Associates and clinic owners reach out to my firm all the time with a simple question: “I’m interested in buying a local practice and I’ve talked with the owner in general terms, but I don’t know where to go from here.” It’s a simple enough question, but it has a complex answer.
Above all, it’s important not to spoil a deal by badgering the potential seller with emails, phone calls and visits. Instead, the buyer needs to demonstrate sincere interest—and some legitimate evidence of his or her ability to obtain financing.
At the same time, the suitor needs to recognize that there’s a significant distance between “general terms” the parties may have chatted about at a bar or in a brief phone call and the details that will need to be negotiated. Jumping into discussions of price and terms may be premature at this early stage—even fatal to an eventual sale.
Imagine that an associate raises the idea of a buyout with his longtime boss. Surprisingly, the mere suggestion by the younger doctor that he’d like to see a closing within six months throws the seller into a panic. The idea of near-term retirement is unexpected and alarming. The older doctor, who might have otherwise been open to a sale, shuts down and won’t even entertain an offer until he wraps his head around it.
Now, consider the same set of hypothetical facts, but instead the boss throws out a possible sale price. The associate is caught completely by surprise when the figure is twice what he might have imagined. Soon thereafter, being a fairly shy fellow, the associate elects to surreptitiously pursue a clinic purchase elsewhere rather than face his employer with a far lower counter-offer.
In order to help my clients avoid these potentially deal-killing missteps, I often recommend that they take a step back and consider putting together a letter of intent. This letter isn’t a contract, and it isn’t an offer. More accurately, it’s an offer to explore the possibility of a purchase. Once a letter of intent is created, it can be used artfully (not simply forwarded as an attachment to a brief salutary email) to begin the complicated courtship dance of sorting out transaction specifics.
What is a letter of intent not?
A letter of intent is a handy tool in business purchase negotiations, but it’s poorly understood by many attorneys. I consider it one of the most sophisticated unenforceable legal documents I draft. It can work its magic even if the opposing party never agrees to sign it.
Think of a letter of intent as an engagement proposal: It demonstrates sincere intention to move forward, but if the deal doesn’t close, the parties return to where they were before—no harm, no foul. No one will be out much, except disappointment and a relatively short period of unproductive time.
Again, letters of intent are not contracts. Most properly drafted letters state that unambiguously. However, they do sometimes contain one or two legally enforceable elements, such as a provision stating that the seller or buyer will not negotiate with others regarding the same transaction for a set period of time, or language saying that neither party will disclose any transaction-related information (the seller’s tax returns or the buyer’s financial position, for example) to any outside third party who doesn’t have a “need to know,” such as bankers or accountants.
What should a letter of intent include?
This is the issue that separates the sophisticated draftsperson from the many consultants and attorneys who don’t utilize the letter of intent to the full extent of its usefulness. Because it is an entreaty and not enforceable, it provides the party who drafts it an opportunity to express interest without the inclusion of details that might initially disturb the other party.
Advisors who deal with small business owners know that acquisition or disposition of a small business (including a professional practice) is not small business to the parties involved. For the seller, it may mean the culmination of a lifetime of effort as well as the final step in financing a much-anticipated retirement.
For a buyer, a practice acquisition may be the biggest and riskiest purchase of a lifetime—surely cause enough to be skittish. It is for these reasons that the letter of intent, through its wording as well as its contents, can create the framework for a sale. Similarly, a cold and uncompromising letter of intent, delivered impersonally, can torpedo the transaction by either insulting the seller, terrifying the nervous buyer—or both.
Elements of the letter of intent
These are the basic issues that might be included in a letter of intent:
> Description of the enterprise to be purchased
> Nature of the transaction: purchase of assets, stock or LLC membership shares
> Price or price formula or price range
> Period of due diligence, or time before the letter of intent will no longer be considered controlling by the parties (with respect to exclusivity in negotiations)
> Time prior to closing
> Financial terms.
Topics to avoid
These are the issues that might not be appropriate to include in a letter of intent:
> Financing by seller
> Noncompete to be executed by seller
> Continued employment of the seller
> Exclusivity with respect to entertaining other offers (optional)
> Nondisclosure agreement (often spelled out in a separate signed document).
Carefully drafted vs. boilerplate
Many attorneys draft letters of intent as contentious “take-it-or-leave it” proposals. I believe that’s an ill-considered approach. Remember that the letter of intent is a proposal, and genuinely comparable to an engagement. Isn’t it unlikely that your beloved will say “yes” if you specify how many children you expect her to bear while you’re down on one knee?
It’s all in the presentation, my friends … and in the law, presentation equals drafting. Letter of intent templates can be found all over the Internet and in attorneys’ form books. While there’s nothing wrong with using boilerplate language as a starting point, the final version needs to take the target party’s personality and likely concerns into consideration
How not to offend the other party
When preparing to create an effective letter of intent, here are some tips:
> Provide alternative scenarios for terms you suspect might be poorly received. For example, If the seller isn’t quite old enough for retirement, include the possibility of his staying on as a per diem employee or “consultant.”
> Leave out specifics regarding known points of contention. Just because the seller says he won’t finance any part of a sale doesn’t mean he won’t budge on that point later. Omit language as to his anticipated participation in funding the sale.
> Instead of specifying a price, include generalities. How about proposing to pay “approximately five times last year’s practice profit”? The subjectivity of “approximately” wouldn’t cut it in a contract, but this isn’t a contract! To the seller, five times profit is sure to be enticing. As you move closer to a contract and closing, let the CPAs battle over the definition of profit.