Key Takeaways

• Pre-LOI questions surface findings that materially change deal structure, price, or timing. Post-LOI findings force renegotiation from a weaker position.
• The ten questions in this post are each tied to a specific defect category that has come up in California treatment-business acquisitions.
• Documentary follow-up is as important as the verbal answer. Sellers who cannot produce the operating agreement, the medical director agreement, the MSA, a sample patient chart, and the standardized procedures manual on request have a diligence problem the buyer needs to price into the deal.
• Not every finding disqualifies a deal. Some are administrative fixes; some are structural findings that change terms; some are grounds to walk. The purpose of the pre-LOI questions is to surface the findings early enough to make an informed choice.

Ten Questions to Ask a Seller Before You Sign an LOI for a California Treatment Business

By the time a buyer signs the Letter of Intent, the deal has momentum. Exclusivity is running. The buyer has invested time and often outside counsel fees. The seller has redirected other conversations. Findings that surface after LOI signing are harder to negotiate around because both sides have committed to the structure the LOI locked in.

Which is why the questions in this post go before the LOI, not after. Every one is designed to surface a specific defect category — CPOM structure, medical director substance, good-faith exam workflow, billing arrangement, MSA fee mechanics, marketing exposure, historical regulatory issues, product supply chain, employment terms, and payor participation. Any of the ten can materially change the deal, the price, or whether the deal closes at all. Buyers who ask them pre-LOI have the leverage and the time to respond to the answers. Buyers who ask them post-LOI are usually renegotiating from a weaker position.

The Ten Questions

1. What entity holds the clinical practice, and who owns its shares or membership interests?

Why it matters. California’s Corporate Practice of Medicine doctrine reserves ownership of medical corporations to licensed physicians under Cal. Corp. Code § 13401.5, and LLCs cannot render medical services under § 17701.04(e). The seller’s answer should identify a physician-owned professional corporation as the clinical entity. If the answer is an LLC, a non-physician corporation, or an RN-owned entity, the target has a structural defect the buyer’s diligence needs to address.

Documentary follow-up. Secretary of State filing; PC’s statement of information; shareholder register; operating agreement (if there is a separate MSO); Cal. Corp. Code § 13401.5 confirmation for any allied-professional minority shareholders.

What a red-flag answer looks like. “It’s an LLC — that’s easier for taxes.” “The RN owns it and the medical director signs off.” “It’s a professional corporation, but I own it and I’m not a physician; I’m the operator.” Each of these is a defect.

2. What does the medical director actually do, and how are they compensated?

Why it matters. A paper medical director — a physician who signs the paperwork but has minimal actual clinical involvement — is one of the most frequent Medical Board and BRN enforcement findings in California med spa, IV hydration, and wellness practice enforcement. The medical director should be conducting or supervising good-faith exams, developing and approving standardized procedures, being immediately available during procedures, and managing clinical incidents. Compensation should correlate to services actually rendered.

Documentary follow-up. Medical director agreement; activity records (GFEs conducted, charts reviewed, standardized procedures signature dates); compensation records for the last twelve months.

What a red-flag answer looks like. “He signs off on the protocols.” “She’s on retainer and available if we need her.” “Flat $3,000/month, no time reporting.” “She’s the medical director for our whole regional group.”

3. Walk me through the good-faith exam workflow for a new patient.

Why it matters. The 2026 California GFE standard, reflected in Medical Board and BRN guidance and in practitioner analysis, is: a licensed prescriber (physician, NP, or PA) conducts the exam in person or by synchronous video for telehealth GFE; the exam meets the standard of care under B&P § 2242; the exam results in a patient-specific order for the specific treatment plan, not a standing order. Practices that have been running on RN intake with a physician sign-off after treatment, or on questionnaire-only asynchronous evaluation, are operating below the current standard.

