📖 Approx. 11 min
For the directors and presidents of clinics facing a lack of successors, ‘closure’ and ‘business succession’ are critical choices that cannot be avoided. This decision significantly impacts not only your post-retirement life plan but also the philosophy of the medical institution you have built over many years, your contribution to regional healthcare, and the employment of your staff. It is essential to calmly compare the advantages and disadvantages of both options from an economic perspective, not just an emotional one, to choose the optimal path. This article analyzes the economic implications of clinic closure and business succession from multiple angles to provide hints for your decision.
Clinic Closure When Successors Are Absent: Economic Losses and Procedural Realities
While choosing to close a clinic may seem straightforward at first glance, it actually involves a wide range of economic burdens and complex procedures. First and foremost is the ‘closure cost.’ In many cases, expenses for disposing of medical equipment, restoring the interior to its original condition, and demolition costs for leased properties are incurred. These costs vary greatly depending on the clinic’s size, equipment, and location, but can easily range from millions to tens of millions of yen.
Furthermore, dealing with employees is another significant economic aspect. There may be obligations to pay retirement benefits to long-serving staff and the occurrence of notice pay for dismissal. Maintaining employment for skilled personnel is indispensable for supporting regional healthcare, and the psychological burden of causing them to lose their jobs is also considerable. Additionally, informing patients and supporting their transfer to other institutions are essential. This requires time and effort, and consideration must be given to maintaining trust within the local community.
In addition to these direct costs, the ‘value of the business’ lost through closure should also be considered an economic loss. The cessation of the patient base built up over the years, the brand recognition in the region, and the revenue that would have been generated in the future represent an immeasurable opportunity loss.
The closure procedures themselves are also cumbersome. There are numerous administrative procedures requiring specialized knowledge, such as submitting a closure notification to the public health center, a business closure notification to the tax office, and applications to social insurance authorities, as well as dissolution and liquidation procedures for medical corporations. Failure to proceed with these procedures correctly carries the risk of unforeseen troubles and additional costs.
Economic Benefits of Business Succession: Capital Gains and the Value of Business Continuity
On the other hand, choosing business succession offers distinct economic advantages that closure does not. The most significant benefit is the ability to receive the ‘business value’ of the clinic as transfer consideration. This includes not only tangible assets such as medical equipment and real estate but also intangible assets (goodwill) cultivated over many years, such as the patient base, clinical expertise, and regional trust. While these values would become zero if the clinic were closed, succession makes it possible to realize them as concrete financial compensation.
The transfer consideration can serve as a crucial source of funds for stabilizing your post-retirement life plan. The specific amount of transfer consideration varies depending on various factors such as the clinic’s profitability, location, equipment, and future prospects, but cases ranging from several million to hundreds of millions of yen are observed. Clinics with a stable revenue base or specialized expertise tend to receive higher valuations. Multiple valuation methods, including the income capitalization approach, discounted cash flow (DCF) method, and net asset method, are used to calculate the transfer consideration, and an objective assessment by experts is important.
Moreover, business succession also allows for the maintenance of employee employment. This not only protects the livelihoods of staff who have worked together for many years but is also a very important factor in supporting the stable operation of the clinic after succession. With experienced staff remaining, the successor physician can smoothly commence practice, and patients can continue to receive care with peace of mind.
Furthermore, the contribution to regional healthcare should not be overlooked. By continuing the medical services lost through closure, the health of local residents can continue to be supported. While this may not be directly quantifiable in economic terms, it can be a significant benefit for the manager in the form of social recognition and a sense of accomplishment. In cases where specific conditions are met, it is also worth considering the possibility of reducing tax burdens by applying for business succession tax incentives.
Succession and Taxation by Medical Corporation Type: Issues of Shareholding and Funds
When considering the succession of a medical corporation, the tax and legal treatment varies significantly depending on the type of corporation. In particular, the distinction between ‘medical corporations with shareholdings’ and ‘medical corporations without shareholdings (fund contribution type)’ is a crucial point directly linked to the economics of succession.
In the case of medical corporations with shareholdings, the shareholdings held by directors and members are valued according to the net assets of the corporation and are subject to transfer or inheritance. When these shareholdings are transferred to a third party, capital gains tax is levied. The higher the valuation, the greater the tax burden tends to be. Furthermore, changes in membership require not only the transfer of shareholdings but also procedures for the succession of membership status. The risk of high inheritance or gift tax due to accumulated retained earnings increasing the valuation of shareholdings must also be considered.
On the other hand, medical corporations without shareholdings (fund contribution type) do not have shareholdings, so no capital gains tax is incurred upon a change of membership. Instead, fund contributors are refunded their contributions according to the articles of incorporation. These funds are treated as liabilities of the corporation and are not subject to profit distribution. The primary process is the succession of membership status, and the tax complexity tends to be lower compared to corporations with shareholdings. However, the refund of funds depends on the corporation’s financial status, so confirming its certainty is important.
