Must-Have vs. Nice-to-Have: Shaping the Terms of Your LOI

Welcome everybody back to our part two of the Letter of Intent episode on the Dental Practice Cell podcast. Matt, welcome back.

Thanks so much for having me again, Wes.

I like to just sort of jump right into that meat. Last time we touched on kind of high level what is the LOI or letter of intent? Are you looking to buy or sell a dental practice? If you're a seller, how do you find a strong list of potential buyers? There's no MLS or Zillow for dental practice sales. In such a fragmented market, many dentists selling their practice feel discouraged. That's why I built practiceOrbit.com practice orbit is modernizing how dental practices are bought and sold. It's a platform technology. Y' all know them Zillow, Airbnb, Uber, and OpenTable, just to name a few. These technologies do two things. First, they help match buyers and sellers by centralizing the marketplace. Second, once the match between buyer and seller is made, these technologies help them navigate the sale to a successful close. Here are a few of the features inside a Practice Orbit users can determine a reasonable sale price for practice in just minutes. All they need is the most recent business tax return. Practice owners can use the directory to find important service providers like practice brokers, attorneys, accountants and bankers. Practice owners and their brokers can invite those service providers into the platform so all parties are coordinating the sale together. Practice owners will have a beautiful digital listing of their practice, like a home on Redfin. And importantly, the listing will be anonymous and personal information like your address, name and pictures are only released after an NDA is signed and approved by you or your broker. Practice buyers can create saved searches to be auto notified when new listings come on the platform that fit their desired specialty and location. And hey, dental practice brokers, you can list all your practices on the site for free. By doing so, you'll get access to Practice Orbit's large pool of buyers, all of whom have created profiles and saved searches to be auto notified when new listings come for sale. You can use the platform to introduce your listings to a targeted set of buyers. Additionally, and optionally, you can use the platform tools such as a built in NDA, a customizable loi, and a workflow tool to navigate the sale from LOI to closing. In fact, you can manage all your listings on the system, from listing the practice to NDA to loi, and finally to closing the deal. Create your free account today at www.practiceorbit.com.

When is it submitted? What is its main purpose? Today we're going to go into more of the Specific content inside of the letter of intent or the terms. This is a. This is a legal document that outlines terms, sort of preliminary terms of a proposed offer to acquire a dental practice. It's usually created by the seller, even though it is officially to submitted by the buyer as a letter of intent to buy the practice. Let's jump into the terms. You ready, Matt?

Yeah, let's do this. I've put together a list. I've kind of tried to organize this in a way that makes sense to me, but there's 10 general terms that I feel like every letter of intent should have. And so let's start with the ones that every letter of intent I feel should have. And then we can dive into some of the terms that might help or might hinder kicking off the transaction.

Purchase of assets, not the stock. You're an attorney. Talk to us about the difference between an asset sale and a stock sale in a purchase agreement.

Yeah, so there's two ways that you can purchase a business. The first is that if they're a corporation or an llc, you can buy the stock of the company. And then you step in as the owner of that company. And your response, you, at that point, you have everything that that company owns. But the downside to that is that you take on all of their liabilities for everything that happens prior to the sale. 99.9% of dental transactions are not sold as stock purchases. They're sold as asset purchases. And Wes, you can dive a little bit into the tax reasons for that if you think it warrants it. But tax wise, my understanding is that asset sale is a lot more beneficial for both parties, where a stock sale is just beneficial for the seller.

Yeah, let me jump into that a little bit. So a stock sale would be like you're buying Apple stock, you know, of Apple computers, and then you sell that stock. But the corporation never really changes. The underlying assets always remain with whoever the stockholders are. Individual stocks can sort of trade hands, but everything inside of the corporation remains the same. In an asset sale, it's quite the opposite. The seller is retaining his or her corporation and all of his, his or her stock and is essentially doing like a garage sale, just opening up the doors and just selling everything inside of the practice, like equipment, chairs, X ray machines, furniture. If there were leasehold improvements on build out, all that stuff is sort of being sold. Usually the price virtually in every case, the price is way above whatever the market value is of the equipment and the tangible stuff being sold. And the difference between the sale price, let's say it's a million dollars. And let's say the Tang equipment and the furniture fixtures, all that stuff, let's say that's worth 250,000. You could go sell it on eBay for 250,000. That's its market value. The spread of 750 is an intangible asset. You can't touch it. And that's called goodwill. Sometimes you'll allocate some of it to patient records. And that's an asset. It's an intangible asset, but it's an asset and that's being sold. And then the buyer's corporation, which is a separate corporation that the buyer owns, is bringing those assets into his or her corporation. Or if it's a partnership, it would be their partnership, but it's transferring the assets from one entity to the next entity.

