After weeks of initial discussions, you’ve received a multi-page document from a potential buyer. It’s a Letter of Intent or LOI. This document signals a major shift in the M&A process. The conversations are now serious, and the proposed partnership is taking shape on paper.
The LOI is the foundational roadmap for your practice’s sale. As a milestone in the private equity acquisition process, it outlines the major business terms of the deal and sets the stage for the intensive due diligence and final negotiations to come. While most of its financial terms are non-binding, underestimating its influence is a critical mistake. The terms you agree to here create powerful psychological and strategic momentum that is difficult to reverse.
Understanding every component of a healthcare LOI is your first line of defense and your best tool for shaping a favorable outcome.
Deconstructing the Healthcare LOI: A Component-by-Component Breakdown
When a private equity firm or strategic buyer presents an LOI, they are providing a blueprint for the proposed transaction. Your job, alongside your advisors, is to analyze this blueprint piece by piece. Here are the essential components you will encounter.
| Component | Description | What to Watch For |
|---|---|---|
| Purchase Price & Structure | The proposed valuation for your practice. It may be a fixed number or a multiple of your Adjusted EBITDA. It will also detail how the price will be paid—cash at close, seller notes, an earnout, and/or rollover equity. | Look for clarity. How much is guaranteed at closing versus contingent on future performance (earnout)? What percentage of rollover equity is proposed, and what are the terms? |
| Deal Structure | How the transaction is legally structured, typically as an asset purchase or a stock purchase. For physician practices, asset purchases are far more common (>70% of deals) to avoid assuming legacy liabilities. | The structure has significant tax and liability implications. Ensure this aligns with the advice from your CPA and attorney. It may also mention forming an MSO structure to comply with regulations. |
| Binding & Non-Binding Clauses | The LOI must explicitly state which terms are legally enforceable and which are not. Most business terms (like price) are non-binding, while procedural terms (like exclusivity) are binding. | Pay close attention to this section. Misunderstanding it can lead to legal exposure or loss of negotiating leverage. |
| Due Diligence Period | The timeframe, usually 30-90 days, during which the buyer has exclusive access to conduct a deep dive into your practice’s financials, operations, and compliance. See our PE Due Diligence Checklist for what this entails. | A very long diligence period can create deal fatigue and risk. Is the proposed timeline reasonable for the size and complexity of your practice? |
| Post-Sale Restrictions | Restrictive covenants that limit your activities after the sale. These typically include a non-compete clause (barring you from practicing within a certain geography for a period) and a non-solicitation clause (preventing you from hiring staff or soliciting patients). | Are the geographic scope and time duration reasonable and compliant with state law? Overly restrictive covenants can severely limit your future professional options. |
| Assumed Liabilities | A clear statement of which of the practice’s debts and obligations the buyer will assume. Buyers nearly always exclude legacy regulatory or malpractice liabilities. | This section should be specific. You want no ambiguity about which liabilities remain with you, the seller, after the deal closes. |
| Timeline to Closing | A projected schedule with key milestones, such as completing due diligence, signing the definitive agreement, and the target closing date. Explore the full timeline for healthcare M&A deals. | An aggressive timeline can put pressure on you, while a slow one can introduce risk. The schedule should be realistic for both parties. |
The Binding Terms: Where the LOI Has Legal Power
While you can renegotiate the purchase price after due diligence, you cannot simply walk away from the binding parts of a signed LOI without potential legal consequences. Two clauses demand your full attention.
1. Confidentiality
This clause legally obligates both you and the buyer to keep the negotiations and any shared information confidential. This protects your practice from the disruption that could occur if staff, patients, or competitors learned of the potential sale prematurely. It’s a standard and mutually beneficial protection.
2. Exclusivity (The “No-Shop” Clause)
This is arguably the most important binding clause for the buyer. By signing an LOI with an exclusivity clause, you agree not to solicit, entertain, or negotiate offers from any other potential buyers for a specified period (typically 30-90 days).
You are effectively taking your practice off the market. This gives the buyer the confidence to spend significant time and money on due diligence without fear you will use their offer to get a better deal elsewhere. For you, this means the competitive tension that drives up price must be created before you sign. This is where experienced advisors can support your deal negotiations by running a structured process to elicit multiple offers before you commit to one party.
