📖 Approx. 11 min
When considering M&A for medical institutions, the choice of scheme is extremely important. While “share transfer” and “business transfer” are typical M&A methods, the unique circumstances of the medical industry make this choice even more complex. This article provides a practical perspective for chairpersons of medical corporations, clinic directors, and those considering acquiring medical institutions, to deeply understand the advantages and disadvantages of each, the types of medical corporations, and tax and legal considerations, enabling them to select the appropriate M&A method.
Basic Understanding of Share Transfer and Business Transfer in Medical M&A
In M&A of medical institutions, “share transfer” and “business transfer” are considered as primary methods, similar to general corporate M&A, but understanding the characteristics of medical corporations is essential. First, let’s confirm their basic concepts and positioning within medical corporations.
Share transfer is a method where the selling shareholder transfers their shares to the buyer, thereby transferring management rights. Since the corporate entity continues to exist, contractual relationships and licenses/permits are generally inherited as they are. However, medical corporations are non-profit organizations and do not have “shares” like stock companies. Therefore, concepts equivalent to share transfer in medical M&A primarily include “transfer of equity interests in medical corporations with equity interests” and “change of members in medical corporations without equity interests.” These effectively serve as means to transfer the management rights of a medical corporation.
On the other hand, business transfer is a method where the selling corporation individually transfers a part or all of its business to the buying corporation. It allows for selective succession of assets (e.g., real estate, medical equipment), liabilities, contractual relationships, and employees. In this case, the selling corporation itself continues to exist, and only the transferred business moves to the buying corporation. In a business transfer of a medical institution, the facilities of a clinic or hospital, medical equipment, patient data, and employment contracts with employees are typically subject to transfer. This method can be chosen regardless of the type of medical corporation, but it is characterized by the need to re-establish individual contracts and re-acquire licenses and permits.
Advantages and Disadvantages of Share Transfer (Transfer of Equity Interests / Change of Members) and its Application in Medical Corporations
Methods equivalent to share transfer in medical M&A primarily include “transfer of equity interests in medical corporations with equity interests” and “change of members in medical corporations without equity interests.” Let’s examine their advantages and disadvantages in detail.
Advantages
- Procedural Simplicity: There is less effort involved in transferring individual assets and contracts, and M&A tends to be completed in a relatively short period.
- Comprehensive Succession: Since the corporate entity continues to exist, employment contracts, patient contracts, supplier contracts, and licenses/permits (establishment permits, designation as health insurance medical institutions, etc.) are generally inherited. This allows for smooth succession without interrupting medical services.
- Tax Benefits (Individual Seller): If the seller is an individual shareholder (investor), capital gains tax is subject to separate taxation, with a combined tax rate of approximately 20.315% for income tax, special reconstruction income tax, and resident tax. This may result in a higher net amount compared to the corporate tax rate (around 30%) when a corporation generates profit from a business transfer.
Disadvantages
- Succession of Off-balance Sheet and Contingent Liabilities Risk: Since the entire corporate entity is inherited, the buyer also assumes undisclosed past liabilities and risks (unpaid overtime, medical malpractice litigation risk, fraudulent claims for medical fees, etc.).
- Complexity of Changing Members in Medical Corporations: In medical corporations, changes to members (investors) require approval at a general meeting of members and may involve amendments to the articles of incorporation. Particularly, the status of endowment fund contributors in medical corporations without equity interests differs in nature from investors in medical corporations with equity interests, and issues related to the repayment of endowment funds may arise.
- Unrealized Gains Issue in Medical Corporations with Equity Interests: In medical corporations with equity interests established in the past, there are many cases where significant unrealized gains exist between the valuation of equity interests and their book value, posing a risk of gift tax or inheritance tax when members change.
Advantages and Disadvantages of Business Transfer and its Application in Medical Corporations
Business transfer of a medical institution is a method of succeeding only specific operations (clinic or hospital management) while retaining the medical corporate entity. Let’s look at its characteristics and unique considerations in the medical industry.
Advantages
- Selectivity of Assets and Liabilities to be Transferred: The buyer can individually select the assets and liabilities to be acquired, which is a significant advantage as it helps limit the risk of off-balance sheet and contingent liabilities. Unnecessary assets or high-risk liabilities can be avoided.
- Divestiture of Business: The seller can divest unprofitable or non-core businesses and focus on remaining operations.
- Flexibility in Use of Transfer Consideration (Seller Corporation): The consideration obtained from a business transfer goes to the selling corporation and can be used for subsequent business restructuring or dissolution expenses.
Disadvantages
- Procedural Complexity: Procedures are very cumbersome, time-consuming, and costly, including registration of individual assets (medical equipment, real estate, etc.), re-execution of contracts (patients, employees, suppliers), and re-acquisition of licenses and permits.
