Letter of Intent Template for Acquiring an Adult Day Care Center

Parties and Transaction Overview

Identifies the buyer entity, seller entity, and the specific business being acquired. For adult day care acquisitions, clarify whether you are acquiring the operating entity (stock or membership interest purchase) or the assets of the center (license, contracts, equipment, and goodwill). Asset purchases are most common in this sector because they allow the buyer to step into licensing and Medicaid enrollment under a new entity while limiting successor liability for prior billing irregularities.

💡 Sellers who have operated under a sole proprietorship or loosely organized LLC may resist an asset purchase because it triggers Medicaid re-enrollment delays. Acknowledge this concern in negotiations and propose a transition services agreement (TSA) that allows the seller's Medicaid number to remain active for billing purposes during the re-enrollment window — typically 60–180 days depending on the state. Confirm with your healthcare attorney whether a novation, change of ownership (CHOW) filing, or new enrollment application is required in the target state before finalizing structure.

Purchase Price and Valuation Basis

States the proposed purchase price and the methodology used to arrive at it. Adult day care centers in the lower middle market typically trade at 3x–5.5x Seller's Discretionary Earnings (SDE), with the multiple heavily influenced by payer mix diversification, census stability, licensing status, and owner dependency. Centers with strong private-pay and long-term care insurance revenue alongside Medicaid command higher multiples than those with 90%+ Medicaid concentration.

💡 Sellers often overvalue their centers based on gross revenue rather than normalized SDE. Before submitting your LOI, request at least two years of P&L statements and add back owner compensation, personal vehicle expenses, and any related-party rent adjustments. If the seller's Medicaid billing records show declining reimbursement rates or pending audits, use this as justification for a lower multiple. For centers where 85% or more of revenue is Medicaid-funded, be prepared to defend a 3x–3.5x multiple rather than the 4.5x–5.5x range reserved for diversified-payer programs.

Deal Structure and Financing

Outlines how the acquisition will be financed, including SBA loan proceeds, seller note contribution, and equity injection. Adult day care centers are SBA 7(a) eligible businesses, and most lower middle market acquisitions in this sector are financed with an SBA loan covering 70–80% of the purchase price, a 10–20% buyer equity injection, and a seller note for the gap. SBA lenders will scrutinize Medicaid revenue concentration and will often require a seasoned operator or healthcare-experienced guarantor.

💡 Sellers who are retiring and need liquidity at close may push back on a large seller note. Counter by emphasizing that the SBA structure protects both parties — it provides the seller with the majority of proceeds at closing while giving the buyer the working capital needed to maintain staffing and operations during the Medicaid re-enrollment transition. If the seller insists on an all-cash deal, explore whether a private equity-backed buyer or a strategic acquirer already holding an SBA loan could structure a larger equity component. Also flag to your SBA lender early if Medicaid revenue exceeds 70% of total revenue, as some lenders apply additional underwriting scrutiny to government-payer concentration.

Earnout Provisions

Defines any contingent payments tied to post-closing performance, most commonly Medicaid census retention. Census-based earnouts are standard in adult day care acquisitions because participant relationships — especially those mediated through Medicaid case managers and family caregivers — may shift during the ownership transition. A well-structured earnout protects the buyer if census drops materially while incentivizing the seller to actively support the transition.

💡 Sellers will often resist earnouts, viewing them as the buyer shifting acquisition risk post-close. Reframe the earnout as a seller confidence instrument — if the census is truly stable and the referral relationships are solid, the seller will earn the full amount. Tie earnout metrics exclusively to census retention and billing compliance, not to EBITDA or net income, which the seller can no longer control after closing. Cap the earnout at no more than 15–20% of total purchase price to keep the deal economics clean for SBA underwriting.

Due Diligence Period and Access

Establishes the timeframe and scope of the buyer's investigation into the business. Due diligence for an adult day care center requires access to Medicaid billing records, state licensing files, survey inspection history, participant census data, staff certifications, and the facility lease — all of which require careful handling under HIPAA and state privacy laws.

💡 Many adult day care sellers — particularly founder-operators or social workers who built programs organically — have never organized their financial records for a transaction. Expect to encounter commingled personal and business expenses, inconsistent billing records, and licensing files that exist only in paper form. Request a 10-day data room deadline and follow up firmly if materials are delayed — sellers who cannot produce clean Medicaid billing records within two weeks of LOI execution are likely to be problematic counterparties. Retain a healthcare-specialized CPA to conduct Medicaid billing reconciliation alongside your standard financial due diligence.

Exclusivity and No-Shop Period

Grants the buyer an exclusive negotiating window during which the seller agrees not to solicit or entertain competing offers. Exclusivity is standard in lower middle market acquisitions and is essential here given the complexity of Medicaid re-enrollment and licensing transfer timelines.

💡 A 45–60 day exclusivity window is appropriate given the complexity of adult day care due diligence. Sellers who push back on exclusivity — citing concern about losing other interested parties — may be using competing interest as leverage. Request evidence of other LOIs or buyer conversations before agreeing to a shorter window. If the seller insists on a 30-day exclusivity period, ensure your attorney and CPA are engaged before LOI execution so the due diligence clock starts immediately upon signing.

Conditions to Closing

Lists the specific conditions that must be satisfied before the transaction can close. For adult day care acquisitions, licensing continuity and Medicaid enrollment status are non-negotiable closing conditions that must be explicitly stated in the LOI and later in the definitive agreement.

💡 Pay close attention to the Medicaid enrollment condition. In many states, the new owner cannot bill Medicaid under their own provider number until the enrollment application is approved — a process that can take 90–180 days. Negotiate for the seller to maintain their Medicaid provider agreement and continue billing on behalf of the acquired entity during this window under a clear TSA, with billing revenue flowing directly to the buyer post-close. Your healthcare attorney must review the specific state's CHOW requirements before this section is finalized.

Non-Compete and Transition Services Agreement

Establishes the seller's obligations to avoid competitive activity post-closing and to actively support the business transition, including introductions to Medicaid case managers, referral sources, participant families, and key staff.

💡 The transition services component is arguably more valuable in an adult day care acquisition than in almost any other lower middle market deal. The seller's relationships with Medicaid case managers, state social workers, hospital discharge planners, and participant families are the lifeblood of census stability. Do not accept a 30-day transition period — push for 90–180 days with clear deliverables. Compensate the seller fairly for this time to secure genuine cooperation rather than grudging compliance. Include specific milestones such as joint visits to the top 10 referral sources within the first 30 days.

Confidentiality

Requires both parties to maintain the confidentiality of the transaction and all information exchanged during due diligence, with specific carve-outs for HIPAA-protected participant information.

💡 Confidentiality is unusually critical in adult day care transactions because premature disclosure of a pending sale can trigger participant family anxiety, staff departures, and even Medicaid case manager inquiries. Insist on a strict no-contact protocol for the seller's staff and participant families during due diligence, and conduct all site visits outside of program hours or with the seller present. Breaches of confidentiality in this sector can materially reduce census before closing.