And so from the legal standpoint, the major benefit from the buyer's standpoint and the seller's standpoint is that it's a clean break when the buyer steps in after purchasing the assets of the practice. Again, this is the tangible assets and the non tangible assets, including ip, intellectual property, goodwill, domain names, all of that stuff. When they step in, they start with a fresh slate. And so they're not going to get pulled into any previous issues that the practice had. And we still draft around that when you get to the purchase agreement and cover you on that front. But by having a brand new entity step in and take ownership of the assets, it creates a line in the sand for liability between pre closing and post closing.

Very clean from a tax standpoint. Going back to that one, a seller would actually prefer it to be a stock sale. Because if it were a stock sale, like if you hold Apple stock for more than a year and assuming the practice owner was owning this practice for more than a year, then selling the stock becomes long term capital gains. Any gains are taxed at that lower long term capital gain rates of either 15 or 20%. Generally it's 20%. And if it's an asset sale, whatever gains are on the tangible equipment, like the equipment, any gains on that is taxed at ordinary tax rates. For example, if your equipment gain is $100,000 and let's say you're in the highest tax bracket federally of 37%, and let's say state, for example California, that is 10%, then that's a total of 47% you're paying on those gains. If it's an intangible asset like goodwill, you're paying the lower capital gain rate. Most Likely going to be 20%. The state does distinguish. It's still 10% ordinary or long term capital gain. So you're essentially saving about 17%. The seller is on any amount of the price that's allocated to goodwill. This is why sometimes there's a little bit of a tug of war between the buyer and the seller. The seller wants more of the price allocated to intangible assets that are generally going to be taxed at a lower rate. Now the buyer on the other hand, likes the tangible assets because they get to do take this thing called a depreciation deduction. They get a tax benefit sooner than the tax benefit on buying the intangible goodwill. Basically it comes down to this. There's a shorter timeline on getting the tax deduction for equipment. It's usually five years, maybe seven years on certain items. Goodwill is 15 years. And so generally people time value of money, a dollar today is worth more than a dollar in 15 years. Most people want to try to get their tax deduction sooner and so they would prefer more of the price be allocated to equipment. Now we probably have a whole podc, this sort of negotiation that takes place between the buyer and seller. Safe to say, generally speaking, you have somewhere around 70 to 90% is allocated to intangible assets and usually 10 to maybe 30% is allocated to the tangible assets.

So within the letter of intent, a lot of times there's not going to be a specific statement that says this is a asset sale, not a stock sale. But there should be some language that says the buyer intends to purchase all of the assets of the seller's practice. So that's usually how it's worded. But if you see anything in the letter of intent that says this will be a stock sale, then that's where you want to get your advisors involved and kind of work through that. Okay.

I think I've seen like two stock sales by the way, in my 13 years, 14 years doing this, I think. Yeah, about two stocks of that sales and they usually had a reason for it. And kind of a pain in the butt because I didn't mention this. But if it is a stock sale, yeah, the seller gets long term capital gains on the entire sale, which is great. But the buyer doesn't get to depreciate anything because it's like buying Apple stock. You don't get to deduct that on your tax return. Paying for Apple stock. If you have a loss on it when you sell it, yeah, you can take a long term capital loss, but the buyer does not Want a stock sale because they need that depreciation deduction, they need to get a tax deduction for the purchase of the practice. Speaking of being an asset sale, can you address how you want to exclude certain assets and do you indicate what assets are excluded in the letter of intent?

Yeah, absolutely. If the seller has material assets, like if they have a brand new piece of equipment that they're going to be taking with them to their next practice or something like that, if it's a material asset that they're going to exclude, I generally ask to have that included in the letter of intent, just so everybody's crystal clear on it. Otherwise, just a broad statement that says any excluded assets will be listed in the definitive purchase agreement will work.

