Your medical practice may be considering a proposal to be acquired by another group or by a healthcare system, or it may be seeking a capital injection as a way to fund its growth or buyout of retiring partners. To understand the transaction terms it will often be boiled down first to a term sheet which describes the transaction, and then to a letter of intent.

The LOI will be the first opportunity to see if the deal has real prospects to close. Understanding the LOI and the related process is important before signing on. Here are some things that should be included in order to avoid any misunderstanding as you proceed down the path toward the transaction.

Structure. The document should describe the structure of the transaction: merger, acquisition, or equity capitalization, and whether the “exchange” will be equity or assets. This will also describe how the ownership will be structured post-transaction. You may insist on clarifying leadership after the transaction as well.

Value. The transaction value should be included. It may make sense to include the basis of establishing the value as well and when and how the payment will be made. An explicit description of cash or equity transfer at close, any reserve or earnouts, and whether there is any debt included to finance the transaction. 

Conditions. Conditions of the transaction require special attention. One of the conditions will be satisfactory completion of due diligence. The diligence process is where scrutiny of key contract assignability, billing errors, employment agreements, governance gaps and compliance issues are evaluated and can cause a reduction in deal value. This is where advance preparation can pay off before allowing the other party to find issues that cause a price revision; because it is far more likely to go down than up.  In addition, other items such as change in ownership assurances, management services contracting, and other conditions critical to the success of the venture after closing will be included.  Carefully review the conditions and add any others that will help prevent last minute surprises.

Binding Terms. While the Letter of Intent is generally considered non-binding, there will be certain provisions that are binding. One is an exclusivity provision which prevents a party from soliciting or evaluating other competitive transactions. This should be closely evaluated to make sure that it is mutual, and that it applies only for a reasonable period of time. Other terms that are commonly binding include confidentiality, fees and expenses, period allowed for due diligence, and governing law. Spending time to clarify and understand the binding provisions will lead to a more likely successful and seamless transaction.