The following comparison table shows the main differences between the two:
| Item | Medical Corporation with Shareholdings | Medical Corporation without Shareholdings (Fund Contribution Type) |
|---|---|---|
| Presence of Shareholdings | Yes (valued according to net assets) | No |
| Financial Consideration at Succession | Transfer consideration for shareholdings | Refund of funds (according to articles of incorporation) |
| Membership Change Procedures | Transfer of shareholdings and succession of membership status | Succession of membership status |
| Tax Issues | Capital gains tax, inheritance/gift tax risks | Tax treatment upon fund refund (generally non-taxable) |
| Profit Distribution by Corporation | Profit distribution possible according to shareholdings | Profit distribution not possible |
Since the succession scheme and tax strategy will vary greatly depending on which type it is, it is important to consult with experts in advance and consider the optimal method tailored to your clinic’s situation.
Legal and Administrative Procedures in Succession: Points to Note Regarding Licenses and Facility Standards
To ensure smooth business succession, an accurate understanding and appropriate handling of legal and administrative procedures are essential. In particular, ‘licenses’ and ‘facility standards,’ which are directly related to the continuous operation of medical institutions, are treated differently depending on the succession scheme.
First, when inheriting a clinic, various licenses and registrations are required, such as a clinic establishment permit under the Medical Care Act, designation as an insured medical institution under the Health Insurance Act, and a license as a drug prescriber. The procedures for these licenses differ between ‘corporate merger/business transfer (corporate maintenance type)’ where the corporate status is directly inherited, and ‘business transfer (new establishment type)’ where a new corporation or individual proprietor takes over the business. In the case of the corporate maintenance type, existing licenses can generally be inherited, but notification of representative change and registration of officer changes are required. In the case of new establishment type, all licenses must generally be reacquired from scratch, which tends to be time-consuming and labor-intensive.
Next, the continuity of ‘facility standards’ is also an important issue. To claim certain medical fees, facility standards related to staffing, equipment, and structure must be met, and notifications must be submitted to the regional bureau of health and welfare. For example, facility standards for ‘medical institutions providing home medical care support’ or ‘community comprehensive care add-on payments’ are strictly defined, and the requirements must continue to be met after succession. If the qualifications and experience of the successor physician or the number of full-time physicians change, the possibility that existing facility standards cannot be maintained must be considered. In some cases, new facility standard notifications or changes to existing notifications may be required, and these directly affect medical fee revenue, so they should be thoroughly checked during the succession planning stage.
Failure to comply with these procedures can lead to the inability to claim medical fees or, in the worst-case scenario, the revocation of designation as an insured medical institution. To achieve smooth succession, collaboration with lawyers, administrative scriveners, and M&A specialists well-versed in the Medical Care Act and Health Insurance Act is indispensable.
Regional Healthcare Vision and Medical Fee Revisions: External Environmental Factors to Consider for Succession
When considering the succession of a medical institution, it is necessary to take into account not only the internal situation of the clinic but also changes in the external environment surrounding the healthcare industry. In particular, the ‘regional healthcare vision’ and ‘medical fee revisions’ are important factors that can significantly impact the clinic’s management after succession.
The regional healthcare vision is a future vision for the healthcare delivery system formulated by each prefecture to respond to the aging population and changes in medical demand. Its pillars include the reorganization of hospital bed functions, promotion of home medical care, and differentiation and strengthening of collaboration among medical functions. For example, if the consolidation of hospital bed functions progresses in a certain region, the role and revenue structure of clinics with acute care beds may change. In regions where the demand for home medical care is increasing, the value of clinics focusing on visiting services may increase. When considering succession, understanding the vision for the region where your clinic is located and assessing whether it aligns with future medical needs and policy directions is crucial for stable management after succession.
Next, medical fee revisions are one of the most important factors directly affecting the profitability of medical institutions. In medical fee revisions, which occur in principle every two years, the points for individual medical procedures, facility standards, and rules for add-on and deduction payments are reviewed. For example, if the medical fees for a specific disease are increased, the profitability of clinics with strengths in that area may improve, but conversely, if they are decreased, profitability may be squeezed. Furthermore, new policy incentives such as those for work style reform and promotion of medical DX may be introduced. The successor physician must constantly monitor the trends of revisions and flexibly adapt the clinic’s medical system and management strategy. Depending on the timing of succession, adaptation to changes in the business environment immediately after a revision may be required, so it is advisable to conduct simulations with experts in advance.
These external environmental factors also affect the valuation of the clinic and future revenue projections, so they must be fully considered when developing a succession plan.
Economic Comparison of Closure vs. Succession: Perspectives for Concrete Income and Expenditure Simulation
To decide whether to choose ‘closure’ or ‘business succession’ in a situation where successors are absent, it is essential to compare how each option will ultimately affect the assets remaining in hand through concrete income and expenditure simulations.
