Reading a DSO letter of intent: the six terms that matter most

A letter of intent is designed to be signed quickly. It leads with the number, it is short, and it usually arrives with a deadline. What it actually does is freeze your negotiating position: nearly everything important that is vague in the LOI gets resolved in the buyer’s favor later, because after you sign, exclusivity starts and your alternatives go quiet.

So read the LOI the way the buyer’s deal team wrote it: as a package of six terms, of which the price is only one.

1. The working capital peg

Most LOIs say the practice will be delivered with a normalized level of working capital (receivables, payables, supplies) without saying what normal means. That number gets set during diligence, when you have the least bargaining power. Set wrong, it quietly claws six figures back out of your proceeds at close.

• Ask for the peg methodology in the LOI, not after it.
• Trailing twelve month average is a common, fair basis. Get the basis in writing.

2. Earnout triggers

An earnout is the part of the price you only receive if targets are hit after close. The question is not whether earnouts are bad; they are a normal tool. The question is who controls the outcome being measured. If the buyer changes your hours, marketing, or associate staffing after close, your earnout math changes with it, and you no longer hold the levers.

A fair earnout measures something you still control. An unfair one measures something the buyer controls and you underwrite.

3. Rollover equity terms

Rollover is the portion of your price you reinvest into the buyer’s company. The headline percentage tells you almost nothing. What matters is which entity you own, at what valuation your equity converts, and what rights come with it: put rights, tag-along and drag-along provisions, information rights. We wrote a separate plain-English guide to rollover and the second bite, because it deserves one.

4. Holdbacks and escrow

A holdback is cash from your price parked in escrow against future claims. Normal in moderation. Check three things: how much, how long, and what specifically releases it. Cash at close that is not actually at close should be priced by you as what it is: deferred, conditional payment.

5. Your employment agreement

In most DSO transitions you keep practicing for years after close, and you are usually the practice’s biggest producer. The employment agreement prices those years: compensation model, schedule, clinical autonomy, and what happens if either side wants out early. Dentists routinely negotiate the sale price hard and accept the employment terms as boilerplate. The deal team is counting on exactly that.

6. The non-compete

Reasonable protection for the buyer is normal. But radius, duration, and the definition of competing vary enormously between drafts, and an aggressive non-compete can strand you if the relationship sours. The difference between protection and a cage is drafting, and drafting is negotiable before you sign.

If an LOI is sitting on your desk, start with the free offer second read: it shows where the headline number sits against current indicative bands and how much of it is actually cash at close. Then, if you want a second pair of eyes on the paper itself, that read is free too, and nothing about asking commits you to anything.