Documentary follow-up. Intake forms; sample patient chart from the last three months (with patient identifying information redacted); GFE documentation template; treatment plan template; standardized procedures for the delegation framework the RNs work under.

What a red-flag answer looks like. “The RN takes the history and the doctor signs off later.” “Our patients complete an online questionnaire and we treat them the same day.” “The standing orders cover everything — we don’t need a separate exam per patient.”

4. Show me a sample patient billing statement, and tell me what entity is on the merchant processor.

Why it matters. Non-compliant treatment businesses often bill patients directly through the LLC or non-physician entity that has been operating the practice. Direct patient billing by an entity not authorized to render medical services is a specific CPOM defect and is treated as evidence of the underlying structural violation under B&P § 17200. It is also one of the operational features regulators can verify without visiting the practice.

Documentary follow-up. Sample patient billing statement (patient information redacted); merchant processing account documentation; screenshot of the receipt patients see; the entity name on the practice’s Yelp/Google Business Profile.

What a red-flag answer looks like. “The LLC does the billing — that’s just the operating entity.” “We route payments through the wellness brand and then transfer to the medical corporation quarterly.” “Everything runs through Square under the trade name.”

5. What are the terms of the MSA between the PC and the MSO, and how is the management fee calculated?

Why it matters. The MSA is where the California Attorney General’s 2026 enforcement pattern has landed most directly. Percentage-of-revenue management fees are lawful under B&P § 650(b) and Epic Medical Management, LLC v. Paquette, 244 Cal. App. 4th 504 (2015), but require fair-market-value documentation and cannot be paired with MSO control over clinical decisions. Nixon Peabody’s July 2026 analysis, following the Carbon Health settlement, framed the AG’s concerns around “discretionary management fees, incentive programs tied to increased product/services, and ‘without cause’ replacement triggers for PC owners.” A buyer inheriting an MSA with any of those features is inheriting the enforcement risk that comes with them.

Documentary follow-up. The MSA; the FMV documentation supporting the management fee; the last twelve months of intercompany invoicing between the PC and the MSO.

What a red-flag answer looks like. “The MSO takes 40% of gross revenue.” “The management fee floats — whatever the practice can support.” “The MSO agreement gives us the right to replace the physician if we need to.” “The franchise system provides the standard MSA — we’ve never had it reviewed by California counsel.”

6. What has been on the marketing — the website, social media, paid ads, before-and-after content — for the last three years?

Why it matters. California false-advertising exposure under B&P § 17500 and the Unfair Competition Law is a separate exposure category from CPOM. Marketing that overstated outcomes, made unsupported wellness claims, used testimonials without appropriate disclosures, misrepresented provider credentials, or represented the practice as “physician-supervised” while the medical director was largely absent creates exposure that travels with the target’s operating history. Historical marketing on the site, social media archives, and paid-ad screenshots for the last several years is fair diligence territory.

Documentary follow-up. Site archive access (Wayback Machine can help); social media archives; sample paid ads from the last three years; testimonial and endorsement content; before-and-after imagery with any accompanying claims.

What a red-flag answer looks like. “We took down some old content — I can’t easily pull it up.” “We’ve always said we cure long COVID / reverse aging / boost immunity — that’s our thing.” “We use influencers, but I don’t have their contracts.”

7. Have there been any Medical Board, BRN, DEA, AG, DHCS, or payor inquiries — pending or historical — involving the practice or any physician associated with it?

Why it matters. Historical regulatory exposure travels with the target’s operating history, and buyers who close on a target without surfacing pending or historical matters inherit them. The question needs to cover the practice, the seller personally, the current medical director, and any current or recent physician of record. Every “no” answer needs supporting documentation — a Medical Board search on the physician’s license, cross-check against the BRN’s public disciplinary database, and a candid conversation with the current medical director.

Documentary follow-up. Full written responses to the question, including any documentation of resolved matters; License verification and disciplinary history for the medical director and any physician of record via the Medical Board of California’s public license lookup; corresponding BRN verification for RN staff and any nurse practitioner or CNS involved in clinical decisions.

