What is an LOI in healthcare M&A?
A letter of intent (LOI) in healthcare M&A is a non-binding agreement that sets the proposed purchase price, structure, exclusivity period, and diligence timeline before a buyer commits the resources to close a deal.
Definition
An LOI (letter of intent) is a pre-contract term sheet that outlines the major commercial terms of a proposed acquisition, including price, structure, exclusivity, and timing, signed before definitive agreements are drafted.
The detail
LOIs in healthcare practice transactions typically cover eight things. Purchase price, usually stated as a multiple of adjusted EBITDA with a working capital peg. Structure, including cash at close, rollover equity percentage, and any earnout or seller note. Exclusivity (no-shop), usually 60 to 120 days during which the seller cannot negotiate with other buyers. Diligence access, including financial, legal, clinical, and operational. Timeline to closing. Treatment of real estate (purchase, master lease, related-party lease). Treatment of employment agreements, especially for the selling physicians and key staff. Conditions to closing, including regulatory approvals and any required consents. Most terms are non-binding, but exclusivity and confidentiality provisions are binding. The biggest seller mistake is treating the LOI as a formality and negotiating hard terms only at the definitive agreement stage — by then the buyer has spent money on diligence and has leverage to chip price.
Exclusivity periods in healthcare LOIs typically run 60 to 120 days, during which the seller cannot solicit or engage with other buyers.
Source: ABA M&A Committee resources
LOI-to-close conversion rates for healthcare practice deals typically run 70 to 85 percent, meaning 15 to 30 percent of signed LOIs fall apart during diligence.
Source: Pitchbook Healthcare Services
What this means for clinic owners
From Sorso
Do not sign exclusivity until you have pressure-tested the headline number against at least one other buyer. Once you are in a no-shop, the buyer knows you cannot walk quickly, and any retrade is harder to refuse. The LOI is where leverage lives.
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How do PE firms value medical practices?
Private equity firms value medical practices primarily on a multiple of trailing twelve-month adjusted EBITDA, typically 5x to 12x, with the multiple driven by scale, growth, payer mix, and provider retention.
What is a quality of earnings report?
A quality of earnings (QoE) report is a buyer-commissioned financial due diligence analysis that normalizes EBITDA, tests the reliability of revenue and expenses, and identifies risks that affect purchase price, typically costing $50K to $150K for a healthcare practice.
What is rollover equity in a practice sale?
Rollover equity is the portion of sale proceeds that the selling owner retains as equity in the buyer's platform, typically 15 to 30 percent of total consideration, creating a second liquidity event when the platform is later sold.
What is a working capital peg in an M&A deal?
A working capital peg is the target level of net working capital the buyer expects at close; delivery above or below the peg results in a dollar-for-dollar purchase price adjustment, typically reducing a headline price by 3 to 8 percent at close.
How long does it take to sell a medical practice?
Selling a medical practice to a PE buyer typically takes 6 to 12 months from engagement to close, with 2 to 3 months of prep, 1 to 2 months of marketing, 2 to 3 months of diligence and negotiation, and 1 to 2 months for definitive documents and closing.
What is an earnout in a healthcare M&A deal?
An earnout is a portion of the purchase price paid only if the practice hits post-closing financial targets, typically 5 to 20 percent of total consideration over 12 to 36 months, tied to retained EBITDA or revenue thresholds.
What is a data room in healthcare M&A?
A data room is the secure online repository where a seller uploads financial, legal, clinical, and operational documents for buyer diligence, typically containing 500 to 2,000 files organized across 15 to 25 top-level categories.
What is an IOI in healthcare M&A?
An indication of interest (IOI) is a non-binding preliminary bid, usually providing a price range rather than a specific number, submitted after a buyer reviews the confidential information memorandum but before full diligence or LOI.
What is reps and warranties insurance in M&A?
Reps and warranties insurance (RWI) is a buyer-side policy that covers financial losses from breaches of seller representations in the purchase agreement, typically priced at 2.5 to 4 percent of coverage amount for healthcare deals.
What is a non-compete in a healthcare practice sale?
A non-compete in a healthcare practice sale restricts the selling physician from opening or joining a competing practice within a defined geography and time period, typically 15 to 50 miles and 3 to 5 years, though state law enforceability varies widely.
What is pro forma EBITDA in a practice valuation?
Pro forma EBITDA adjusts historical earnings for known future changes like new providers hired mid-year, fee schedule increases in effect, or a recently-opened location running below capacity, typically reflecting a full year of annualized performance.
Founder of Sorso and a CFA charterholder. Before Sorso, Stan spent 19 years in corporate finance at institutions including UniCredit and Société Générale — managing a $450M loan portfolio and making senior partner at a major mezzanine lender by 29 — then built a fractional CFO firm exclusively for outpatient healthcare clinics.
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