buyer before closing, and the sales price of the practice. The higher and longer both of those variables are, the more earnest money is given.
Financing is readily available for the acquisition of a dental practice and our firm is able to recommend lenders that specialize in this field. Almost all of the practices we represent are 100% financed by these lenders, with the exception of Buyers occasionally needing to make necessary down payments. Buyers are often completely financed with an additional amount of working capital loaned as well.
Not included in the appraised value of the practice are the accounts receivable. The Buyer often has two options. They can 1) decide to purchase them separately at a price agreed upon by the Seller; or 2) have the staff collect all the outstanding payments from patients on behalf of the Seller and receive a token fee for the collection of those payments. Our recommendation is for the Buyer to purchase the accounts receivable with the practice. This typically allows for a smoother transition and interaction for both parties involved.
The accounts receivable are valued on a sliding scale based on the aging summary. The account receivables are broken out in the following periods: zero to 30 days; 31 to 60 days; and 60 to 90 days, with a discount typically of 10%, 20%, and 30% respectively. Most receivables past 3 months are typically included with the purchase of the accounts receivable.
Not included within the appraised value of the practice is the real estate. The value of the real estate is comprised typically by a recently conducted appraisal or through comparable properties that have recently sold. The sales price of the real estate is dependent on the most recent appraisal.
When financing the real estate, in most situations the Seller requires the Buyer to submit a down payment. Along with the down payment, the Buyer is required to pay all closing costs associated with financing the real estate including the real estate appraisal. The mortgage is typically paid off within 15 to 20 years through monthly payments similar to a lease payment.
Allocation of Purchase Price
The purchase price is determined through two main categories: tangible assets and intangible assets. Tangible assets include the physical things such as the furniture, fixtures, equipment, and supplies. The intangible assets include what cannot be physically measured like the goodwill, covenant not to compete, and patient records. Typically, the purchase price is comprised of 70% intangible and 30% tangible assets.
It is beneficial for the Buyer to have an independent appraisal and inspection of the equipment.
The day the transfer of ownership from Seller to Buyer occurs is known as the closing date. The 4 to 8 week period of time given to the Buyer after the LOI is executed gives the Buyer time to perform their due diligence, obtain financing, work out the lease or obtain financing for the real estate. Closing is typically executed at the end of a month but can be scheduled whenever is best for both parties within the month.
The signing date, sometimes executed before the closing date for a smoother transition, is the day all documents are signed for the official purchase and close. It is especially significant to organize the signing date before the closing date if the closing will happen more than 8 weeks after the LOI is accepted.
Legally, a contingency allows a party to remove themselves from a contract due to an unforeseen event or situation. The LOI contains these contingencies to allow the Buyer a peace of mind knowing that they can opt out of the purchase if any of the circumstances were to happen. Four contingencies typically found in the LOI allow the buyer to 1) Perform his or her due diligence by reviewing the practice’s financials, reports, and records; 2) Obtain financing; 3) obtain financing for the real estate and accept the terms of an office lease; 4) Agree to the purchase terms and other related closing documents.
Focused around the Seller, the acceptance date allows the Seller time to review the offer and see if the Buyer is a good fit for his or her practice. Typically the Seller is given five business days from the day the Buyer submits the LOI to address the offer.