A lot of associates treat the letter of intent as a formality because it’s non-binding. The trouble is that the attorneys draft everything else from it. Whatever you agree to in the LOI is what they build the asset purchase agreement (APA) from, so the letter of intent (LOI) is the time to speak up.
We look at letter of intent for dental practice before they sign, and the problems are usually the terms nobody wrote down. We had a doctor buying a practice who got to sit with the seller and look at the schedule, and it was completely full, booked out multiple weeks. But when we started looking at the P&L, the collection number wasn’t there.
A full schedule doesn’t mean the money is being collected. That’s a conversation you want to have before you sign the LOI, while you can still change the price or walk away.
What Is A Letter Of Intent When You Buy A Dental Practice?
A letter of intent (LOI) is a short document, usually a few pages, that lays out the main terms of the deal before the attorneys write the binding APA. Most of it is non-binding. The parts that usually do bind you are confidentiality and exclusivity, which means the seller stops talking to other buyers for a set window.
The LOI normally covers the price, the target closing date, whether it’s an asset purchase or a stock purchase, any deposit, and how long you get for due diligence. What it often leaves out, unless you ask, are the details that decide how much cash you have in your first year of ownership. We’ll go through those one at a time, starting with the money you need before you even send the LOI.
Get Your Financing Lined Up Before You Submit An LOI
Some buyers want to wait until they have a signed LOI before they talk to a bank. We tell them to get the financing done first. When you turn in an LOI with your financing already in place, the seller and the landlord both know you’re ready to go and that a bank will actually fund you.
Your loan also has to cover more than the price. Most doctors want the bank to finance the purchase price plus working capital, which is the cash you need for payroll, lab bills, and supplies in the first few months before your own collections come in. We explain what lenders look for in our post on dental practice financing.
Once the loan is sorted, the next question is what you’re actually getting on day one.
Spell Out The Supplies And The Seller’s Open Bills
In a dental asset purchase, the seller keeps their cash and you bring your own working capital. What catches buyers is what’s left on the shelves and in the mailbox. If the LOI says nothing, the seller has little reason to keep restocking composite, impression material and disposables in the last couple of months before handing over the keys.
Ask for a few things in writing. The seller keeps running the practice the normal way until closing, including ordering supplies, and a reasonable stock of supplies stays in the office when you take over.
The seller should also pay their own lab bills and vendor invoices for work done before closing. Otherwise you can end up paying for crowns that were seated before you owned the place, which brings us to the bigger version of the same problem: the money patients owed the seller.
Who Collects The Money Patients Owed Before You Bought?
On any given day, a practice has unpaid balances from patients and insurance companies for dentistry that’s already done. That’s accounts receivable (A/R). When you buy the practice, someone has to own that money and chase it, and the LOI is where you decide who.
There are two common setups. The seller keeps the pre-closing A/R and collects it after closing, and you only collect on dentistry done after you take over. Or you buy the A/R at a discount as part of the deal and take on the work of collecting it.
Each one has a cost. If the seller keeps it, your front desk will be taking payments on the seller’s behalf for months, and someone has to track whose money is whose. If you buy it, you get cash coming in right away, but you carry the risk on balances that never get paid.
Pick one on purpose and write it down. A silent LOI usually ends up with the seller keeping the A/R, whether or not that suits you.
Transition Pay For The Selling Doctor Belongs In The LOI
Most sales include a stretch where the selling doctor stays on to introduce patients and hand off cases. That can be anywhere from a few weeks to a year or more, and some sellers stay on longer as an associate.
The LOI should say how long the transition lasts, how the seller is paid, and whether staying is a requirement or an option. Paying the seller a percentage of collections on their own production is a common setup, and it keeps them focused on doing dentistry.
The risk in a vague transition clause is patients leaving. If patients see the seller as their dentist and the seller disappears the week after closing, some of them follow that relationship out the door. How hard the seller works during the transition often comes down to what else they’re allowed to do after the sale, which is the non-compete.
The Non-Compete And The Lease Both Need A Line In The LOI
Almost every dental LOI includes a non-compete. A typical one says the seller won’t open a competing office within 10 miles of the practice for the next 2 years. Your attorney will tell you what radius and term actually hold up in your state, because that’s state law and it varies a lot.
The non-compete and the transition pay affect each other. A seller who can’t practice nearby for years has every reason to help you keep the patients and get paid for it. A seller who can open across town soon after closing has less reason to work hard at handing patients over, so you want the transition terms tighter.
The lease deserves the same attention. The landlord usually has to consent before the lease can be assigned to you, and some leases have a recapture clause that lets the landlord take the space back instead. Ask in the LOI that the deal depends on getting the lease assigned to you with enough years left to make the purchase worth it.
That leaves the term with the biggest tax effect, and we recommend raising it before the LOI is signed.
Start The Goodwill Vs. Equipment Split At The LOI
When you buy a practice, the APA is the legal document, but the bill of sale is what matters for taxes. Think of it like a Costco receipt. It says how much of the price was equipment, supplies, leasehold improvements, and goodwill, and that receipt is the blueprint for your deductions.
Anything you can touch, like chairs, the CBCT, cabinetry, and the plumbed ops, is equipment, and it gets written off much faster. Anything you can’t touch, like the patient base and your name in the neighborhood, counts as goodwill. The non-compete gets the same treatment, and the tax code spreads those deductions over 15 years. If nobody advises you, the seller tends to put almost everything into goodwill, and you get a very small deduction in your first year.
The seller wants more in goodwill, and you want more in equipment, and that push and pull usually shows up first in the LOI. Both of you report the split to the IRS on Form 8594. A written allocation binds both of you unless the IRS decides it isn’t appropriate, which is why it goes in writing.
There’s a limit on how far you can push it. The urge is to call nearly everything equipment and almost nothing goodwill, and that only works if you’re buying a shell with very little in patient fees. If the practice has real revenue and a reputation, the IRS can treat the split as moved in your favor and come back to collect those taxes along with penalties and interest.
We try to get you favorable tax treatment, as long as the split lines up with reality.
What Should a CPA Check In Your LOI Before You Sign?
Your attorney reads the LOI for legal risk, and we read it for the money and the taxes. If you’re buying a practice, please make sure you have an attorney looking over the contract and a CPA looking at the tax side of it.
On our side, the first things we check are the allocation, the A/R terms, what the seller owes on supplies and open bills, and how the transition is paid. We also check that your new entity is ready, because in an asset purchase you come with an empty box (your new LLC) and pack the equipment and goodwill into it.
Then we test the profit the price was built on. We’ve seen the dentist’s wife working as the office manager for $10 an hour, and the numbers look great on paper. The moment you buy the practice and hire an office manager at a real wage, that profit drops.
We’d rather see the LOI before you sign it than after. Once the APA is drafted from it, every change needs the seller’s agreement and costs everyone time and money.
Our dental practice acquisition support covers the whole process from entity setup through closing.
If you’re under LOI or about to make an offer, book a call with Virjee Consulting to review your LOI before you sign and we’ll go through the numbers together.
If you liked this, you might also like: How Much Should You Pay for a Dental Practice in 2026?
About the Author
Omar Virjee, CPA is the founder of Virjee Consulting, a CPA firm specializing in year-round tax planning and monthly bookkeeping for solo and small-group dental practice owners across the United States. Omar focuses on helping dentists maximize owner take-home pay through proactive tax strategy, S-Corp optimization, dental real estate planning, and clear monthly financials.
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Getting owner pay right is half tax question and half payroll mechanics, and our dental payroll services cover the mechanics side.