- Re-acquisition of Licenses and Permits: Establishment permits for medical institutions, designation as health insurance medical institutions, and facility standards (e.g., community medical support hospitals, DPC hospitals) generally need to be newly applied for by the acquiring corporation. This can lead to temporary interruption of medical services or the risk that existing facility standards cannot be maintained.
- Tax Burden: Consumption tax is levied on some transferred assets (buildings, medical equipment, etc.). Additionally, real estate acquisition tax and registration and license tax are incurred when real estate is transferred. The selling corporation is subject to corporate tax, etc., on the capital gains.
- Re-employment of Employees: Employment contracts are individually succeeded, so re-employment procedures must be carried out with the consent of employees.
M&A Scheme Selection Points by Medical Corporation Type
The type of medical corporation significantly impacts the choice of M&A method. Here, we explain the selection points for each major type of medical corporation.
Medical Corporations with Equity Interests
Transfer of equity interests (de facto share transfer) is the primary option. However, as mentioned earlier, there is always a risk of gift tax or inheritance tax on the difference between the valuation of equity interests and their book value. To avoid this risk, or to consider the seller’s tax benefits, business transfer is often chosen. With a business transfer, the corporate entity continues to exist, and while taxation on unrealized gains may occur when residual assets are distributed upon liquidation, individual tax burden at the time of transfer can be avoided. A change of members is essential, and the buyer must thoroughly consider the post-acquisition management structure.
Medical Corporations without Equity Interests (including those with endowment funds)
Medical corporations without equity interests do not have “equity interests,” so “transfer of equity interests” equivalent to a share transfer is not possible. The main M&A methods are change of members (transferring effective management rights by replacing all members, including the chairperson) or business transfer.
- Change of Members: By replacing all members, including the chairperson, the operational rights of the corporation are succeeded. In the case of medical corporations with endowment funds, while endowment funds entail a repayment obligation, their repayment is subject to requirements such as provisions in the articles of incorporation and not being in a state of insolvency, which can be difficult in practice. If repayment is difficult, there is a possibility of gift tax issues.
- Business Transfer: It is common for the existing medical corporation to dissolve and liquidate, and a new medical corporation to succeed the business. Although the procedures are complex, it offers the advantages of limiting risks and facilitating business restructuring with a new corporation.
Specified Medical Corporations and Social Medical Corporations
These corporations have extremely high public utility and are subject to strict regulations in their operation in exchange for tax incentives. Therefore, concepts like “share transfer” or “transfer of equity interests” as seen in for-profit companies do not exist, and business transfer is the only M&A method. Even with a business transfer, very strict screening is involved, such as suitability for the regional medical care vision and approval from the prefectural governor.
Tax and Legal Considerations in Medical M&A
The choice of M&A scheme significantly impacts tax and legal aspects. Especially in the medical industry, there are many specialized legal regulations, requiring different considerations from general M&A.
Tax Considerations
- Capital Gains Tax: If the seller is an individual, capital gains from share transfer (transfer of equity interests) are subject to separate taxation at a rate of approximately 20.315%. On the other hand, if a corporation generates profit from a business transfer, corporate tax, etc., is levied, with an effective tax rate of around 30%. Careful consideration is necessary as this significantly affects the seller’s net proceeds.
- Consumption Tax: In a business transfer, consumption tax is levied on some transferred assets such as buildings, medical equipment, and goodwill (excluding land). Share transfer (transfer of equity interests) is non-taxable. The buyer needs to consider the burden of consumption tax.
- Real Estate Acquisition Tax and Registration and License Tax: If real estate is transferred in a business transfer, the buyer incurs real estate acquisition tax and registration and license tax.
- Business Tax: Capital gains from a business transfer by a medical corporation may be subject to business tax.
- Unrealized Gains Taxation (Medical Corporations with Equity Interests): In medical corporations with equity interests, there are cases where significant unrealized gains have accumulated in the equity interests due to past profits. There is a risk that this unrealized gain will be taxed when members change (inheritance or gift).
Legal Considerations
- Re-acquisition of Licenses and Permits: In the case of a business transfer, the establishment permit for the medical institution, designation as a health insurance medical institution, and facility standards must be newly acquired by the buyer. This process requires time and effort and can lead to interruption of medical services or disadvantages in medical fees.
- Regional Medical Care Vision: Based on the regional medical care vision formulated by prefectural governments, the differentiation and collaboration of hospital bed functions are promoted. If changes in the number of beds or functional conversion after M&A do not align with the regional medical care vision, licenses and permits may not be obtained.
- Regulations under the Medical Care Act: Medical corporations are required to be non-profit, so there are strict regulations different from stock companies, such as the handling of member status and endowment funds, and the prohibition of surplus distribution. Procedures compliant with the Medical Care Act are required throughout the entire M&A process.
- Importance of Due Diligence: Due diligence (DD) is indispensable for thoroughly investigating risks specific to medical institutions, such as off-balance sheet liabilities, appropriateness of medical fee claims, labor issues, medical malpractice risks, and the status of IT systems and personal information protection.
