What You Need to Know About Submitting an LOI

The purpose of the letter of intent is primarily just to make sure that everybody's serious about taking the next steps in the transaction. It's geared to lay out what the agreed upon terms are prior to really investing any real money in time into proceeding on the transaction.

Welcome everybody to a new edition of the Dental Practice Sale podcast. Today I've got our co host, Matt. Matt, welcome back. Hi.

Yeah, thanks so much for having me again, Wes. I'm excited about this.

I'm excited too. I just want everybody to know in a couple weeks, I think it's May 15, this is 2023, we've got the California Dental association coming up and Practice Orbit is going to have a booth in the exhibit center and I'm actually going to be speaking and giving a demo of the Practice Orbit software and talking about the state of transitions in dental right now. So we are thrilled to do that. Really excited to bring, I think, interest around this technology, which I think the ecosystem of dental transitions very much needs these days. Well, one of the purposes of the Dental Sale podcast is to educate all those sort of stakeholders in the dental transition process about key points, key educational points about the process and what it's like to sell a dental practice. Today we're going to talk about a specific subject that occurs early on in the sale of a dental practice and that is the submitting what's called the letter of intent. I'm going to talk, Matt, for a sec. From the, from the standpoint of a seller or maybe a broker who's using the Practice Orbit software, they can go in and they can for free create their account, they get verified and then they can create their practice profile. Sometimes it's called Prospectus. I like to call it a practice profile. And it's like a HO on Zillow or Redfin where it displays the practice and it will show maybe some anonymous pictures of the pract, it will explain the type of practice, some financial numbers, number of employees, number of ops, equipment, that kind of thing, to be able to kind of showcase to interested potential buyers what is the style and the profile of the practice. And one thing we did in the software, Matt, that I love is the fact that it is anonymous when it first is displayed on the website search page for interested users. So it doesn't list name of the doctor, it doesn't list the address of the doctor. Any picture that would give away the location and identity of the practice can be marked as private. Those are not displayed. And then any users who want to be able to see this information of course, would have to create an account. And the identifiable detail is only released if the buyer or the interested party submits a non disclosure agreement or NDA inside the practice orbit system to the practice seller who can then approve it. And when it's approved, that information is released. So a seller who's going through that process, they have their practice profile done, they've now posted it anonymously on the site. And now there are some interested parties, maybe it's dental associates, maybe it's some institutional dentistry and they want to inquire more. And so they submit a non disclosure agreement and then they can receive more detail. The buyer then gets the detail and it says, I'm very interested in this practice. I would like to move forward with a serious good faith effort to start the negotiation process. And they do that by submitting this document called a letter of intent. So, Matt, let's kick it off. You're a dental attorney, you've done hundreds of dental transactions. What is the purpose of the letter of intent?

The letter of intent. And quickly, I just want to point out that a lot of times when you're working with professionals, they just abbreviate letter of intent as loi. So you're going to hear that all the time. And I'm going to do my best to continue to call it a letter of intent. So everybody's crystal clear on what we're talking about. But if you hear loi, you can use that interchangeably. But the purpose of the letter of intent is primarily just to make sure that everybody's serious about taking the next steps in the transaction. It's geared to lay out what the agreed upon terms are prior to really investing any real money and time into proceeding on the transaction. So, you know, there's the idea of how do you know if someone's serious if they're a buyer? If you're selling a practice, how do you know how serious they are? Well, once you get the letter of intent, a signed letter of intent in place, you know that they're serious. And after you have the letter of intent, you could start giving them some of your confidential information that they're going to need to be able to verify that it's a practice they want to purchase and that the purchase price is accurate and that everything looks good.

Great. We're going to go into the terms inside of the letter of intent in detail. I think that will be really helpful to users. But one thing I've always found a bit interesting slash odd is the letter of intent is a letter expressing an intent of interest to buy something. In this case a dental practice. Letter of intent is used in other areas, not just in buying a dental practice, but would think that that letter is coming from the buyer. However, I generally find in the industry that it's originated from the seller or the seller's broker. And even the practice orbit technology, the seller is the one who enters some basic information which then is provided to the buyer who can determine if they want to accept those terms or negotiate different terms, for example, a different price, and then resubmit that back to the seller. So who should be drafting this, in your opinion? And is it okay that it's oftentimes the seller.