Got it. An important asset that should be excluded every time is cash in the bank. So cash in your corporate checking account is excluded, meaning that the seller keeps that the cash does not go to the buyer. All right, great little conversation there on what is an asset sale versus a stock sell and why it's generally an asset sale onto the purchase price. Pretty straightforward, Matt. We do outline what the purchase price is. Probably the most important number on the whole letter of intent. Any comments on that before moving on to the next term?

The big picture with the purchase price is that you do want to talk to your dental CPA or have evaluation done. Because once you put the purchase price into the letter of intent, it's very difficult to change that, to increase it or decrease it, depending on which side you're on. Without any concrete changes in the facts as you know them, it usually will kill the deal. If a buyer says, I want a 10% reduction and they don't really have a reason for it, it just hurts the deal altogether. So do a little bit of work on the front end to make sure that the purchase price that you're offering is something that you're willing to pay.

And I often will recommend a buyer and sometimes even a seller, go see what a bank would lend on this practice, because that's a good check. It's a good kind of reasonableness check on the asking price from the seller. And most banks are very happy to just do a quick analysis of what they would be able to lend on a given practice. And there's more to that, but I highly recommend that often.

And so coupling with the purchase price is the payment terms. If you're going to pay the full purchase price from a bank loan that gets wired on the close date, then that usually doesn't need to be addressed. But in the Event that you're gonna be doing any seller financing or anything like that, you should add a provision in there that says this is the purchase price and this is how it's gonna be paid. So 90% of the purchase price is paid through a bank loan. 10% is gonna be carried back from the seller. Kind of the big picture.

And just reiterating Inside of the practiceOrbit.com Technology is a price assessment that you basically can put in just a few numbers from the tax return and answer one question about how much of your personal expenses you run through the practice. Sort of a general idea. And it will calculate an estimate. I'll say an average estimate and a high estimate of what a seller could expect for that practice. It is partly affected by geography. I will say that. And the price estimator in the system doesn't consider geography, but if you're in a reasonably populated area, it can be somewhat consistent throughout the country. It's more rural areas where price can really fluctuate on a given practice. Okay.

Based off the supply and demand in those basic economics.

That's right, yeah. Closing date. Talk to me about that term.

Yeah. So the closing date's something that's a little bit tough to put into place within the letter of intent. So if you're not sure, my recommendation usually is to put a number that's 60 or 90 days out from when you sign the letter of intent. If the seller has a hard deadline, then you can use that. Or if you as a buyer has a hard deadline, you can use that. But it is important to at least put something in there so that everybody that's involved, all the advisors, the buyer, the seller, all have something that they can work towards and actually get the deal done. Everybody's life gets busy, and if you don't set the deadline, then it just ends up getting delayed or pushed.

Pretty straightforward there. Let's go on to the next one. Contingencies.

Yeah. So you want to discuss overall the contingencies. And what a contingency is, is it's a requirement that has to happen before the actual transaction can be completed or before the sale is finalized. Some of the contingencies that I recommend having in the letter of intent is what the buyer's due diligence period is. You want to have this as kind of a finite amount of time in which the buyer is given access to do all the inspections on the due diligence that they need to, whether that be clinical due diligence, legal due diligence, or financial due diligence. And as far as what that timeline should be, it really varies. But a safe number I would say is 30 days from the signing of the letter of intent, provided that they can get all the information that they've requested and get in there.

One comment I'll add there is. I love how you use those three areas of due diligence. The financial, the legal and the clinical. For a buyer, if a buyer's listening or sellers may be interested as well, but the buyer will have a team to help out with this. They'll have maybe a cpa, somebody like practice CFO or me, or some of our advisors here who will get all the bank statements, payroll reports, lease, all these documents to verify that the numbers on the profit and loss statement accurately represent the economic reality of that practice. That's the financial due diligence. Legal due diligence is really going through all of the terms of the contract and making sure that they're well understood and addressed. And then the clinical due diligence is how accurate are patient records, how well have they been kept, what is the condition of the equipment? And so you'll obviously have an attorney for the legal due diligence. Sometimes a buyer may get a practice management consultant or somebody to come help them with the clinical due diligence.

Yeah, absolutely. The next contingency that's a requirement prior to closing is going to be that the buyer be approved for lending and that the funding actually go through. So in other words, if for whatever reason, at the 11th hour the lending falls through, usually the buyer can be released by not meeting that contingency. You have any comments on that one, Wes?

