If a buyer is interested in your healthcare company and wants to move the process forward, they will send you a letter of intent (LOI). This document shows that the buyer is serious about the purchase, willing to make a formal offer and wants to learn more about your company. While a letter of intent isn’t a binding agreement, it starts to lay out the conditions for how a future sale would be handled should the two of you come to a final agreement. It’s important for you as a seller to understand what’s in a letter of intent so you can settle on terms that are fair and help you move through a potential sale effectively.
Terms of payment
The letter of intent should list the buyer’s offer for your company. If possible, you should push for this to be a specific price rather than have than set a conditional price, like 6x your company’s EBIDTA. Using a conditional price can create uncertainty as you go through your negotiations and try to lock down the figures that determine the final price.
The LOI should state the conditions that need to be met before payment would be made, when payment would be made, and how the payment would be made: cash, stock, earn-outs, promissory notes, etc.
The LOI should also state whether they transaction will be a stock or asset deal. Beyond this, the deal structure will explain which liabilities will be taken over by the buyer and which ones will be kept by you, which you would need to pay off out of your sale proceeds.
A buyer may ask that you give them an exclusivity period as part of their letter of intent. This way they don’t have to worry about you negotiating a deal with someone else while they are still completing their due diligence your company. If the LOI has an exclusivity period, it will state how long that period will last for the potential buyer.
You should push to keep the exclusivity period as short as possible to keep your deal moving and to prevent a waste of your time. Thirty to ninety days is the standard length of most exclusivities. If you are getting along well with a buyer, you can always agree to extend the exclusivity period while their research is underway.
Due diligence and confidentiality
A buyer sends out a LOI because they want to more closely examine your healthcare business to make sure it meets their expectations for a purchase. The due diligence requirements outline what the potential buyer will be allowed to examine during your negotiations and what you will need to do to help them research their purchase. Buyers will sometimes want access to key employees during the due diligence period. This is usually a point of concern for most sellers and access should be negotiated prudently. Since the buyer will be seeing a lot of personal information about your company, they will agree to a confidentiality agreement as part of the deal.
Closing date and conditions
The LOI should set a deadline for when the deal is expected to close and what work needs to be done on both ends to meet this deadline. The deadline can be extended as both the buyer and seller move through the process, but because of the time, effort and information that is shared, you should work diligently to meet the deadline and ensure the buyer does the same.
The LOI sets the tone for your deal so you need to make sure to get this agreement right. By properly negotiating all these terms, you can set yourself up to succeed with your future sale.