So traditionally the buyer is the one who is going to draft it with the offer that they're comfortable making for the purchase of the business. But with that said, as you mentioned, a lot of brokers have their template, Lois, and a lot of sellers have an LOI that they give to the buyer. And it's a little bit backwards. But the idea is, is that when the seller drafts it or the broker drafts it on behalf of the seller and gives it to the buyer, the idea is that it's close to what the seller is willing to accept for the purchase of the practice. So when the buyer drafts it without any insight from the seller, it just may be so far away from what the seller is willing to accept that the seller may just laugh at it and not take the buyer seriously and reject it, or choose another offer that's closer to what the seller wants. So there is a benefit to having the seller put together what they're willing to accept and submit it to the buyer. Generally, when I'm representing buyers and the seller gives us a letter of intent, we review it and we make some edits based on what the buyer is willing to offer, and then we resubmit it back to the seller. And if the seller agrees with our edits, then we get it signed and go forward. So there's no mandatory party that should initially draft it. But when the seller does draft it, you know that those are the terms that they're willing to accept. So if those look good to the buyer, you're in the game.

Makes sense. I also wonder if there's not an element of economics at play here, because the supply is less than the demand in most markets, not all markets, but most markets, and the supply is less than the demand, meaning you have fewer sellers for the number of interested buyers out there who can dictate the terms a little bit more, probably the sellers. So in that sense, it might make a lot of sense that the seller is the one who says, hey, market here. Here's what I'm willing to leave my practice for to sell my practice for. If you're interested, then let's have a conversation kind of thing.

Oh, absolutely. And like you said, a lot of times, sellers will get multiple offers from buyers. And if you're a buyer and you're very nitpicky on the letter of intent or you put together exactly what you want without any consideration of what the seller wants, the seller's likely going to have another offer at some point and you may lose out on the deal. So it is good to communicate. The buyer and seller should communicate verbally and make sure that they're on the same page with some of the major terms prior to sending it over.

All right, softball question for you. Can the seller sign more than one LOI at the same time or have two active LOIs or more you call.

It a softball question, but it's a little bit tricky, and that's coming from, you know, being an attorney. There's no easy answers or easy questions. But what that boils down to is whether the letter of intent has an exclusivity provision. It if either one of them has an exclusivity provision, and that means that the seller is agreeing not to list the practice or not to enter into any other negotiations with anybody else, then that seller should not entertain multiple. LOIS if the seller is transparent and says, listen, I'm not doing the exclusivity thing. I'm letting we're going to go through this process with multiple buyers, and each can submit a letter of intent, and I might accept all their letter of intent. And then we'll decide when we get to the purchase agreement who we're going to go with. I'd imagine that's okay. I don't see any issues with it. But from a practical standpoint, buyers generally, they're going to have to invest some money in their team to go through due diligence and everything. So I don't recommend it to have multiple open. Lois unless the idea is that you're submitting the loi just so you can look under the hood of the practice to determine whether you're serious about buying it. But if you're a buyer or you're a seller and that arises, I would definitely have a straightforward conversation with the other party and make sure that everybody's expectations are in line so that one party doesn't get bent out of shape when they, you know, they think that they're in and spend a bunch of money and have the rug pulled out from underneath them.

The analogy is you're putting on the engagement ring. Now you're supposed to sort of say, I am no longer on the market. And that becomes very apparent. It would be, I think, a strange arrangement where you put on the engagement ring but you both agree to be testing out the waters out there for other potential spouses, whatnot. I think that some of that applies here as well. And as you mentioned, money goes into play, especially once the letter of intent is in. And so there's generally a desire for a commitment to each other exclusively until something would break off that commitment and then it could go back on the market and the seller can take other loi. I believe I have in a case where a seller had exclusivity, with a couple exceptions of some pre existing conversations with potential buyers, maybe like a son in law or daughter or something like that, that sort of carved out separately. But other than that, I generally find it to be exclusive.