Healthcare-Specific Clauses: Navigating the Regulatory Minefields
A generic LOI is not sufficient for a medical practice sale. The document must address the unique regulatory environment of healthcare to protect both parties.
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Compliance Representations: The LOI should contain language where both parties represent that they have operated in compliance with federal and state healthcare laws. This includes the Anti-Kickback Statute, Stark Law, and HIPAA. A lack of this language is a major red flag. For a deeper dive, see our guide to navigating Stark Law and Anti-Kickback issues.
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Handling of Patient Data: The LOI must make it clear that no individually identifiable patient health information will be shared before the deal closes, except as permitted by law. Buyers will analyze anonymized data, but the transfer of patient files is a post-closing event.
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MSO and Corporate Practice of Medicine (CPOM): In states with CPOM laws, the LOI may specify that the transaction will be structured through a Management Services Organization (MSO). This structure allows a non-physician entity (the PE-backed buyer) to manage the business while the physicians retain control of the clinical practice. Mentioning this in the LOI signals the need for a sophisticated legal structure. Learn more about the Corporate Practice of Medicine Doctrine here.
Common LOI Pitfalls and How to Sidestep Them
Navigating the LOI stage is filled with potential missteps. Here are a few to avoid.
- Treating It as “Just a Formality”: The terms in the LOI become the default for the final agreement. While the price might be adjusted based on due diligence findings, trying to make major structural changes or renegotiate key business points later is extremely difficult and can erode trust.
- Accepting Vague Language: Buyers may use ambiguous terms like “a customary amount” for working capital or “a standard” non-compete. Insist on specifics. Define the working capital target as a precise dollar amount or formula. Quantify the non-compete by years and miles. If you encounter unfamiliar language, our key terminology glossary for healthcare LOIs can help.
- Failing to Engage Specialized Counsel: Your practice’s general business attorney may not have the niche expertise required for healthcare M&A. You need legal guidance for your healthcare LOI from a firm that lives and breathes healthcare compliance and transaction law. They will spot risks a generalist might miss.
After the Ink Dries: What Happens Next
Signing the LOI is not the end of negotiation; it is the beginning of confirmation. The next phase is an intense period of due diligence where the buyer works to verify all your claims. You will be asked to provide extensive documentation on everything from financials to credentialing.
The LOI you so carefully negotiated will serve as the guide for this entire phase. It sets the expectations, the timeline, and the foundational terms that will ultimately be translated into a definitive, legally binding purchase agreement.
If you have an LOI in hand or expect to receive one, the details matter. Ensuring you have the right advisory team to scrutinize those details and manage the process is the most important decision you will make on the path to a successful closing.
Frequently Asked Questions
What is a Letter of Intent (LOI) in a medical practice sale?
A Letter of Intent (LOI) is a foundational document in a healthcare M&A transaction that outlines the major business terms of the sale. It acts as a roadmap for the deal, setting the stage for due diligence and final negotiations, and signals the transition from informal talks to a formal sale process.
Are the terms in an LOI legally binding?
Most financial and business terms in an LOI are non-binding, meaning they can be renegotiated after due diligence. However, certain specific clauses like Confidentiality and Exclusivity (the “No-Shop” clause) are legally binding. These binding terms require the seller to keep information confidential and not to negotiate with other buyers during the exclusivity period.
What key components should I expect in a healthcare LOI?
Key components of a healthcare LOI include the purchase price and structure, deal structure (asset vs stock purchase), binding vs non-binding terms, due diligence period, post-sale restrictions (like non-compete clauses), assumed liabilities, and the timeline to closing. Each element has specific implications for financial, legal, and operational aspects of the deal.
What common pitfalls should I avoid when negotiating an LOI for my medical practice?
Common pitfalls include treating the LOI as just a formality, accepting vague or ambiguous language, and failing to engage specialized legal counsel familiar with healthcare M&A. These mistakes can lead to unfavorable deal terms, legal exposure, or difficulties in closing the deal successfully.
What happens after signing the LOI in a healthcare practice sale?
After signing the LOI, an intensive due diligence phase begins where the buyer examines your practice’s financials, operations, and compliance documents. The LOI serves as a guide during this process, setting expectations and timelines that lead to the drafting of the definitive purchase agreement and eventual closing of the sale.