I don't know.

It's pretty straightforward.

Yep.

The next contingency I recommend, including, is the contingency that the buyer be able to enter into a lease assignment or a new lease or purchase the real estate associated with the practice so that they actually have somewhere after the practice closes where they can go and operate the business. And this is a lot of times viewed as an asset of the sale is the ability to get in there and actually take ownership or take rights to be in the space. Without that, the value is going to be drastically lowered. It's incredibly important that this be a contingency. You don't want to sign a binding purchase agreement and have the rug pulled out from underneath you and not be able to access the location.

The landlord has a lot of control. Two of the main reasons why practice sales are held up from actually closing is you have these two gatekeepers. One is the bank and the bank has a underwriting process. And I've seen a very fast underwriting process at some banks and a relatively slow underwriting process at some banks. Some are much more detailed, some aren't as detailed. But banking and getting the lending commitment, what's called a commitment letter from the bank, where it's in stone that they have it open for say a two month, three month period, that that loan is ready to be released at the time of closing, you want to get that commitment letter that can hold practice sales. The other one is the landlord. I've seen landlords, more than anything, I feel like, hold up the close of a practice because they're unwilling to allow the lease to be transferred or signed to the buyer. And sometimes they use that a little aggressively to, I don't know, just stir up trouble for the transaction.

Oh, absolutely. Well, one thing to keep in mind is that especially in the realm of lease assignments, the landlord really has no incentive or motivation to cooperate and get things done in a timely manner when they're assigning the lease. From the landlord's perspective, they've got a tenant in there that's that has to pay rent, who would be the seller, regardless of whether the seller sells the practice or not. And so for them, going through with the lease assignment, you know, it helps because it helps build goodwill between them and the new tenant and all of that stuff. But unlike everybody else in the transaction, they're not immediately benefiting from anything on this. So that's what makes a move a little bit slower. And it's one of the key reasons why you want to reach out to them right away because you can kind of anticipate their resistance and get ahead of it so that you knock that out in line with everything else.

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And there we could do, and probably should do a full episode on leases because the buyer needs a certain term on the lease in order to secure lending. The bank wants to know that the buyer is securely in their space before they go and loan because moving your practice could be devastating to the cash flow of that practice. So addressing that early on is I think very, very important on the leases.

Yeah. And the rule of thumb that I see on that amount of time that you need to have the availability to be in the lease is usually in line with the term of your loan. So what we see a lot of is a 10 year loan for the practice. And the bank will require 10 years worth of lease term, whether that be an initial five year term plus an option of five years. And there's a little wiggle room with some of the banks where they're willing to come down if there's something unique. But it benefits the buyer as well to lock that in.

It does.

And some predictability.

In some ways it's. Well, I would say oftentimes it's not just a straight assignment of the lease because there's not enough term left. It becomes a renegotiation of a lease as a part of the assignment of the existing lease. Maybe they need to negotiate an additional five year option or just start from scratch. So that can take a while. Landlords are not very well known for being hyper responsive in the negotiation process. And because as you said, they've got a paying tenant who's legally bound to keep paying, so why should they feel so rushed? And by the way, sellers typically, Matt, correct me if I'm wrong, you're going to be still on the lease of the buyer as a guarantor in case for any reason the buyer cannot pay at least up until what was the end of the seller's term, correct, Matt?

Yeah, of the current term.

The current term.

And sellers that are a little bit further out from selling, if you're just starting the process, starting to think about maybe selling in five years or something along those lines, it's really important to get somebody in there to help you negotiate your lease to try and limit that liability when you're negotiating the lease that you're currently about to sign or that you will sign. And you can negotiate the release of that guarantee upon an assignment, which is great when you, when you do that. And you can also negotiate your right to assign the lease to a potential buyer without the landlord's consent or to put some conditions on it where you say I don't need the landlord's written consent, provided it's a buying dentist who meets these financial criteria. And as long as that buying dentist meets those criteria, then the landlord can't withhold their consent, which makes it a lot easier to sell your practice.

It seems to me there's a lot of negotiating points on a lease in this whole deal of transitioning into a practice. But the basic or the takeaway here is that the letter of intent should state that the consummation of the transaction is contingent upon a lease being assignable. So that the buyer has of course, a place to operate.

