Buying or Selling a Medical Practice

Buying or Selling a Medical Practice in California: A Legal Guide for Physicians

Buying or selling a medical practice in California is not a standard business transaction. The corporate practice of medicine (CPOM) doctrine, licensing requirements, patient record obligations, Medical Board notification duties, and payor contract assignment restrictions create a regulatory environment that has no parallel in general commercial transactions. A physician who approaches a practice sale or acquisition the way one might approach buying a retail business or professional services firm will encounter legal obstacles that can delay, restructure, or derail the deal entirely.

California's CPOM doctrine, as reinforced by SB 351 (effective January 1, 2026), restricts who may own and operate a medical practice. Only licensed physicians—or professional medical corporations in which all shareholders hold the requisite licenses—may own a medical practice. This means that the buyer in a medical practice transaction must hold a valid California medical license or be a properly structured professional medical corporation under the Moscone-Knox Professional Corporation Act (Corporations Code §13400 et seq.). Unlicensed individuals and general business corporations cannot acquire the clinical operations of a medical practice, though management services organizations (MSOs) may acquire certain non-clinical assets under carefully structured arrangements.

Bay Legal PC represents both buyers and sellers in California medical practice transactions, from solo physician offices to multi-location specialty groups. We structure deals that comply with CPOM, protect patient interests, navigate payor contract complexities, and address the unique tax and financing considerations inherent in healthcare transactions.

Section 1: Why Medical Practice Transactions Are Different

CPOM, Licensing, and Regulatory Constraints on Medical Practice Sales

The foundational constraint on any California medical practice transaction is the corporate practice of medicine doctrine. Under long-standing California law, as interpreted by the Medical Board and codified in part through SB 351, only licensed physicians may own a medical practice, make clinical decisions, hire and supervise clinical staff, and control the physician-patient relationship. This means the universe of eligible buyers is limited to individual physicians with active California licenses or professional medical corporations organized under Corporations Code §13401 in which every shareholder holds the required license.

This ownership restriction has cascading implications for deal structure. A non-physician investor, private equity fund, or general business corporation cannot directly acquire the stock or membership interests of a medical professional corporation. While MSO structures have historically been used to allow unlicensed entities to acquire management and administrative functions—leaving clinical ownership with a "friendly" physician—SB 351 has tightened the boundaries of permissible MSO involvement, particularly for private equity-backed entities. Any transaction involving an MSO component must be structured with precision to avoid CPOM violations that could result in injunctive action by the Attorney General.

Beyond CPOM, medical practice transactions trigger a distinct set of regulatory obligations. The buyer must hold or obtain all necessary licenses and permits—including a DEA registration, state controlled substance license, clinical laboratory license (if applicable), and any facility licenses required by the California Department of Public Health. The Medical Board of California must be notified of changes in practice ownership and medical directorship. Medicare and Medi-Cal provider enrollment must be updated, and CMS reassignment of benefits must be processed. Failure to address any of these requirements can result in gaps in the practice's ability to bill for services, loss of payor contracts, or regulatory sanctions.

Section 2: Asset Sale vs. Stock/Share Sale Structures

Choosing the Right Transaction Structure for a Medical Practice

Medical practice transactions in California are typically structured as either asset purchases or stock (share) purchases, and the choice between them carries significant legal, tax, and operational consequences. In an asset purchase, the buyer acquires specified assets of the practice—equipment, furniture, supplies, patient lists, goodwill, trade name, and assigned contracts—while the selling entity retains its corporate shell along with any undisclosed or excluded liabilities. In a stock purchase, the buyer acquires the shares of the professional medical corporation itself, obtaining ownership of the entire entity including all of its assets, contracts, and liabilities.

Asset purchases are more common in solo and small-group practice transactions because they allow the buyer to selectively acquire desirable assets while leaving behind unwanted liabilities—including potential malpractice exposure, outstanding debts, and compliance deficiencies. The buyer can negotiate specific representations and warranties regarding the condition of assets and the absence of undisclosed liabilities. From a tax perspective, the buyer in an asset purchase generally receives a stepped-up basis in the acquired assets, allowing for depreciation and amortization deductions that reduce taxable income in the early years of ownership. The seller, however, may face less favorable tax treatment, as an asset sale can trigger ordinary income on certain categories of assets (such as depreciated equipment) rather than capital gains.

Stock purchases preserve the corporate entity's existing contracts, licenses, and provider numbers—which can be a significant advantage when the practice holds valuable payor contracts or Medicare/Medi-Cal enrollments that are difficult to reassign. However, the buyer assumes all liabilities of the corporation, known and unknown, including potential malpractice claims, tax obligations, and regulatory compliance deficiencies. This makes thorough due diligence even more critical in a stock purchase. The CPOM doctrine also constrains stock purchases: the buyer must be a licensed physician eligible to hold shares in a professional medical corporation, and any transfer of shares to an unlicensed person is void under Corporations Code §13407.

