When you are buying or selling a healthcare practice, even simple, straightforward transactions can become needlessly complex. Miscommunications and misunderstandings over key terms of the transaction can emerge, requiring the parties to spend unnecessary time, energy, and money on attorneys’ fees to resolve disputes. One of the best ways to avoid, or at least minimize, these misunderstandings is through a letter of intent, also sometimes referred to as a memorandum of understanding or a term sheet.
Letter of Intent Basics
Letters of intent can take many different forms, but they are usually short synopses of the key terms of the sale. The goal with a letter of intent is to provide a roadmap for the parties and their attorneys as they document the parties’ agreement in a final contract. Letters of intent are usually drafted fairly early in the process, after the parties have negotiated some of the key terms, but before the due diligence period has started. Usually, but not always, the letter of intent will be accompanied by payment of a relatively small amount of earnest money.
Under Arizona law, letters of intent can either be binding or non-binding, depending on the way they are drafted. In most cases, both parties will want the letter of intent to be non-binding, although even non-binding letters of intent can contain penalties, such as the forfeiture of any earnest money paid.
Although the terms you’ll want to include in a letter of intent may vary, there are some key terms, such as price and closing date, that you will want to include in most, if not all, letters of intent. These key terms include the following:
- Purchase Price. While this may seem self-explanatory, this term should be spelled out clearly to indicate whether it also includes any earnest money paid, and should also take into account any existing liens or security interests in the practice that will be paid at closing.
- Closing Date. This is when the sale will actually become final and the ownership of the practice will be transferred from seller to buyer.
- Allocation. The allocation of purchase price between goodwill and equipment can have significant tax consequences for both the buyer and seller, and it is something that you typically want to be in agreement on early in negotiations.
- Leases. If the seller leases the office space or some of the equipment in the office, you will want to have some confirmation of the basic terms of the leases in the letter of intent, as well as confirmation that the leases may be assigned to the purchaser.
- Restrictive Covenants. Almost every sale of a practice comes with a restrictive covenant (also known as non-competes or non-solicitation agreements) that prohibits the seller from competing with the buyer of the practice. A more detailed discussion of healthcare noncompetes, and specifically how they apply in the Arizona, can be found here.
- Included/Excluded Assets. You don’t need to list every piece of equipment in the letter of intent, but if there are specific items that you want to carve out or specifically include, such as expensive equipment or items with sentimental value, you should include them in the letter of intent.
- Due Diligence Period. This is the opportunity for the buyer to confirm the representations made by the seller during the negotiation process. More information on what a buyer should do during the due diligence period can be found here, but the letter of intent should state how long the buyer will have to conduct his or her investigation.
- Contingencies. Contingencies are events that will prevent the transaction from closing between the date the letter of intent is signed and the closing date. The most common ones include a failure by the purchaser to obtain adequate financing and misrepresentation of information that is discovered during the due diligence period.
These are just some of the things you will want to think about as you prepare the letter of intent, but the main thing to remember is that a letter of intent is a critical part of buying or selling a practice. If correctly drafted, a letter of intent can potentially save thousands of dollars in legal fees and hours of headaches.