Yeah. And you know, I've had quite a few transactions when I'm representing the buyer side where we'll ask for exclusivity and the seller won't agree to the exclusivity because they want to have a backup offer. They want to be able to entertain backups. And that's very important for some sellers where when they have a hard exit date, that they want to be out of the practice and they don't want to wrap up 30, 60, 90 days to have their buyer fall out and they want to have a backup plan in place and they want to kind of foster that a little bit. So that's one of the scenarios. But again, I think it's just a communication thing and there's no one way of drafting an loi. All of it can be negotiated, meaning that whatever the seller's goals are and whatever the buyer's goals are, as long as you're transparent and communicate back and forth and let each other know what's going on, you can kind of draft it however you'd like on that front.

Got it. So some flexibility, I think. Great podcast, Matt. Let's mark this one for later. What are the items or disagreements that break deals? So LOI is signed, but it never consummates in a purchase agreement being signed. What are the reasons for that? That'll be a great episode. I'm going to mark that down and you and I jump back on here because we've both seen many deals fall apart partly for the seller, sometimes from the buyer side. And it can be a very emotional, sensitive period. That'll be a great episode. Okay, next question.

Absolutely.

Is, should the buyer and the seller engage a legal team and maybe even recruit their accountant or CPA into the discussion at the point of loi or before the point of loi, or do they really just need to engage them once the LOI is in place?

So it really depends on how confident the buyer or seller is. If they've done transactions before and they know what they want, then they might be able to get away without counsel. But what I will say is that it's a good idea to have an accountant or CPA look at the purchase price to see if it's in the range of what is acceptable. And it's a good idea to have an attorney look over it to make sure that there's no binding provisions or if there are binding provisions, if they're acceptable. Once you put terms in the loi, and I think we'll get into this in a little bit, the binding versus non binding terms, it's just really difficult to change those terms without offending the other party, unless there's something concrete that comes up that gives you a reason to change them. And it's usually not a strong enough argument that your reason is, oh, I finally had a CPA look at the purchase price and they don't like it, so now I want to lower it. You know, when you're already in the negotiations of the purchase agreement, it's just a lot harder of a sell.

Yeah.

And it really kind of kills the goodwill, which is a huge part. You want to, you want to be on the same page with the big terms and then, you know, you can go back and forth with some of the nitty gritty, more minor terms.

Yep. This is such an important point because for many practices, for the success of the practice to transition onto the buyer, that goodwill doesn't just need to transfer on paper, it needs to transfer in reality, that the buyer has the support and the endorsement of the seller to both the team at the practice, the team members, and also to patients. And I have seen many times where buyer and seller will make a much bigger issue out of relatively small terms, which then really creates just an unhealthy aspect in their relationship which carries then into the actual transition of goodwill. Buyers and sellers, especially buyers, I think on this case, need to be very mindful of what's an issue to sweat about and what, what is an issue to not sweat about. That's where teams Accountants, attorneys can come in and help out. I will say from the CPA standpoint, we've represented hundreds and hundreds of buyers. We find that the seller is generally a little bit more flexible pre LOI than they are after loi because when loi is in, there's a number on paper with the signature at the bottom. And now the expectation is is set pretty firmly. And to bring them down you have to have a really good compelling reason for them psychologically be okay with a reduction in the asking price or the sale price after the LOI is in. From the CPA standpoint, what we recommend is you run a basic analysis before signing the LOI as a buyer. Before signing the LOI to calculate what are you going to take home by way of cash flow after you pay your overhead, which is your expenses after paying your debt and after paying so your overhead and your debt and your personal life needs, do you have enough left? Is there going to be money left and does it make sense to therefore move forward after that? Oh, and after taxes, that's actually what I was looking for. After overhead, debt and taxes, does the cash flow back to you reflect strongly, especially compared to what you're earning as an associate? Because I always tell buyers I want you to be cash flowing more, but at least as much as what you're cash flowing to your personal bank account from being an associate. Because now you're taking on more work, not just production, but now you're taking business ownership. That can be a part time job. It is a part time job in many ways and can be a stress and a headache. So you better get compensated for that and you get compensated for it, ideally by better cash flow, but also by building equity in the practice too as you pay on your debt and whatnot. So that's the time that we like to do it. We call it the free initial analysis and asking price assessment. And then if the cash flow looks good, we recommend go ahead and submit your letter of intent to kind of formalize the next step. 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 sellers makes, 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. 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And Wes, how does that process work within the Practice Orbit system? Kind of the initial Is there a system within Practice Orbit that will allow buyers to kind of do that initial assessment with is the purchase price reasonable or is that something that they would bring in outside?

