📖 Approx. 7 min read
Clinic Closure and Succession: Which is More Economical?
“Lack of a successor” is a significant management challenge faced by many clinic directors and medical corporation chairpersons. Should one choose to close the clinic, or aim for business succession through M&A? This decision is not merely about retiring from management; it profoundly impacts future asset formation and the financial well-being of surviving family members. This article compares the economic merits and demerits of closing and business succession, considering unique aspects of the healthcare industry, to support informed decision-making.
Economic Impacts and Considerations of Clinic Closure
When a clinic closes, the business typically undergoes liquidation. First, assets such as buildings and equipment are sold or disposed of, and liabilities like loans and outstanding payments are settled. If a capital gain is realized from sales, it is taxed as capital gains income. However, in many cases, selling depreciated equipment may not yield significant profits. Additionally, costs such as severance pay and personnel expenses for remaining tasks must be considered. For medical corporations, the liquidation process upon dissolution can be complex. Procedures stipulated by corporate law, such as distributing residual assets to members (shareholders) and returning funds (contributed capital with repayment obligations), must be adhered to. These processes require specialized knowledge, incurring costs for engaging professionals like lawyers and tax accountants. While hasty closure should be avoided from the perspective of contributing to regional healthcare, it is crucial to understand the disadvantages of pursuing purely economic rationality.
Economic Benefits and Process of Business Succession
Business succession, particularly through M&A, can offer greater economic benefits compared to closure. In succession, it is common to transfer the clinic’s business comprehensively, including buildings, equipment, medical fee receivables, patient lists, employees, and licenses. This allows for the valuation of the business itself, rather than just asset sales. The transfer price is determined by comprehensively considering the clinic’s profitability, location, future prospects, patient numbers, existing equipment, and the impact of medical fee revisions. For medical corporations, the valuation of equity interests and the procedures for changing members (shareholders) are crucial. Furthermore, if a fund system is in place, its repayment method and its relation to the transfer price must be considered. Generally, successful business succession can enable the director (transferor) to receive a higher price than through closure. Moreover, the continuation of the medical institution after succession maintains its contribution to regional healthcare. However, succession negotiations are delicate and require specialized knowledge and experience. Careful progress, in collaboration with experts, is necessary for tax treatment of capital gains, transfer of licenses, and handling of medical fee receivables.
| Item | Clinic Closure | Business Succession (M&A) |
|---|---|---|
| Expected Transfer Price | Low to Moderate (Primarily asset sale) | Moderate to High (Business value assessment) |
| Procedural Complexity | Moderate (Liquidation, remaining tasks) | High (Negotiation, contracts, licenses, taxes) |
| Professional Fees | Moderate (Lawyers, tax accountants) | High (M&A advisors, lawyers, tax accountants) |
| Handling of Remaining Tasks/Liabilities | Generally borne by the transferor | May be assumed by the buyer |
| Contribution to Regional Healthcare | Ceases | Continues |
| Future Asset Formation | Limited | Potential for expansion depending on the price |
Specific Issues for Medical Corporations: Equity Interests, Member Changes, and Funds
Business succession in medical corporations involves unique issues distinct from those in stock companies. Firstly, as medical corporations are “associations” and generally do not have the concept of equity interests (with some exceptions), succession through stock transfer, as in stock companies, is not possible. Succession primarily involves changes in membership (shareholders). It typically involves existing members withdrawing and new members joining, following resolutions at a general meeting of members. At this time, repayment of interests to withdrawing members (effectively, the return of invested capital) occurs, posing challenges in valuation methods and securing repayment funds. Secondly, there is the fund system. Funds are contributions made by members (or third parties) for the medical corporation’s business operations and have a repayment obligation. The repayment amount of these funds must be considered when determining the succession price. Furthermore, the balance between these fund repayments and member reimbursements is crucial in deciding the transfer price. Additionally, external environmental changes such as medical fee revisions, changes in facility standards, and regional healthcare plans impact the valuation of business succession, making detailed analysis through due diligence by experts indispensable. To smoothly navigate these complex procedures, support from a team of experts well-versed in medical M&A is essential.
