Physicians and other healthcare providers often consult with counsel when planning to sell their medical or other professional practice. Unfortunately, this consultation can occur after they have already negotiated and signed a letter of intent (LOI) with a potential buyer.
Although many healthcare providers do a great job negotiating an LOI, too often they agree to be bound by unreasonable terms or fail to ask for essential terms simply because they do not know any better or do not fully understand the terms to which they are agreeing. While it is true that LOIs typically contain language indicating that they are not intended to be "binding," most buyers are reluctant to move away from the specific terms of the LOI, or to agree to new terms, once signed. This is particularly true when it comes to hospital and private equity buyers.
Although every LOI is different, a seller must be aware of whether the proposed structure of the transaction is optimal for the seller to benefit financially and/or from a tax perspective. This can depend on the type of entity involved and its tax status, as well as other factors. Very often a buyer will want to structure a transaction in a particular way to its benefit.
Sellers who do not have proper representation may not understand the nuance of the structure enough to question it, which can be an expensive mistake. Every seller should consult an accountant and/or financial advisor before signing any LOI to be sure that the transaction is actually to their financial benefit.
Often, the purchase price in a deal is broken down in a variety of ways so that the sellers are not receiving the full purchase price at closing. Is the buyer looking to allocate some of the purchase price to an escrow account? If so, how much and for how long? Is some of the purchase price being "rolled" over into equity of the buyer and, if so, is the amount reasonable and determined in a verifiable manner? Is a portion of the purchase price tied to financial success of the practice after the closing or to all practice healthcare providers staying on board for some period of time?
Every deal is different, but sellers are often surprised when the purchase price they expected at closing is not the one they receive, and which they may never actually realize. The actual purchase price received can be further diminished by the seller's need to pay off loans, lines of credit, capital leases, legal fees, liens, and other ongoing obligations of the selling entity at closing, which can add up to substantial amounts. It is essential for every seller to truly understand the final payout in a transaction and to be sure it makes doing the transaction worthwhile.
Because the sellers of a practice are professionals and will be working following closing, they want to be sure that any LOI protects what is most important to them. This can include work schedules, vacation time, call, staffing levels, call commitment, and even locations where they are willing to render services.
Setting these deal points from the start can only help avoid later misunderstanding, especially if the sellers are unwilling to compromise. It is also significant for sellers to be very clear how long they are willing to work following the closing, the compensation (or formula) they expect to be paid, and other similar factors. Including these details at the LOI stage is imperative because it impacts the entire valuation and structure of the transaction.
While there are many other elements of an LOI that a seller needs to appreciate, one of the most important is the exclusivity provision. This language is typically binding and will prevent the seller from looking for or entertaining any other potential offers for a set period of time, which does not typically exceed 120 days.
We usually recommend to our clients that there be a way in which to terminate exclusivity, particularly if the transaction appears stalled and/or the parties no longer appear engaged in doing the deal. Without an "out," the exclusivity provision merely ties the seller's hands and can prevent another promising offer from being entertained until the deal closes or the exclusivity period runs out.
For practices that find their practice sale using a practice broker, it is key to have counsel review the broker agreement before it is signed. Although most brokers run very clean operations, too many practices end up paying more fees than they understood they would owe. Moreover, the broker agreement can tie the practice to the broker for long periods of time if the value of earnouts and rollover stock are pledged as part of the broker fee. Brokers are not lawyers, and their interests are not always completely aligned with the practice. Physicians should not rely on a broker for legal advice.
Like any legal document related to a transaction, it is ideal to talk with counsel as well as financial advisors before signing an LOI.
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Cite this: Ericka L. Adler. Health Professionals: Don't Sign a Letter of Intent Without Legal Review - Medscape - Jul 12, 2022.