So inside the system we had various tools to make the buyers and the sellers and brokers who use it find value in operating a transition inside of the ecosystem, inside the technology itself rather than outside of the technology. One of the features the buyer in addition to finding practices, filtering, saving them to their dashboard, submitting inquiries, that kind of thing, chat rooms, whatnot is that it calculates what is their expected take home after overhead, debt and taxes. Now we know their state, we know their state taxes and we can estimate a federal tax rate in there and that will then give them, I think a really important piece of information on whether they should accept a letter of intent that's proposed to them from the seller. So we do. Now sometimes technology can only go so far in calculating a standard or a number because it uses a standard set of calculations in arriving in that number. And there are at times nuances in practices that need to be considered. For example, is their associate that's already in there, what's going to happen with the associate? Are they going to remain or are they going to go? For example, are there going to be changes in certain expenses when you step in? Are you going to get the same insurance reimbursement rates as the seller? That could change too. So not a perfect system. And that's where you could hire a professional like some practice CFO or if you have a dental accountant to sort of run those numbers more specifically. But within the software, it's a pretty darn good estimate what that cash flow will be to the buyer. And then for the seller, it actually calculates if you sell at a given price, after you pay your taxes on the sale, after you pay off your debt, and after you pay your selling costs like attorneys and accountants, and if you have a broker, it'll add the broker cost, what is left after that dust settles, then used to pivot to your retirement or to that extent in your life. And that's a really valuable number because a lot of times sellers say, awesome, I can sell for 1.5, then they don't realize that because the amount of debt and a lot of the expenses and the taxes, they're walking away with 600,000, where in their head they were going to walk away with 1.3. So it's a really valuable number within the system.

Yeah. And one final thing to add on that point is that by having your accountant or CPA come in and give you an idea, or by getting close to it with the practice Orbit system, getting close to what the number should be as the buyer, it's going to save you a lot of time because if in the letter of intent you agree to a purchase price that is not supported by the practice's cash flow, the bank is not going to lend to you. And you won't know that right away. So you're going to have to go through a lot of the negotiations. And then you get to a point where the bank says this is what you're. And there's a pre approval process which usually helps with this to a degree. But if you're too far off, it turns into an issue and then you have to negotiate a possible seller carryback or you've got to come up with cash out of pocket. So the closer you can get to what the real value of the practice is, the better. And by using an accountant or CPA on that front is going to help verify that.

I think the term an ounce of prevention is worth a pound of cure applies here with the loi. The more you can kind of sift out some of the big terms ahead of time, the smoother it's going to go in the due diligence and closing period and the less likely you're going to be out of pocket money that you pay to advisors because the deal fell through because of unexpected items that emerged. So great comments there. Here's the last question, Matt. Here's what I posed. We go through this last question and this is going to be part one and then we do a part two episode of the terms inside of the loi. So I think here we're talking about purpose of the loi, kind of big picture questions of the loi, how to use the LOI effectively and whatnot. But I think we need to dedicate, have more time to dedicate to the actual terms of the loi, which there are about seven or eight terms. And I think we want to get under the hood a little bit so provide some valuable information to buyers and sellers. Here's the final question. Are Lois, you mentioned this briefly, you touched on it. Are Lois, letters of intent, are they binding legal documents or non binding legal documents? And perhaps you explain what that even means.