Absolutely.

All right. Non compete.

Yeah. The next contingency is that the seller is going to agree to enter into a non compete agreement. This is something that is really, it's required for the buyer in order to get the full value of what they're paying for the practice. But also a bank is going to require that there be a non compete in order to secure their investment or as a security measure for them lending the money to the buyer. And kind of the default, what we see in most transactions in California, and it's a little bit different when you get out into rural areas or very dense areas, so it can be changed. But we usually see a 5 year, 15 mile non compete, meaning that the seller can't compete with the practice. They just sold for five years after the closing in for 15 miles radius.

And of course that doesn't prevent them from associating in practice based on an associate agreement, which is extremely common, as you know. The next two seem fairly straightforward. Signature of the buyer as a term and the acceptance of the seller. Oh, I missed one item, didn't I?

One of the contingencies is that you want the seller to agree to continue conduct business as usual prior to the closing. So you don't want a big drop in production from the time the letter of intent is signed until the actual practice closes. And if there is a big drop, it would give the buyer an out based on the impact of that drop.

Got it. Okay, on to the next two.

These two, they're kind of boilerplate provisions, but from a practical standpoint, when the buyer submits the LOI to the seller, the buyer's going to sign it and that constitutes an offer. And then the seller's going to review it. Sometimes they'll make some changes and send it back for the buyer to accept or reject and then resubmit it and create a new offer. Or if the seller likes it and is comfortable with all the terms, then they'll sign it. And that acts as their acceptance. And that completes the letter of intent process.

So both Signatures buyer and seller at the bottom of the letter of intent. And that's pretty much every time, correct?

Yeah, it's best practice after that. Maybe we should have put that at the end of the list because that's kind of the final step. But. So we're going a little out of order. But you want to have provision for termination of the letter of intent, the ones that I work with. Usually we say either party can terminate this letter of intent through notifying the other party in writing and you can put a time frame on that and sometimes it'll run with the due diligence period. So if you gave them 30 days due diligence, then at the end of that 30 days due diligence, either definitive purchase agreement needs to be signed or if it's not, the timeframe will need to be extended or it's an automatic termination.

Got it. Okay. Reiterating a little bit from our last podcast, this is really a non binding legal document. There are things that could convert it to be binding, but in my experience it's almost always non binding, which both parties can back out. It does feel to me though, like there's an etiquette or a protocol to this though. You don't just back out easily like you're serious. You sign the loi, it's like you're engaged now, you're off the market for the most part and you're just focused on each other. But that said, it still isn't a binding document.

And so to condition that. Wes, some of the provisions of most. Lois are not binding. All of the ones that we've discussed right now are not binding. Meaning that you can walk away at any time without. Usually without a penalty.

But.

But there are going to be some provisions that are binding and it should be stated in the LOI which provisions are going to be binding and which ones are not. So this next clause that should be included is what we call a binding provision, which is confidentiality. And you can put this in the loi. Sometimes you'll have signed an NDA prior to the LOI which covers this. And then it doesn't need to be included in the loi, but when it is in the loi, this would be an example of everything else can be dropped. But the agreement that you're going to keep the information that you've received confidential is binding and is enforceable.

Okay, that would make sense. How is that different from the non disclosure agreement? Is this just accentuating the expectation of confidentiality?

Yeah, exactly. And not all transactions start with a Non disclosure agreement. Good point. Sometimes the whole kickoff is, I mean, it's just within the letter of intent. That's why it should be included. Unless you, you have an outside document that covers that.

Got it. Is that all of the always to include terms? Did we miss any?

Yeah. So those are, I feel like those are the mandatory terms. Now I want to kind of dive into some of the terms that you'll see regularly. But if they're not there, it's not a deal breaker. So we call these the sometimes to include the first one being a deposit. And if the seller requires a deposit, then you should have language in your letter of intent about number one, how much the deposit is going to be for and then secondly, whether that deposit is refundable or non refundable and at which point, if it's a refundable deposit, at which point it becomes non refundable.

And as I mentioned in the first one, I haven't seen this one pop up too often. Maybe half a dozen times times over the years.

