PART 2 OF 4: The Legal Rules That Govern the Sale

The California-specific constraints every seller should understand.

Selling a medical practice in California means navigating a regulatory environment that does not apply to ordinary business sales. Understanding these constraints protects the deal and the seller's interests. This post surveys the legal rules that most often shape a medical practice sale.

Corporate Practice of Medicine

California's Corporate Practice of Medicine doctrine limits who may own a medical practice — generally, licensed physicians, with a medical corporation required to be at least 51% physician-owned. This directly affects the pool of eligible buyers. A sale to an investor or management company ordinarily cannot transfer practice ownership directly and must be structured through a compliant arrangement, such as a management services organization model.

Structuring the transaction

Most medical practice sales are structured as asset sales rather than sales of the corporate entity, which affects how the seller is taxed and which liabilities remain with the seller. Purchase price allocation across goodwill, equipment, and other assets carries tax consequences for both sides and is a genuine point of negotiation.

Fraud and abuse considerations

Compensation and any continuing relationship between buyer and seller must respect healthcare fraud-and-abuse law — including the federal Anti-Kickback Statute, the Stark Law, and California's fee-splitting and referral restrictions. Earn-outs, post-sale employment, and management fees all warrant careful structuring.

Patient records and notification

Sellers retain obligations regarding patient records under HIPAA and California law, including how records are transferred and how patients are notified of the change in ownership. These obligations continue through and beyond closing and should be addressed in the agreement.

Restrictive covenants

A buyer will typically want a non-compete from the selling physician to protect the goodwill being purchased. California sharply restricts non-competes, but a covenant given in connection with the sale of a business — and the goodwill of that business — falls within a recognized statutory exception, provided it is properly scoped.

How West Coast Health Law Can Help

We advise sellers on the regulatory framework governing a medical practice sale — structuring the transaction, protecting against fraud-and-abuse exposure, and ensuring covenants and records obligations are handled correctly.

This article is provided for general informational purposes only and does not constitute legal advice or create an attorney-client relationship. Laws change and every transaction is different; consult a qualified attorney about your specific situation.

West Coast Health Law offers a FREE consultation which you may schedule by clicking the button on our website.