Section 3: Valuation and Due Diligence

Valuing a Medical Practice and Conducting Healthcare-Specific Due Diligence

Medical practice valuation requires specialized methodologies that account for factors unique to healthcare businesses. The most commonly used approaches are the income approach (capitalizing the practice's adjusted net earnings or discounted future cash flows), the market approach (comparing the practice to recent sales of comparable practices), and the asset approach (summing the fair market value of tangible and intangible assets, less liabilities). For most medical practices, the income approach is primary, because the practice's value is driven by its ability to generate future revenue rather than the book value of its equipment.

Intangible assets are often the most valuable—and most difficult to quantify—components of a medical practice. Goodwill in a medical practice is typically divided into "personal goodwill" (attributable to the individual physician's reputation, skill, and patient relationships) and "enterprise goodwill" (attributable to the practice's systems, location, brand, assembled workforce, and payor contracts). In California, this distinction carries significant legal and tax implications. Personal goodwill typically transfers poorly—if the selling physician departs, patients may follow—while enterprise goodwill is more durable and transferable. Practices with provider-dependent revenue (where the majority of collections are attributable to a single physician) may command lower multiples than diversified multi-provider groups.

Due diligence for a medical practice acquisition extends well beyond the standard financial and legal review conducted in general business transactions. Healthcare-specific diligence includes: verification of all physician and mid-level provider licenses and board certifications; review of malpractice claims history and outstanding litigation; analysis of payor contracts, fee schedules, and reimbursement trends; audit of coding and billing practices for compliance with federal and state fraud and abuse laws; review of HIPAA compliance programs and any prior breaches; inspection of DEA registrations and controlled substance protocols; examination of employment agreements (including any restrictive covenants, which are likely void under BPC §16600); and evaluation of real property leases, equipment leases, and vendor contracts for assignability and remaining terms.

Section 4: Patient Records, Physician Transition, and Post-Closing Integration

Protecting Patients and Ensuring Continuity of Care During the Transition

Patient notification and medical records transfer are among the most legally sensitive aspects of a medical practice sale. California law and HIPAA impose overlapping obligations that must be carefully coordinated. Under HIPAA, a selling physician generally cannot transfer protected health information (PHI) to a purchasing physician without patient authorization, unless the transfer qualifies as a permitted disclosure between a covered entity and its business associate or successor. California Health and Safety Code §123110 et seq. governs patient access to health records, and Title 22, CCR §72543 establishes record retention requirements (minimum seven years from discharge; longer for minors).

In practice, the most common approach is for the purchasing physician to become the custodian of the selling physician's patient records through a HIPAA business associate agreement (BAA). Patients who continue care at the practice are asked to provide written authorization to transfer their records to the new physician. Patients who choose a different provider receive copies of their records upon request. The selling physician retains the legal obligation to maintain patient records for the required retention period, even after the sale—making the custodianship arrangement and BAA critical components of the transaction documents.

Physician transition planning addresses the operational reality of moving a practice from one physician to another. The selling physician typically agrees to a transition period (ranging from 30 days to six months or more) during which the physician introduces the buyer to the patient panel, facilitates warm handoffs for complex or chronic-care patients, and assists with payor and referral source introductions. The transition agreement should specify the selling physician's compensation during this period, the scope of clinical services to be provided, malpractice coverage arrangements (including tail coverage), and the timeline for the selling physician's departure. California's prohibition on non-compete agreements (BPC §16600) means the selling physician cannot be restricted from opening a competing practice nearby—making a well-structured transition even more important to retain the patient base.

Steps / HowTo Section:

H2: Steps for a Successful Medical Practice Transaction in California

1. Engage experienced healthcare transaction counsel. Before initiating negotiations, both buyer and seller should retain attorneys experienced in California medical practice transactions, CPOM compliance, and healthcare regulatory law. General business attorneys frequently lack the healthcare-specific knowledge required to navigate CPOM, licensing, and payor contract issues.

1. Execute a letter of intent and confidentiality agreement. The LOI establishes the basic terms—purchase price, structure (asset vs. stock), transition period, and contingencies—while the confidentiality agreement protects sensitive patient, financial, and operational information shared during due diligence.

1. Conduct comprehensive healthcare-specific due diligence. The buyer should review all licenses, malpractice history, payor contracts, billing compliance, HIPAA programs, employment agreements, real property and equipment leases, and corporate governance documents. Engage a healthcare valuation professional to conduct an independent practice appraisal.

1. Determine and negotiate the transaction structure. Based on due diligence findings, finalize whether the deal will be structured as an asset purchase or stock purchase. Address CPOM compliance, particularly if any MSO or management arrangement is involved. Allocate the purchase price among asset categories for tax purposes.

1. Draft and negotiate definitive transaction documents. These typically include the asset purchase agreement or stock purchase agreement, bill of sale, assignment and assumption agreements, transition services agreement, HIPAA business associate agreement, and any seller financing or earn-out provisions.

1. Address patient notification and records transfer. Develop a patient notification plan consistent with Medical Board guidelines, HIPAA requirements, and California Health and Safety Code provisions. Establish the custodianship arrangement for patient records and the process for obtaining patient authorizations.