What a red-flag answer looks like. “There’s nothing I need to disclose.” “Everything was resolved a while ago.” “The doctor had something on his record but it was minor.” Any answer without documentary support.

8. Where do you source your medications, injectables, and — if applicable — controlled substances? Show me the prescription and inventory documentation.

Why it matters. Prescription drugs held or administered by a practice have to be procured through prescription-authorized channels tied to the physician-of-record. Gray-market injectable suppliers, prescription drugs held without corresponding prescription documentation, controlled substances held without DEA registration or with expired registration, and inventory records that do not reconcile are all defects the buyer needs to price into the deal. For IV clinics, compounding pharmacy relationships and USP 797 sterile compounding standards add a layer.

Documentary follow-up. Supplier list; prescription records for any legend drugs the practice holds; DEA registration for the physician of record (if the practice offers controlled substances); inventory reconciliation for the last twelve months; compounding pharmacy contracts (for IV / infusion practices).

What a red-flag answer looks like. “We source through a supplier that gets us the best prices.” “The doctor writes standing orders for the whole stock.” “DEA registration — I’m not sure whose name it’s under.”

9. What are the current employment or engagement terms for physicians, NPs, PAs, RNs, and other clinical staff?

Why it matters. SB 351 (effective January 1, 2026) voids specific non-compete and non-disparagement clauses in employment arrangements with PE- and hedge fund-affiliated MSOs and PCs. B&P § 16600 already voids most employee non-competes in California independent of the healthcare context. Non-competes that the seller has been relying on to retain clinical staff are typically unenforceable and are not an asset the buyer is acquiring. Employment terms that misclassify workers, that pay clinical staff through the MSO (rather than the PC), or that structure compensation in a way that suggests the MSO is the employer of clinical staff are structural defects worth surfacing.

Documentary follow-up. Standard-form employment agreements for physicians, NPs, PAs, RNs; the medical director agreement; any 1099 arrangements with clinical staff; W-2 information showing who employs the clinical staff (MSO or PC); any retention bonus, non-compete, or non-disparagement clauses.

What a red-flag answer looks like. “The nurse-injectors are 1099 — we don’t want the payroll overhead.” “The MSO employs everyone; it’s cleaner that way.” “All the clinical staff signed two-year non-competes when they started.”

10. What payor participation does the practice have, and what is the current billing volume and audit history?

Why it matters. Most non-licensee acquisition targets in the med spa / IV / wellness / hyperbaric space are predominantly cash-pay, which simplifies the payor-transition analysis. Where the target has meaningful Medicare or Medi-Cal enrollment, the Change of Ownership analysis under 42 C.F.R. § 489.18 applies and the buyer has to choose between assuming the seller’s provider agreement (inherits exposure, avoids billing gap) or applying for new enrollment (isolates from exposure, accepts billing gap). Historical payor audits, recoupment demands, or pending investigations are material findings that need to be surfaced pre-LOI.

Documentary follow-up. Payor participation list (Medicare, Medi-Cal, commercial); Medicare provider agreement and enrollment; last twelve months of Medicare and Medi-Cal billing volume by CPT code; audit correspondence for the last three years; overpayment recoupment records; any pending investigation notices.

What a red-flag answer looks like. “We stopped taking insurance because of an audit.” “There was a payor issue but it’s resolved.” “Everything is cash-pay so this doesn’t apply.” (Note: the last answer is fine on the payor-transition side but doesn’t address whether the target has been offering superbill support to patients or whether historical billing has occurred.)

