Due Diligence in the Medical Spa Industry

It’s a way to make sure you really understand what you’re getting into and that there are no hidden surprises waiting down the line. In this article, we’ll walk you through what due diligence looks like in the medspa world and explain why it’s such a smart move for anyone thinking about getting involved in this fast-growing industry.

What Is MedSpa Due Diligence?

Medspa due diligence is the process of carefully reviewing all aspects of a medical spa business before moving forward with a merger, acquisition, or partnership. It involves digging into the company’s operations, finances, legal records, and compliance history to make sure everything checks out. The main goal is to spot any risks early, uncover hidden liabilities, and confirm that the business is both legally compliant and financially healthy. This step is a standard part of the process for buyers and investors, and in some cases, even sellers, who want to present their business transparently. A key part of the review includes evaluating medspa cash flow, which gives insight into the business’s ability to generate income and stay afloat long-term.

Key Areas of Medical Spa Due Diligence

When reviewing a medical spa, due diligence usually falls into four main categories. Each one helps paint a clearer picture of how the business runs and whether there are any issues that could cause trouble later. Here are some common insights: 

• Legal

–  Make sure all required business and medical licenses are valid and up to date
– Review scope-of-practice rules to ensure services are being performed legally
– Check that proper physician supervision or oversight is in place where required

• Financial

–  Analyze cash flow, including a close look at income and expenses
– Review profit and loss statements to assess overall performance
– Confirm that tax filings are current and that there are no unresolved tax issues

• Operational

–  Evaluate staffing structure, credentials, and employment agreements
– Review standard operating procedures (SOPs) to see how daily tasks are managed
– Look at scheduling, CRM, and Medical Spa Payment Solutions used for transactions
– Examine vendor contracts for supplies, equipment, or services

• Regulatory

-Confirm HIPAA compliance for protecting patient privacy
-Check adherence to OSHA safety standards for workplace health
-Review agreements with the medical director to ensure proper clinical oversight

Legal Considerations for MedSpa Transactions

Legal considerations are a major part of any medspa transaction and should never be rushed or overlooked. First, it’s important to confirm that the business is operating within the state’s specific scope-of-practice laws. These rules determine which procedures can be performed, who is allowed to perform them, and under what level of supervision. You’ll also need to examine the ownership structure to make sure it aligns with corporate practice of medicine laws, which vary by state and often restrict who can legally own or control a medical spa. Another key area is verifying that the medical director and any supervising physicians are properly licensed and contracted in accordance with state requirements. In addition, it’s smart to investigate whether there are any past or ongoing lawsuits, compliance issues, or regulatory red flags that could pose a risk later on.

Financial Review and Red Flags

When reviewing a medical spa’s financials, the goal is to get a clear and honest understanding of its performance and stability. A detailed review helps reveal the strengths of the business, and just as importantly, any warning signs that could affect its future. Here’s what to focus on:

• Review Key Financial Documents
  Go through the past 2–3 years of income statements, balance sheets, and medspa cash flow reports. This gives you a snapshot of how money is earned, spent, and managed over time.
• Analyze Revenue Sources
  Break down income by treatment type such as injectables, facials, laser treatments, or body sculpting. This shows which services bring in the most revenue and whether the business is too reliant on one category.
• Look for Patterns and Seasonality
  Identify any consistent slow periods or high-earning months. Seasonal trends are normal in the medspa industry, but unexpected drops in revenue could be a red flag.
• Spot Unusual Expenses
  Watch for large, one-time costs or ongoing expenses that seem out of place. These could be signs of poor financial planning or mismanagement.
• Check Payroll Trends
  Sudden increases in payroll might indicate recent over-hiring or inflated wages. On the other hand, underpaying staff could lead to high turnover and operational issues.
• Watch for Overuse of Discounts
  Heavy reliance on discounted packages or promotions can inflate short-term revenue but hurt long-term profitability. Look at how many services are sold at full price versus discounted rates.
• Confirm Tax and Payment Records
  Make sure tax filings are current and accurate. Also, check that all vendor payments, leases, and loan obligations are up to date with no signs of debt or legal disputes.
  

By digging into these financial details, you’ll get a much clearer picture of whether the medspa is a solid investment, or if it’s hiding problems beneath the surface.

Compliance and Licensing Review

A thorough compliance and licensing review is a must during medspa due diligence. Start by making sure the facility holds all necessary state and local licenses, along with current business permits to legally operate. If the spa uses or stores any controlled substances, verify that it has a valid DEA registration. It’s equally important to check for full compliance with HIPAA, OSHA, and proper infection control protocols, as violations in any of these areas can lead to serious penalties. Lastly, review all documentation related to supervising agreements and delegation protocols for nurses or nurse practitioners to confirm that clinical roles are structured and authorized correctly.

Operational Systems and Patient Base

Looking into the operational side of a medspa gives you a real sense of how smoothly the business runs day to day. Start by evaluating the systems used for booking appointments, managing electronic medical records (EMRs), tracking inventory, and handling payments, including any Medical Spa Payment Solutions in place. Next, take a close look at the team: review each staff member’s role, make sure training records are up to date, and understand how compensation and incentives are structured. It’s also helpful to analyze patient demographics, including age ranges, visit frequency, and how many clients are returning versus new. Lastly, don’t overlook the medspa’s marketing efforts, aim to check their social media presence, online reviews, and how they handle reputation management to attract and keep clients.

FAQs

What is medspa due diligence?

A process of evaluating the financial, legal, and operational health of a medical spa before a purchase or investment.

Why is due diligence important before buying a medical spa?

It helps identify risks, confirm value, and avoid hidden liabilities that could affect the success of the business.

Who should perform due diligence for a medspa?

Investors, buyers, lawyers, and accountants with industry knowledge should lead or assist in the process.

How long does medspa due diligence take?

Typically 30 to 90 days, depending on the size of the business and how quickly documents are shared.

What documents are reviewed during due diligence?

Financial statements, licenses, contracts, compliance records, staff credentials, and patient volume data.

Can poor due diligence result in legal issues?

Yes, missing key legal or compliance problems can lead to regulatory penalties or failed business performance.

References

Global Payment Integrated: Medical spa payment trends

https://www.globalpaymentsintegrated.com/en-us/blog/2019/11/20/medspa-payment-statistics-infographic

Pabau: Key requirements for running a successful medical spa

https://pabau.com/blog/medical-spa-requirements

American Med Spa Association: Due Diligence in Medical Spa Mergers and Acquisitions

https://americanmedspa.org/blog/due-diligence-in-medical-spa-mergers-and-acquisitions

HR for Health: How To Open a Medical Spa
https://hrforhealth.com/blog/opening-a-medical-spa