Medical M&A Brokerage Fee Market Rates and Breakdown: The Success Fee System

For chairpersons, directors, or succession managers considering M&A (Mergers & Acquisitions) for medical institutions, brokerage fees are likely a cost of concern. In particular, understanding the calculation methods, breakdown, and market trends of brokerage fees for medical M&A, where a success fee system is common, is essential to prevent unexpected additional costs and proceed smoothly with the M&A process. This article explains the structure of brokerage fees in medical M&A, the market rates for the success fee system, and their breakdown from a professional perspective, taking into account issues specific to the medical industry. Please note that specific examples and figures presented are general trends and benchmarks, and may vary depending on individual cases.

Concept of Brokerage Fees in Medical M&A

In the M&A of medical institutions, the complexity of transactions varies greatly depending on the type and scale of the medical corporation, clinic, or hospital. Particularly for medical corporations, specialized knowledge and experience beyond general business succession are required, including issues related to the existence of equity interests, procedures for changing members in the general meeting of members, refund of funds, and transfer of licenses and permits. M&A brokers provide the expertise to smoothly navigate these complex processes and support the achievement of optimal transaction terms for both buyers and sellers. In return for these services, brokerage fees are incurred, and in most cases, a “success fee system” is adopted, where payment is made upon the successful completion of the transaction. This is a reasonable system for both parties, as it incentivizes the broker to work towards the successful completion of the transaction. However, even with a success fee system, depending on the contract terms, upfront fees or interim fees may be incurred, so a detailed confirmation before signing the contract is necessary.

Market Rates and Calculation Standards for the Success Fee System

The market rate for brokerage fees in medical M&A under a success fee system is generally calculated as a certain percentage of the transaction value (transfer price). This percentage varies depending on the brokerage firm, the difficulty of the deal, and its scale, but it is often around 3% to 10%. For example, if the transaction value is 100 million yen, the fee would be calculated as approximately 3 million to 10 million yen. However, it is common to see a “tiered system” where this percentage decreases as the transaction value increases. This is a consideration to reduce the burden on both buyers and sellers by setting a lower fee rate for individual amounts as the transaction value gets larger.

It is also necessary to confirm the “transaction value” used as the calculation basis depending on the contract terms. The total fee can vary significantly depending on whether the evaluation includes not only the total assets transferred but also the assumption of liabilities, medical service receivables, pharmaceutical and material inventory, and even intangible assets (brand, customer lists, know-how, etc.). In the M&A of medical institutions, it is important to clearly agree on the calculation basis with the M&A broker, as factors such as the impact of medical service fee revisions, facility standards, and the transferability of designations as insured medical institutions affect the calculation of the transaction value.

Breakdown of Brokerage Fees and Points to Confirm

The success fee in brokerage fees may include not only “success fees upon transaction completion” but also multiple elements corresponding to the scope of work. Generally, brokerage fees are considered to include remuneration for the following services:

• Sourcing Services: Searching for buyers or sellers, selecting candidate targets.
• Initial Valuation & Due Diligence Support: Initial assessment of the target medical institution’s business viability, financial status, legal/tax risks, and support for collaboration with specialists (lawyers, tax accountants, etc.).
• Negotiation & Terms Adjustment: Support for negotiations on transfer price, payment terms, handover items, etc.
• Agreement Drafting Support: Support for drafting and reviewing letters of intent and final agreements.
• Closing Support: Support for filings with relevant government agencies and procedures for transferring licenses and permits (partial).

Especially in the M&A of medical institutions, which involves complex procedures specific to medical corporations (resolutions of the general meeting of members, refund of funds, valuation of equity interests, applications for changes in licenses and permits, etc.), it is crucial to confirm whether such specialized support is included. Also, it is important to understand that in many cases, separate fees will be incurred for lawyers, tax accountants, and certified public accountants conducting due diligence, as well as registration fees and license application fees, in addition to the brokerage fee. It is important to have the contract clearly state how these actual expenses will be handled (whether they are included in the brokerage fee or settled separately).

Upfront Fees, Interim Fees, and Actual Expense Settlement

While the success fee system is mainstream, some brokerage contracts may include an “upfront fee” at the initial stage of the M&A process or an “interim fee” at an intermediate stage. Upfront fees are paid when the brokerage firm accepts the case and are incurred regardless of the success of the transaction. Interim fees are typically paid upon the signing of a letter of intent. These fees are set as a certain remuneration for the human and time resources invested by the brokerage firm in carrying out the case. The existence, amount, and refundability (e.g., a portion of the upfront fee being credited towards the success fee) of upfront and interim fees vary greatly depending on the contract terms. When contracting with an M&A broker, be sure to confirm the details regarding the existence and amount of these initial and interim fees, and how they will be handled if the transaction is not completed.

Furthermore, it is necessary to clearly define in the contract the various actual expenses incurred during the M&A process (travel expenses, communication costs, fees for specialists, registration fees, license application fees, etc.), separate from the brokerage fee. Generally, these actual expenses are settled separately, but in some cases, they may be included in the brokerage fee as a comprehensive commitment. Regardless of the method, it is important from a budget management perspective to understand in advance what kind of expenses may be incurred and approximately how much.

How to Wisely Choose a Medical M&A Brokerage Fee Structure

While the brokerage fee for medical M&A is an important factor influencing the success or failure of a deal, choosing a broker solely based on the fee amount is not advisable. Medical M&A requires a high level of specialized knowledge and experience due to its unique nature. For example, extensive expertise is required in areas such as the medical corporation system, medical service fee system, medical-related laws and regulations, alignment with regional medical plans, valuation of assets and liabilities specific to medical institutions (medical equipment, electronic health record systems, medical receivables, pharmaceutical inventory, etc.), and taxation of capital gains and business taxes.

When selecting a brokerage firm, we recommend evaluating the following points comprehensively:

1. Track Record and Specialization in Medical M&A: Does the firm have a wealth of successful M&A transactions for medical institutions? Does it employ specialists (doctors, former medical corporation personnel, medical consultants, etc.) knowledgeable about the medical industry?
2. Proposal and Negotiation Capabilities: Can the firm understand the needs of both buyers and sellers and propose feasible schemes? Does it have the ability to smoothly conduct complex negotiations?
3. Transparent Fee Structure: Are the breakdown of fees, calculation standards, and scope of actual expense settlement clear and satisfactory?
4. Reliability of the Representative: Is the representative sincere and able to communicate effectively? Do they demonstrate a commitment to confidentiality?

In particular, when considering complex schemes such as M&A for medical corporations without equity interests, business succession from a medical corporation to another medical corporation, or organizational changes from a medical corporation to a stock company, choosing a broker with expertise in that area is key to success. Furthermore, whether the broker can propose a superior succession scheme that contributes to the realization of regional medical plans will also be important from a long-term perspective.

Conclusion: View Fees as an Investment and Collaborate with Experts

The brokerage fees for medical M&A are not inexpensive. However, they can be viewed as an “investment” towards the smooth and advantageous completion of an M&A deal. In particular, to overcome the complex issues unique to medical institutions, navigate specialized challenges such as medical service fee revisions, facility standards, and licensing, and ultimately achieve a succession that leads to the sustainable development of the medical institution, the specialized support of a trusted M&A broker is indispensable. By fully understanding the fee structure and selecting a broker that aligns with your institution’s situation and goals, you can significantly increase the probability of M&A success.

At M&A Medical (CentralMedience Inc.), as an M&A support institution certified by the Small and Medium Enterprise Agency, we offer free consultations regarding M&A and business succession for medical institutions. Please feel free to contact us if you have any questions about our fee structure or specific procedures.