Comparison Table of Share Transfer and Business Transfer and Practical Application
Based on the advantages and disadvantages discussed so far, and the unique considerations of the medical industry, the main differences between share transfer (transfer of equity interests / change of members) and business transfer are summarized in a comparison table, and points for practical application are explained.
| Item | Share Transfer (Transfer of Equity Interests / Change of Members) | Business Transfer |
|---|---|---|
| Scope | Entire corporate entity (change of shareholders/members) | Part or all of business assets/liabilities |
| Corporate Entity Continuity | Continues | Selling corporation continues, buying corporation succeeds business |
| Succession of Licenses and Permits | Generally succeeded (some notification changes) | Generally requires re-acquisition |
| Succession of Contractual Relationships | Comprehensively succeeded | Requires individual re-contracting |
| Off-balance Sheet Liabilities Risk | Generally all succeeded | Selectively assumable (risk limited) |
| Procedural Complexity | Relatively simple | Complex, time-consuming, and costly |
| Taxes (Seller Side) | Individual capital gains tax (approx. 20.315%) ※Beware of unrealized gains issues |
Corporate tax, etc. (approx. 30%) |
| Taxes (Buyer Side) | Generally none | Consumption tax, real estate acquisition tax, registration and license tax, etc. |
Key Points for Practical Application:
- Prioritizing Seller’s Tax Benefits: If the seller is an individual and it’s a medical corporation with equity interests, share transfer (transfer of equity interests) is often advantageous in terms of tax rates. However, addressing unrealized gains issues is essential.
- Prioritizing Buyer’s Risk Avoidance: For buyers who want to minimize the risk of off-balance sheet and contingent liabilities, business transfer is suitable. Risks can be limited as assets and liabilities to be succeeded can be selected.
- Prioritizing Procedural Simplicity and Speed: If there is no time for re-acquiring licenses/permits or re-executing contracts, share transfer (transfer of equity interests / change of members) is advantageous. However, depending on the type and situation of the medical corporation, a business transfer may proceed more smoothly.
- Aiming for Business Reorganization/Restructuring: If the goal is to liquidate an existing medical corporation and start a business with a new corporation, or to sell only a part of the business, a business transfer is suitable.
Steps for Utilizing Experts to Succeed in Medical M&A
Medical M&A involves complex issues specific to medical law in addition to general corporate M&A, making expert support indispensable. Here are the steps for utilizing experts to lead M&A to success.
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1
Initial Consultation and Strategy Formulation
Clarify the M&A objectives (business succession, expansion, business reorganization, etc.) and discuss strategy with experts, such as desired conditions for sale/acquisition and which scheme is optimal. At this stage, assess the feasibility by understanding the type of medical corporation and its financial situation.
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2
Partner Search and Matching
Experts leverage their extensive network to search for potential sellers/buyers that match the desired conditions. They support optimal matching, considering the characteristics of the medical institution and the regional medical care vision.
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3
Execution of Letter of Intent (LOI)
Once a potential buyer is found, a Letter of Intent (LOI) is executed for key terms such as the estimated transfer consideration, scheme, and future schedule. At this stage, exclusive negotiation rights and confidentiality obligations are established.
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4
Due Diligence (DD)
The buyer conducts a detailed investigation of the target medical institution’s financials, tax, legal, labor, compliance with medical regulations, appropriateness of medical fee claims, and maintenance of facility standards. Especially in medical M&A, the content of medical services, handling of patient data, and maintenance status of medical equipment are also important checkpoints.
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5
Execution of Final Agreement and Closing
Based on the DD results, a definitive agreement is executed, incorporating the final transfer consideration, representations and warranties, and covenants. Subsequently, final procedures (closing) such as settlement of consideration, change of ownership, and application for licenses/permits are carried out.
The optimal choice between share transfer and business transfer in medical M&A varies depending on your institution’s situation and future outlook. Comprehensive judgment of diverse factors such as complex medical regulations, tax matters, and regional medical care visions requires specialized knowledge and experience. M&A Medical, with extensive experience and expertise specializing in the healthcare industry, will formulate the optimal M&A strategy tailored to your institution’s situation and provide consistent support until completion. Please feel free to contact us for an initial consultation.
Consult M&A Medical for Healthcare Succession
M&A Medical is a specialized M&A and business succession support service for medical institutions. As an M&A support organization certified by the Small and Medium Enterprise Agency, we assist with the transfer of clinics and medical corporations facing a shortage of successors, as well as strategic acquisitions, on a success-fee basis.
- First consultation and simple valuation are free
- No upfront fees or monthly charges (success fee only)
- Strict confidentiality (proceed with NDA execution)
- Available in all 47 prefectures and for all medical specialties
Whether you “just want to know the market value,” “have no successor,” or “are considering joining a group,” please consult us early, even in the initial stages of consideration.