The final income and expenditure when choosing closure is generally composed of the following elements:
- Asset Sale Revenue: Proceeds from the sale of medical equipment, real estate (if privately owned), and inventory pharmaceuticals.
- Debt Repayment: Repayment of loans, lease liabilities, etc.
- Closure Costs: Costs for restoration to original condition, disposal of medical equipment, employee retirement benefits, demolition costs, various procedural costs, etc.
- Taxes: Capital gains tax on asset sale profits, corporate tax, etc., for corporations.
In summary, ‘Asset Sale Revenue – Debt Repayment – Closure Costs – Taxes’ is the estimated final amount remaining in hand after closure.
On the other hand, the final income and expenditure when choosing business succession is composed of the following elements:
- Transfer Consideration Revenue: Gains from the transfer of goodwill, medical equipment, real estate, etc., associated with the business transfer.
- Debt Repayment: Repayment of loans, etc., from the transfer consideration.
- Transfer Costs: Fees for M&A intermediaries, tax accountants, lawyers, and other experts.
- Taxes: Capital gains tax, corporate tax, etc., for corporations.
Here, ‘Transfer Consideration Revenue – Debt Repayment – Transfer Costs – Taxes’ is the estimated final amount remaining in hand after succession. In particular, for sole proprietors, capital gains tax is calculated as Capital Gains = Revenue – (Acquisition Cost + Transfer Costs) and is taxed separately from other income.
Tax Considerations: Business Tax and Capital Gains Tax
For sole proprietors, capital gains from the transfer of business assets are generally not subject to business tax, but capital gains from real estate transfers are subject to capital gains tax for income tax and resident tax. For medical corporations, corporate tax is levied, and subsequent executive retirement benefits and dividends are also taxed separately. The tax burden varies greatly depending on the chosen scheme and asset composition, making it extremely important to conduct detailed simulations with a tax accountant in advance.
By conducting these simulations, you can objectively evaluate which choice, closure or succession, is economically more advantageous. However, it is important to understand that these figures are estimates and can vary significantly depending on the individual clinic’s situation and market conditions.
Steps to Successful Business Succession and Utilization of Experts
Business succession involves many complex processes, so proceeding systematically and strategically is key to success. Below are the general main steps for business succession.
- 1.
Formulating a Succession Plan and Gathering Information
Organize your retirement timeline, desired conditions, and the clinic’s strengths and weaknesses. Begin gathering information on the M&A market and succession cases. - 2.
Consultation with Experts and Valuation
Consult with experts such as M&A intermediaries, tax accountants, and lawyers, and request a business valuation of the clinic. Sign a Non-Disclosure Agreement (NDA) and proceed with information disclosure. - 3.
Searching for Candidates and Matching
Through the experts’ network, search for potential successors such as physicians, medical corporations, and companies wishing to acquire. Meet with candidates who meet the criteria from among multiple options. - 4.
Letter of Intent and Due Diligence
Conclude a Letter of Intent (LOI) regarding the transfer price and main terms. Subsequently, the buyer will conduct a detailed investigation (due diligence) of financial, legal, tax, and medical systems. - 5.
Final Contract and Closing
Based on the due diligence results, negotiate final terms and conclude the final contract, such as a stock transfer agreement or business transfer agreement. Payment of consideration and transfer of assets and rights will take place. - 6.
Administrative Procedures and Handover
Proceed with necessary administrative procedures, such as notifications to public health centers and regional bureaus of health and welfare, and changes to medical corporation registration. Inform patients and employees, and hand over clinical operations.
It is extremely difficult to proceed with these steps alone, and specialized knowledge is indispensable. M&A intermediaries provide comprehensive support throughout the entire process, from valuation to candidate search, negotiation, and contract conclusion. Tax accountants propose optimal tax schemes, and lawyers manage legal risks. By collaborating with each expert, the possibility of avoiding unforeseen troubles and achieving smooth business succession under optimal terms increases. Consulting with experts early and making concrete plans is the first step toward success.
A situation of lacking a successor is by no means limited to closure. To maximize the value of the clinic you have built, enrich your post-retirement life, and continue contributing to regional healthcare, we strongly recommend seriously considering the option of business succession. At M&A Medical, specialists dedicated to M&A and business succession for medical institutions will provide the optimal proposal tailored to your clinic’s situation. Please feel free to contact us for an initial consultation.
For Medical Succession Consultations, Contact M&A Medical
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 success of transfers from clinics and medical corporations struggling with a lack of successors to 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 after signing NDA)
- Support available in all 47 prefectures and for all medical specialties
Please consult with us early, even in the initial stages of consideration, whether you just want to know the market price, have no successor, or are considering joining a group.