What to Do With the Answers

Not every finding disqualifies a deal. Common categorization:

• Administrative fixes. Findings the buyer’s counsel can address in the closing transition (updating the Fictitious Name Permit, refreshing standardized procedures, transitioning payment infrastructure). These typically do not change deal terms.
• Structural findings. Findings that change the deal materially — the target has no PC and the buyer’s structure has to build one; the seller has been billing patients through an LLC and the historical exposure needs allocation; the medical director has been paper and the buyer needs to source a new physician-partner. These often change price, purchase-price allocation, or closing timing.
• Disqualifying findings. Findings that make the deal not worth doing — historical exposure disproportionate to acquisition price; the seller unwilling to accommodate the structural changes CPOM diligence identifies; a pattern of bad-faith operation rather than compliance misunderstanding; a pending investigation that hasn’t been disclosed. Walking away is a legitimate outcome of diligence.

The purpose of the pre-LOI questions is not to catalog problems for their own sake — it is to surface them early enough that the buyer can make an informed choice about which category each finding falls into and how to structure the deal accordingly.

When to Bring Counsel Into the Pre-LOI Diligence

Before the LOI is signed. Structuring the diligence questions, receiving the answers, and translating them into deal terms is exactly what pre-LOI structural counsel does. The cost of counsel at this stage is meaningfully lower than the cost of restructuring or unwinding a deal that closed on incomplete information.

Bay Legal, PC represents non-licensee buyers of California treatment businesses through pre-LOI structuring counsel, CPOM diligence, and deal documentation. Call (650) 668-8000 or schedule a consultation at baylegal.com/contact.

Frequently Asked Questions

Why ask these questions pre-LOI rather than as part of the standard diligence phase?

Pre-LOI is when the buyer has the most leverage and the deal has the least momentum. Structural findings surfaced pre-LOI can change the deal architecture — asset vs. stock structure, purchase-price allocation, closing timing, whether the transaction needs an AB 1415 OHCA notice. Post-LOI, changing those terms requires renegotiation from a position where the buyer has already committed. Some structural findings are easier to walk away from at LOI than to negotiate away post-LOI.

What if the seller doesn’t have documentation for one of these questions?

Missing documentation is itself a finding. A well-run California treatment business should be able to produce the entity documents, the medical director agreement, the MSA, sample patient charts (redacted), the standardized procedures manual, and the recent billing samples on reasonable notice. Sellers who cannot produce this material typically either have never had it (in which case the practice has structural defects to remediate) or don’t want to produce it (in which case the diligence process is a warning about how the deal will run).

How does this list differ from a general M&A due diligence checklist?

General M&A diligence covers financials, contracts, tax, employment, litigation, real estate, and intellectual property. The ten questions above are California healthcare-specific and address the CPOM, GFE, standardized procedures, MSA, marketing, and payor issues that general M&A diligence does not surface. Both are necessary. The healthcare-specific questions are what turn a defensible acquisition into a compliant post-closing operation.

Should I ask these questions in writing or verbally?

Both. Verbal conversation surfaces things the seller wouldn’t put in writing — hesitations, “we’ve been meaning to fix that,” references to advisors who told them the current structure was fine. Written follow-up captures the answers for the record and prompts documentation. A well-run pre-LOI diligence process typically has both a verbal walk-through and a written request for documents.

What happens if I already signed the LOI without asking these questions?

The findings still need to be surfaced, and the buyer’s counsel can typically use the diligence phase to work through them. But the buyer’s leverage is materially lower post-LOI, and renegotiation is harder. If material findings emerge, the buyer’s options are (a) negotiate the terms downward, (b) restructure the deal, (c) invoke a diligence termination right if one exists in the LOI, or (d) close on the current terms and inherit the exposure. Pre-LOI pre-emption is materially better than any of these post-LOI moves.

Talk to a California Healthcare Acquisition Attorney

Bay Legal, PC represents non-licensee buyers of California treatment businesses through pre-LOI structural counsel, CPOM diligence, and deal documentation. If you are evaluating a target and want to structure the pre-LOI conversations for maximum diligence value, call (650) 668-8000 or schedule a consultation at baylegal.com/contact.