Yeah. And for whatever reason, I've seen it come up more recently in the last little bit it might have. I'm really not sure what is causing it. And where it does come up is when the parties really don't know each other at all or if there's multiple offers and the seller kind of has the leverage to say, well, whoever gives me the deposit first, you know, that's who I'll go with. When it's refundable, usually the deposit will be refundable through the due diligence period. So if you say that there's a 30 day due diligence period at the end of that due diligence period, if you get through it all and if the deal's still going on, then at that point, once the due diligence expires, then that money becomes the seller's money. If the transaction's canceled, if the transaction goes through most of the time the deposit will be applied to the purchase price and occasionally it'll be returned to the buyer and then the seller takes the full purchase price through the lending through the bank loan.

Got it. Escrow is an interesting one to me because I feel like I see it maybe half the time it's not necessarily mandatory. Perhaps sometimes a bank may require it. If it's not, there's not an escrow company, then the banks will usually have a cash disbursement list explaining where the loan proceeds are going. And just kind of a reiteration of what escrow is. Here is the Company acts as an intermediary to hold funds and release those funds once all the contingencies are satisfied. And then they provide an escrow statement which has sort of this like accounting ledger on it with a couple columns showing what is owed to the seller, what is the seller have to pay, where the disbursement of the money, where is it all going ultimately, how much the loan is to the buyer. What comments do you have here? It sounds like it's not a mandatory item per your view of the loi, but share what would be included about the escrow and the loi.

So I prefer using an escrow when there's a deposit because the deposit is placed in escrow and then the escrow agent follows the instructions about when the deposit can be refunded and who it should go to in the event that it's not refundable. So that's one of the easy ones, but it's not necessarily required. Some of the duties that escrow does outside of what Wes just mentioned, is that they usually will run UCC lien searches for the state and the country and publish any notices that need to be taken care of. They'll obtain clearances from the county and state if those are required. And then sometimes they'll work on lender requirements for gathering information that goes to the lender. All of this stuff can be done by your attorney or by yourself or by your team. But with the escrow, it's somebody who that's their sole job is to make sure X amount of things happen before the money's released and make sure that the transaction goes smoothly.

I prefer an escrow for sure, because as the CPA doing the tax work and the accounting work, the escrow statement clearly shows the flow, the flow of the loan, all of the expenses involved. It helps us know how to categorize them for accounting and tax purposes. It's just very, very clear because sometimes there's a lot sort of flying around when you're closing between debt. And like I was looking at one yesterday of a practice that just sold a couple weeks ago, there were a couple items that the seller had to reimburse the buyer for related to membership program. Sometimes some nuanced items like that we get the escrow document and it's just very, very clear. So even if an escrow is clearly required, if there's a deposit that goes with the loi, because you need a third party intermediary to sort of custody that and release it at the right time, but even if there's not A deposit. It's still helpful to create really good data organization around the transaction.

Yeah. And to add to some of those accounting things. Escrow can help with prorating the taxes, prorating any rents, security, deposits, all of that stuff. So really, it just helps keep everything organized. Again, your team could take care of this, but it's somebody who. That's what their job is and making sure it's all done the correct way.

And so the LOI is basically stating whether the seller intends to use escrow or not. Is that correct?

Yeah. Whether the parties intend to use it.

Okay.

And a lot of times you'll say something to the effect of, you know, there'll be a $10,000 deposit which is required to be submitted to escrow within five days of signing this letter of intent. So. Yeah, you got it.

Got it. Okay. We spoke about allocation of the purchase price up above. The price is definitely obviously included in the loi. How that price is allocated across the tangible and the intangible assets. That one sounds optional.

Oh, absolutely. And my preference is to not have it included because it's something that you'll negotiate in the definitive purchase agreement. With that said, if one of the parties has, as a material term to them, a certain allocation. So if there's a seller that says, I don't care what the norm is, I want 90% going to Goodwill, and that's a deal breaker for them in those scenarios, I recommend putting it into the letter of intent, because if you can't agree on that from the start, there's no sense in going through the rest of the transaction and putting the time in if that's going to be a deal breaker.

I like the way you phrase that, Matt. It seems to me that what goes in the letter of intent is what are common deal breakers, that you just put them out on the table in the very beginning. And then you have these other items that generally are not deal breakers, like how much goes to goodwill in the price allocation versus equipment, which has a tax sort of tug of war effect between the buyer and the seller, but it usually doesn't break deals. You can negotiate kind of the nu there.