Licenses, Medical Fees, and Taxes: Key Considerations in Succession
Licenses, medical fee receivables, and tax treatment are extremely important elements in the business succession of a clinic. Firstly, licenses such as establishment permits and designations as insurance medical institutions are fundamental to the business. While these are generally not transferable, the acquiring party must undergo procedures to obtain new establishment permits and designations for the medical institution after succession. As these procedures take a certain amount of time, the buyer desires a smooth handover. Secondly, medical fee receivables. Uncollected medical fee receivables are an important asset of the business, but their transfer and collection methods must be clearly defined in the contract. Lastly, tax treatment. Taxation on capital gains significantly impacts the transferor’s tax burden. In the case of medical corporations, succession involving dissolution and liquidation may require complex tax treatments, such as special distributions or distributions of residual assets. For the buyer, issues such as the valuation of acquired assets, depreciation, and future business tax treatment are also points of consideration. To minimize these tax risks and achieve smooth succession, it is crucial to collaborate with tax accountants and other experts from an early stage to consider the optimal scheme.
Steps for Considering Succession (Example)
- Current Status Analysis and Goal Setting: Objectively evaluate the current state of your clinic (financial, personnel, location, etc.) and clarify your post-succession wishes (retirement timing, desired price, continuation of regional contribution, etc.).
- Consultation with Experts: Consult with M&A advisory firms, lawyers, and tax accountants specializing in medical M&A to receive advice on the possibilities of business succession and economic comparisons with closure.
- Search for Potential Buyers: Together with experts, search for potential buyers who meet your clinic’s criteria (e.g., same specialty, different specialty, medical corporations aiming for successor development).
- Negotiation of Terms and Letter of Intent: Negotiate terms such as transfer price, handover conditions, and timing with potential buyers, aiming to conclude a Letter of Intent (LOI).
- Due Diligence (DD): The potential buyer conducts a detailed investigation into your clinic’s finances, legal status, and operational reality as a medical institution.
- Final Contract Signing: Based on the DD results, sign the final sales agreement.
- Licenses and Various Notifications: Apply for necessary licenses and submit notifications to relevant authorities to complete the succession.
Regional Healthcare Plans and the Future of Business Succession
In recent years, initiatives towards realizing “Regional Healthcare Plans” have been accelerating in the medical industry. These plans aim to establish a sustainable healthcare delivery system by promoting the differentiation and collaboration of hospital bed functions, securing and training healthcare professionals, and more within each region. Against this backdrop, the closure of a clinic due to a lack of successor can become an issue that cannot be overlooked from the perspective of maintaining and strengthening the regional healthcare delivery system. Business succession can be an effective means not only for the survival of individual medical institutions but also for contributing to the realization of regional healthcare plans. For example, succession to a medical institution with functions essential to the region, or acquisition by a large medical group aiming for successor development, can lead to the maintenance and improvement of regional healthcare quality and accessibility. On the other hand, new challenges accompany post-succession management, such as changes in revenue structures due to medical fee revisions and adapting to advancements in medical technology. Understanding the trends in regional healthcare plans and constructing business succession schemes aligned with them is crucial for enhancing the value of medical institutions in the future.
Medical corporation chairpersons and clinic directors facing the challenge of a lack of successor and contemplating closure versus business succession are encouraged to consult with us at their earliest convenience. At M&A Medical, our team of experts, well-versed in the healthcare industry, will propose the optimal choice for your institution from multiple perspectives, including the economics, legal aspects, taxation, and impact on regional healthcare, of both closure and business succession.
Consult M&A Medical for Medical Succession
M&A Medical is a specialized M&A and business succession support service for medical institutions. As an M&A support institution certified by the Small and Medium Enterprise Agency, we support the transfer of clinics and medical corporations struggling with successor shortages, as well as strategic acquisitions, on a success-fee basis.
- Initial consultation and preliminary assessment are free
- No upfront fees or monthly charges (success fee only)
- Strict confidentiality (proceeds under NDA)
- Services available nationwide across all 47 prefectures and all medical specialties
Please consult us early, even if you only wish to know the market value, have no successor, or are considering joining a group.