Letters of intent (LOIs) are used in veterinary medicine during employment and practice sale negotiations to put preliminary terms into writing. They can be useful for planning but unclear expectations and ambiguity in LOI language – particularly about the binding/non-binding nature of clauses – can cause proposed deals to fall through, and litigation can ensue.
A letter of intent (LOI) is a document describing preliminary terms in a complicated business negotiation. It is usually written in a letter format by one party with a place for the other party to sign, indicating agreement. Sounds simple, right? Unfortunately, when the LOI is not clearly written, misunderstandings and complications can arise from the ambiguity if parties interpret the language differently. One party may intend the letter to be completely non-binding, while the other may want parts or all of it to be legally binding. If the deal falls through when parties had different expectations, litigation may ensue.
Hypothetical Example
Dr. Jeanie Lock worked for Dr. Bill Manor at Allgood Animal Clinic from the time she was 15 until she was accepted to veterinary school. Dr. Manor was a great mentor and teacher and, before Dr. Lock went to vet school, they talked about her someday becoming a partner in his practice and eventually taking over when he wanted to retire. So, when she graduated from veterinary school, she returned to work at Allgood. She figured it would take two to three years for her to develop her surgical and diagnostic skills, and assumed that when Dr. Moore turned 60 (in three years), he would bring up the partnership deal. Because she hated to negotiate, she decided to wait and trust Dr. Manor to bring up the subject when he was ready.
Three years passed. Then five. By this point, Dr. Lock was no closer to becoming a partner than when she signed on. Plus, around that time, another associate at the practice quit to spend more time at home with her new baby. In response, Dr. Manor hired a new, younger associate as a replacement, one who wanted to own his own practice someday. Suddenly, Dr. Lock felt threatened. If she didn’t make a claim on the practice soon, this new practitioner could become the partner! So, she wrote Dr. Manor a letter asking if he still wanted her to be his partner; if so, she wanted that in writing.
Dr. Manor therefore wrote a letter of intent, not using an attorney to create or review the language used. Both signed the letter, which stated that, within a month, he would hire a purchase appraiser to determine the value of the practice. Dr. Manor agreed to not consider any other buyers, while Dr. Lock agreed to not consider buying into another practice – and to keep any information learned about the practice confidential.
Dr. Manor hired a business appraiser almost immediately. The appraiser, though, worked at a glacial pace and was perpetually six months away from finishing the valuation. This dragged out for a year and a half before Dr. Manor fired him, hiring a more specialized veterinary appraiser. Though the new appraiser was more efficient, the process was still arduous. Two years after the doctors signed the letter of intent, there was still no purchase price, which held up the rest of the process.
Both doctors were frustrated with how slowly things had progressed. Dr. Lock wondered if Dr. Manor would ever sell her the practice; frankly, she was no longer even sure she wanted it. After seven years of working at a fast-paced, high-revenue veterinary practice with 15-minute appointment slots, she was burning out. Ultimately, Dr. Lock informed Dr. Manor she was not interested in the partnership anymore. A week later, she gave notice that she was leaving completely.
Dr. Manor felt betrayed and sued Dr. Lock for the cost of the practice appraisal. The basis of his suit? He had spent time and money hiring advisors because he had relied on Dr. Lock to purchase an interest in his practice. He felt she made a commitment for which she should be held accountable, and he used the letter of intent as evidence. Dr. Lock insisted that the letter didn’t require her to pay for the appraisal; that she was free to pull out of the negotiations at any time; and that the letter was only meant to help them move the process along. It was not, Dr. Lock stated, a formal binding document.
Ultimately, the situation did not turn out like either veterinarian had hoped. Originally, the letter of intent had helped them to establish their desires to pursue partnership and outline a basic plan. However, when the deal fell through, there were questions about whether or not the agreement was binding; if so, what were the obligations? What would happen if either of the doctors broke those obligations? Who was entitled to damages?
Letter of Intent Basics
When clearly constructed, the letter of intent can be a useful business tool. It can provide psychological comfort that a deal is moving forward, it can provide documentation to lenders and/or consultants, and it can get the parties thinking about the specific details of the proposed business deal. In veterinary medicine, these documents are most often used when negotiating a buy-in or when contemplating the sale or merger of a practice.