1. Complete post-closing integration and regulatory filings. Update Medicare/Medi-Cal provider enrollment, DEA registration, state licenses, payor contracts, and Medical Board records. Implement the practice's compliance programs under new ownership and complete any remaining transition obligations.

Bay Legal PC represents physicians and medical corporations in all phases of buying or selling a medical practice in California. Our transactional services include structuring asset and stock purchase transactions to comply with CPOM; conducting and coordinating healthcare-specific due diligence; drafting purchase agreements, transition services agreements, and ancillary documents; advising on medical practice valuation methodologies and purchase price allocation; navigating patient notification and medical records transfer requirements; coordinating Medicare, Medi-Cal, and commercial payor enrollment changes; and advising on SBA loan and seller financing structures. We represent both buyers and sellers in transactions involving solo practices, multi-physician groups, and MSO-affiliated practices throughout California.

Q: Can a non-physician buy a medical practice in California?

A: No. California's corporate practice of medicine doctrine prohibits unlicensed individuals and general business corporations from owning or operating a medical practice. Only physicians with active California medical licenses—or professional medical corporations in which all shareholders hold the requisite licenses—may own a medical practice. While management services organizations (MSOs) may acquire certain non-clinical assets and provide administrative services under carefully structured agreements, the clinical practice itself must remain under physician ownership. SB 351 (effective January 1, 2026) has further tightened the restrictions on private equity and hedge fund involvement in physician practices, reinforcing these CPOM boundaries.

Q: What is the difference between an asset sale and a stock sale for a medical practice?

A: In an asset sale, the buyer purchases specific assets of the practice—equipment, supplies, goodwill, patient lists, and assigned contracts—while the selling corporation retains its entity and any excluded liabilities. In a stock sale, the buyer acquires the shares of the professional medical corporation, obtaining the entire entity with all assets, contracts, and liabilities. Asset sales offer the buyer more control over which liabilities to assume and generally provide a tax-advantaged stepped-up basis in acquired assets. Stock sales preserve existing payor contracts and provider numbers but expose the buyer to all corporate liabilities. The choice depends on the specific circumstances of the practice, the payor contract landscape, and the tax positions of both parties.

Q: How are medical practices typically valued in California?

A: Medical practice valuation typically uses one or more of three approaches: the income approach (capitalizing adjusted net earnings or discounted cash flows), the market approach (comparing to sales of similar practices), and the asset approach (summing tangible and intangible asset values less liabilities). Key factors include the practice's revenue and profitability trends, the mix between personal and enterprise goodwill, payor contract quality, provider-dependent revenue concentration, patient demographics, and the condition and remaining useful life of equipment and facilities. Practices with strong enterprise goodwill, diversified provider revenue, and favorable payor contracts typically command higher valuations. A qualified healthcare valuation professional should conduct the appraisal.

Q: What patient notification is required when a medical practice is sold?

A: Both HIPAA and California law require that patients be notified of changes in practice ownership and given the opportunity to choose their healthcare provider. The Medical Board of California expects that patients receive reasonable advance notice of the selling physician's departure, information about the purchasing physician, and clear instructions for obtaining copies of their medical records or transferring care. Under HIPAA, patient authorization is generally required before transferring protected health information to the new physician, unless a business associate agreement or other permitted disclosure pathway applies. California Health and Safety Code §123110 et seq. governs patient access to records, and Title 22, CCR §72543 establishes minimum retention periods.

Q: Can the selling physician be restricted from competing with the practice after the sale?

A: Only in limited circumstances. Under BPC §16600, non-compete agreements are generally void in California. However, BPC §16601 provides a narrow exception for non-competes executed in connection with the genuine sale of a business—specifically, where the seller sells the goodwill of the practice or all ownership interests. A valid sale-of-business non-compete must be limited to the geographic area in which the business has been conducted and the buyer must continue to carry on a like business. If the transaction does not qualify as a genuine sale of business, or if the non-compete functions as a de facto employment restriction, it will be void under Section 16600 regardless of the purchase price or other consideration exchanged.

Q: What financing options are available for buying a medical practice?

A: Common financing structures for medical practice acquisitions include SBA 7(a) loans (which offer favorable terms for healthcare businesses and can finance goodwill, equipment, and working capital), conventional bank loans, seller financing (where the selling physician accepts a promissory note for a portion of the purchase price, often secured by the practice assets), and earn-out structures (where a portion of the purchase price is contingent on the practice meeting specified revenue or collection benchmarks post-closing). Many transactions combine multiple sources—for example, an SBA loan for the majority of the purchase price with a seller note for the balance. The financing structure should be coordinated with the deal structure (asset vs. stock) and the purchase price allocation to optimize tax outcomes for both parties.

Internal Links

• Medical Business & Healthcare Law
• Healthcare Buy-Sell Agreements
• Healthcare Non-Compete Compliance
• Business Formation
• California Business Law

External Links

• Medical Board of California
• California Legislative Information
• IRS