Yeah, so by a binding document, document that just means that you have legal obligations, that you can't just walk away, you know, scot free. If you change your mind, I'm sorry, that's non binding. A binding requires that you have legal obligations and that you have to follow the rules. It's an enforceable contract. So most otherwise that I see and the ones that I draft have, it's kind of a hybrid document and there's a set of terms that are non binding and then there's a couple terms that we do say are binding. So the terms that generally are binding are the confidentiality provision that says any information we give you will remain confidential and then the governing law where any disputes are going to be taken care of. And then if there's a deposit, the refundability of that deposit. So those are generally the binding terms. Everything else is like you said at the beginning of the podcast, it's the buyer's intent and the seller's intent on the terms and they can be changed at any time or the transaction can be canceled.

Do you recommend that a deposit be made. Who would make that deposit? Just the buyer or the seller, or buy both. I haven't seen deposits very often. A few times. Why don't you touch on maybe the pros and cons of that and how that works?

Yeah, so it depends on the relationship of the parties. If these are two parties that don't know each other at all and their first communication is about, give me some information on the practice. A lot of times the seller will ask for a letter of intent just to show that the buyer is serious and not just kicking tires. And in that scenario, I think it's no problem. When it's two parties that know each other or there's some level of trust, whether it's the broker who introduces them, says that I know this buyer and they're very serious, then the deal can be done without a deposit. And like you said, I feel like it's a 50 50. A lot of times there's not a deposit included. But when it's too completely foreign parties, then a deposit's not a bad idea. And different from like a real estate transaction or some other business sales, the deposit generally isn't a percentage of the purchase price. It can be. I've seen that a few times. But a lot of times the deposit is geared towards covering the expenses of the seller to proceed with the transaction until the due diligence period is closed. And we'll dive into that in the next episode about the due diligence period. But it just shows that the buyer's serious and that if the buyer decides to just change his mind after a set period of time, that the seller can be compensated for going through the efforts as long as the seller didn't do anything wrong.

It actually ups the stake of intent in the whole letter of intent concept by putting some money in the pool that's held essentially by escrow company that you could lose if you don't follow through with certain terms of, of the, of the letter of intent. I don't see it very often. I don't think it's generally customary. But in some cases where a greater commitment to the loi, to the transition is needed. I have, I have seen a couple.

Times, if you're a seller and the buyer is hesitant to put a deposit down, that's not always a deal breaker. I mean, like we said, we see a ton of transactions where it doesn't. And sometimes the buyer is completely credit worthy. It's just a cash flow issue. They might have things going on to where they don't have an extra five or ten thousand dollars that they don't have set aside to pay for their transition team and other expenses that come up, or they're trying to save every dollar for when they get into the practice. So it's not a deal breaker. On the seller side, I would say you just really want to make sure that the buyer's serious and that's one tool you could use to verify they're serious.

That's a great point. Many, many buyers are young associates who don't have a whole lot of discretionary cash to put into the pool there. So that's probably one of the reasons why I don't see it very, very often. If it's an institutional buyer, that might make a little more sense because the institutional buyers often come in proposing a buyer higher than market price and you want some commitment. Oftentimes they do have deeper pockets. Maybe not a bad idea there, but even then I don't, I don't see it very, very often. All right, let me refer everybody also over to our we have an education platform here at, at my company, we have an education platform for dentists associated buying into a practice. It's called Associates on Fire and this could be useful for service as well. On videos page of associatesonfire.com if you go to FuelCell2, we have various videos with sort of PowerPoint and presenter videos on the practice purchase process where an initial analysis is done. Due diligence. What is due diligence? Purchase price allocation, meaning how much of the price is going to equipment, how much is going to will. This has a huge tax effect for sellers and for the buyers as well. So a lot of great content over on Associates on fire.com Matt, always fun to have some good conversations with you. We'll be back for round two of the LOI soon.

That sounds great. Thanks so much, Wes.