The letter of intent often includes some, but never all, of the specific terms of the potential business arrangement. Which terms are included vary with the purpose of the letter. Below are some terms that might be included in a letter of intent:
- Pre-employment letter of intent
- Approximate start date
- Contract term
- Working hours
- Compensation
- Benefits
- Buy-in information
- Terms of practice sale
- Percent of ownership that is being considered
- The purchase price, if known
- If the purchase price is unknown:
- The date that consultants or appraisers would be hired, and/or lenders approached
- The date the books would be closed for appraisers to examine
- The method by which a purchase price would be determined (fair market value, excess earnings, feasibility analysis)
- How the purchase price would be paid
- Whether it is an asset or stock sale
- If it is a stock sale, what type
- Whether or not the real estate would be sold along with the practice
- Whether a non-compete would be required of the parties
- Approximate closing date
Binding versus Non-Binding
Typically, the parties do not intend most of the terms listed above to be binding because they are still negotiating the terms of the deal. However, they may choose to include several types of binding clauses, such as:
- Exclusivity or “no shop” clauses that keep the buyer from seeking out other sellers or the seller from seeking out other buyers
- Confidentiality clauses that keep employees from sharing the terms of their negotiations with other candidates and/or that keep a potential buyer from using the information they learn through negotiations to help a competing practice
- Good faith negotiation clauses where parties establish a “contract to bargain”; this does not guarantee a contract will be reached but it does keep both parties from renouncing the deal, abandoning negotiations or insisting on conditions that do not conform to the preliminary agreement. “Good faith” is largely an abstract, undefined concept but can be loosely defined as “honesty of intention to abstain from taking any unconscientious advantage of another, even through technicalities of law”
- Expense sharing will be included if the parties intend to split the cost of hiring appraisers and/or other professionals to help facilitate negotiations
- Contract prerequisite clauses, wherein parties may require one another to perform certain acts before the final contract can be drafted; these may include performing appraisals, releasing financial information or signing a release for background checks
Sometimes, a letter of intent will inadvertently create obligations on the parties. Whether explicitly stated or implied, the letter may do the following:
- The letter itself may imply a duty to negotiate in good faith even without a “good faith” clause. If so, then the parties have to show that they made genuine efforts to negotiate over a reasonable period of time.
- If the letter contains too many important terms of the final contract, then the courts may hold that any remaining details were a mere formality and that an enforceable contract existed. The courts may then penalize parties for not completing the contract terms.
- One party may sue for damages if heavily relying upon the other party’s firm promise to make a deal and no deal is made. Examples might include someone relocating because of a letter of intent regarding employment or taking out a loan for purchasing a practice.
A disgruntled party might use any or all of the above to file suit. When cases come to trial because of vague letters of intent, the courts’ decisions tend to vary widely with the facts presented. Thus, it is difficult to anticipate how the court will find in a particular instance.
Bottom Line
It takes careful drafting to get the benefits of the letter of intent while also avoiding undesirable or unintended legal baggage. To maximize the usefulness of a letter of intent and limit the downside of their misuse, veterinarians contemplating a business arrangement should consider the following four steps:
Consult with an attorney: Because letters of intent must be balanced somewhere between no agreement at all and a full-fledged contract, precise drafting is required. Plenty of heartache, time, and money can be saved by having an attorney draft the letter in the first place.
Don’t make the letter sound like a contract: The more the letter of intent looks like, sounds like, and has enough terms to make a contract, the more likely a court will hold it to be one.
Include:
1. Clauses clearly indicating whether each term is meant to be binding or not binding so misunderstandings between the parties are less likely
2. Clause stating that any term that is not explicitly stated as binding is non-binding
4. A list of any and all steps that must be accomplished before the parties can consider a final, definitive agreement. Expressly state any terms that are still unresolved. This allows you to show, if the process is interrupted, that negotiations were not complete.
3. Hypothetical language using words like “understanding,” “would” and “should”; this can help to give the impression that the current agreement is not definite and may change given additional information or events.
4. Date by which this business exploration must be completed
Do not include:
1. Too many material terms of the potential contract, because the courts may find the LOI is essentially an enforceable contract; this defeats the entire purpose of an LOI
2. A deposit or fee to be paid before entering into negotiations because non-refundable fees tend to make writing binding
3. Definitive language including words like “agree,” “will,” or “shall,” which may imply that the referenced terms are definite and decided upon
Match your actions to your words: Acting like the letter of intent makes the potential contract a “done deal” may indicate to a court that a contract already existed. If parts of the agreement that a party was not bound to complete before the final contract actually are fulfilled, the court may interpret that as “done deal” behavior. Examples include:
- purchasing employee benefits, when considering a hire
- moving to the new place of employment, when considering a new job
- turning over keys or stock certificates, when considering selling your practice
- taking out a loan for purchase, when considering buying a practice
As you progress, record your efforts to comply with the binding terms of the letter and any reasons that you decide to discontinue negotiations. This helps to show that you were negotiating in good faith.
If things fall through, stay professional:
- This will likely be a very emotionally charged time, but resist the urge to take this business situation personally. Avoid confrontations, and have a neutral witness present if you need to discuss the matter with the other party. If the other party starts acting inappropriately, disengage and do not respond in kind.
- If you decide to re-engage in another round of negotiations with the same party, create a period of time between negotiations to allow both parties to think about and process the information exchanged. This break may allow parties to recover from difficult, sometimes hurtful discussions.
Conclusion
Letters of intent are important tools because they help veterinarians who are interested in business relationships lay down the foundations for subsequent negotiations. However, veterinarians should be aware of potential negative consequences. For best results, consult with an attorney, and use caution and common sense so that a letter of intent can serve as a vehicle for progress, and so that you can avoid legal potholes.
