You open an email from a Dental Support Organization (DSO) or private equity buyer and see a single page attached. Near the top is a purchase price with a number that may be higher than you ever expected to see for your dental practice.
After decades of treating patients and managing your team and dealing with the challenges of running a busy practice it can feel like you have finally reached the finish line.
But you have not.
Before you sign anything it is important to slow down and understand what is actually in front of you.
That document is a Letter of Intent (LOI). It outlines the key terms of the proposed sale and it can have a major impact on the final outcome of your transaction.
Many practice owners assume an LOI is simply a non binding step before the final purchase agreement. While many of its provisions may not be legally binding, important sections such as exclusivity and confidentiality can be binding. More importantly the business terms you agree to at this stage can shape the rest of the negotiation.
Once you sign an LOI you may have less room to negotiate. The buyer knows you have agreed to the basic economics of the deal and you may also be restricted from speaking with other buyers during the due diligence period.
That is why it is important to understand the LOI before you sign it.
Here are the key terms every dental practice owner should review before signing a Letter of Intent.
What Is an LOI and Why Does It Matter?
A Letter of Intent outlines the proposed terms of a dental practice sale. It serves as a framework for the definitive purchase agreements that will be prepared later.
Most of the business terms in an LOI are generally non binding. However certain provisions can be legally binding from the beginning. These can include confidentiality and exclusivity and other transaction related terms.
The LOI also establishes the starting point for the rest of the negotiation.
If you agree to a purchase price and working capital requirement and post sale employment terms in the LOI it can become much harder to change those terms later.
That is why you should not treat the LOI as a simple formality. It is one of the most important documents you will review during the sale process.
Headline Purchase Price vs. Cash at Closing
The first thing most practice owners look at is the purchase price.
If a buyer offers $2.5 million for a practice generating $1.5 million in collections it may look like an excellent offer. But you need to look beyond the headline number.
The real question is how much of that $2.5 million will actually be paid to you and when.
For example a buyer could structure the offer like this:
- Upfront Cash at Closing: $1.5 million
- Seller Earnout: $500,000 tied to future performance
- Rollover Equity: $350,000 in buyer equity
- Escrow Holdback: $150,000 held for 24 months
The headline purchase price is still $2.5 million. But only $1.5 million is guaranteed cash at closing.
The remaining $1 million depends on future events and conditions.
That does not automatically make the offer bad. But it does mean you need to understand the risk attached to each part of the purchase price.
When reviewing an LOI pay close attention to how much cash you receive at closing and how much is tied to earnouts and rollover equity and other future payments.
The Exclusivity Trap: The No Shop Clause
One of the most important sections of an LOI is the exclusivity clause or no shop clause.
This provision can prevent you from talking to other buyers or accepting another offer while the buyer completes due diligence.
Buyers may request 90 to 120 days of exclusivity. That can create a long period where you are committed to one buyer while the transaction is still being evaluated.
This matters because issues can come up during due diligence. A buyer may identify an accounting issue or a change in practice performance and then try to renegotiate the original offer.
If you are already locked into an exclusivity period you may have limited options.
To protect your leverage:
- Keep the Exclusivity Period Reasonable: Try to limit the initial period to 45 to 60 days when possible. You can also negotiate a short extension if both sides are making progress.
- Set Clear Milestones: Tie extensions to specific steps such as completion of financial due diligence and delivery of the definitive purchase agreement.
- Understand Your Rights: Have your attorney review exactly what you can and cannot do during the exclusivity period before signing.
The goal is to keep the transaction moving while also protecting your ability to walk away if the buyer changes the deal.
The Working Capital Peg
Many practice owners assume they will be able to take the cash in their business accounts when the sale closes.
That is not always the case.
Buyers want to acquire an operating practice that has enough working capital to continue running normally after closing. This is handled through a working capital peg.
The working capital peg is the amount of working capital the buyer expects to remain in the business at closing. It can include cash and accounts receivable and inventory and other current assets depending on how the transaction is structured.
For example if the agreed working capital peg is $120,000 but the practice has only $90,000 of qualifying working capital at closing you may have to make up the $30,000 difference.
That is why the working capital requirement needs to be negotiated carefully.
The peg should be based on the historical needs of your practice and not simply on a number proposed by the buyer.
Post Sale Doctor Employment Terms
If you plan to continue working after the sale your employment terms should be addressed before you sign the LOI.
Many buyers want the selling dentist to remain with the practice for a period of time. This can help maintain patient relationships and provide a smoother transition for the team.
That can make sense. But you also need to understand exactly what you are agreeing to.
Your LOI should address:
- Length of Employment: Clearly define how long you are expected to remain with the practice and what happens if you want to leave earlier.
- Compensation: Agree on how you will be paid after the sale and whether compensation will be based on production or collections or another structure.
- Days and Hours: Define your expected schedule so there is no confusion about your clinical commitment after closing.
- Non Compete: Understand the geographic scope and duration of any post sale restrictions and have your attorney confirm that they are appropriate for your situation.
Do not leave these terms vague and assume they will be worked out later.
Earnout Metrics: Revenue vs. EBITDA
If your LOI includes an earnout you need to understand exactly how the payment will be calculated.
An earnout means part of your purchase price depends on the practice meeting specific targets after closing.
Those targets may be based on revenue or collections or EBITDA or other performance metrics.
The metric matters because the buyer will control the business after the transaction closes.
For example if an earnout is based on EBITDA the buyer may have control over expenses that affect the practice’s profitability. Corporate management fees and technology costs and other expenses could change the practice’s P&L after the sale.
That can make it harder to reach an EBITDA target even if the practice continues to perform well.
If an earnout is part of your deal you should understand how the target is calculated and what expenses can affect it and who controls those expenses.
For a deeper look at how to improve your practice before going to market see our guide on how to increase the value of your dental practice before selling.
How to Maintain Leverage Until Closing
The best time to protect your leverage is before you sign the LOI.
If you negotiate with only one buyer you may have limited options if that buyer changes the terms during due diligence.
But if you create interest from multiple qualified buyers you have more flexibility. You can compare offers and negotiate from a stronger position.
A competitive buyer process can also give you more options when evaluating cash at closing and earnouts and working capital requirements and other deal terms.
The goal is not simply to find a buyer. It is to create a process where you can choose the buyer and the deal structure that best fits your goals.
Let Practice Elite Help You Navigate Your LOI
You spent your career building your dental practice and serving your patients. Negotiating a practice sale is a very different process.
DSOs and private equity groups complete acquisitions regularly and their teams understand how to structure these transactions. As a practice owner this may be the largest business transaction you have ever completed.
You should not have to navigate it alone.
At Practice Elite we help practice owners understand their valuation and prepare their financials and evaluate buyer offers and navigate the transaction process. We help you look beyond the headline purchase price so you can understand what the deal really means for your payout and your future.
If you have received an LOI or are considering selling your dental practice in the near future do not rush to sign. Book a free strategy call with our advisory team to review your situation and understand what you should consider before moving forward.