Yeah. Oh, absolutely. So outside of what we're talking about today, if there's any term that is a deal breaker for the buyer or the seller, it's worth including in the loi. Absolutely.

To make sure that's a good.

Crystal clear on it.

A good sort of basic way to view the loi. All right. On to the next one, which is exclusivity.

Yeah. So the buyer Generally wants exclusivity once the letter of intent is accepted. And what that means is that that the buyer is asking the seller to stop marketing the practice altogether and to stop any negotiations with any other buyers once the letter of intent is entered into. This is obviously a big benefit for the buyer. But sellers aren't always open to agreeing to this because the transaction process takes a little bit of time and they may want some backup offers in case one buyer falls out. And so they're hesitant to agree to not negotiate or not to fully take the practice off the market.

I think this is an important concept relating to this, is that the seller shouldn't necessarily just take the highest offer in an loi because if you get the highest offer from somebody who's got a 500 credit score, I think when you eventually find that out, the whole deal is going to fall apart and you have to start over. So the more you can feel sure that this is a good buyer from just like a style and chemistry approach in the practice. And of course the price needs to be rep. But are they qualified to take on a loan? Then you can say, okay, I'll be exclusive. Because the probability of that buyer following through is so much higher.

Yeah, absolutely. So to add to that, it's a tiny bit of a gut feeling if you feel. If as a seller, if you feel confident that this buyer is the real deal, exclusivity is not a bad thing to give and allow to be in the letter of intent. If you know nothing about the buyer as a seller, you may want to try and not have it be an exclusive. You may. Yeah. You may want to avoid exclusivity. So keep.

And to confirm, you're saying that a lot of Lois don't have exclusivity built in, and a lot of them do have exclusivity built in. This is an optional one.

Yeah, exactly. This one's optional.

Okay, great. Yep. So talk to your attorney, see what they say about it, and think about it. That is important one.

All right.

Onto rework and retreatment.

Yeah. So this is one that I see from time to time that comes up. My personal recommendation is that it's too much in the weeds to get this thing kicked off. And it's something that should be negotiated in the definitive purchase agreement after you've gotten through the clinical due diligence and have an idea as to what that's going to look like. Now, again, if one of the parties has a hard line for maybe they had a bad experience from a prior transaction where they Got burned and their dead set on the way they want these terms to be written, then you might want to consider it putting it into the loi. But my preference is to leave it out and negotiate that when you get into the weeds of the purchase agreement.

Yep. And I would say I've never seen a deal break apart or fall apart because they couldn't agree on a rework or retreatment plan.

Oh, absolutely, absolutely. The next one is the seller work back and what the seller's role is going to be after the closing and you want to put in there. I do recommend at least putting in transitional services, which are generally not treating patients, but being available for X amount of times to answer question, whether that be in person or by phone or email. But sometimes a buyer will have a reason where they need the seller to work back. And if that's the case, then I definitely recommend including it in the letter of intent.

Great. And last is seller carryback. I'll go ahead and explain. What a seller carryback is. Is that if there is a portion of the purchase price that is not funded by a bank, the seller acts as a second bank in a way and will carry back some of the loan. For example, let's say it's a sale for $1 million and the bank will lend 800,000 on it. The seller can say, I will be the lender on the remaining 200,000. You usually have terms similar to the bank's terms in terms of interest rate and terms. Sometimes they're a little bit different. And then the buyer is making two loan payments, one on the $800,000 loan to the bank and one on the $200,000 loan back to the seller. That is a seller carryback.

And so going back to the overall theme that if the seller carry back is a requirement to be able to fund and purchase the practice, then it should definitely be included in the letter of intent.

Great, Matt, that sums it up. On our document here we have the binding terms, which I think we did talk about. The two binding terms are confident and then of course these are binding to the governing law, which is usually your state law around letters of intent. Any final comments on the terms to include anything else?

No, I think we kind of covered all of it, Matt.

This was part two. Part two is a little bit longer than part one, but we got through the terms and anyone who listens to this I think is going to have a much better understanding going into a letter of intent and learn some of the language around this part of the transaction process. Thank you. For helping out Matt and sharing so much wisdom on this subject.

Oh, absolutely. Thank you. We.