📖 Approx. 10 minutes
When considering M&A or business succession for medical institutions, brokerage fees are a crucial factor. The fee structure can seem complex, and the unique circumstances of the healthcare industry require a different perspective compared to general M&A. This article provides a detailed explanation based on expert knowledge, covering the basic structure of medical M&A brokerage fees, the calculation criteria for success fees, and specific points for reducing costs.
Basic Structure of Medical M&A Brokerage Fees: Success Fee System is Dominant
In general M&A brokerage, there are multiple fee items such as retainer fees, intermediate fees, monthly advisory fees, and success fees. However, in the field of medical M&A, many brokerage firms tend to adopt a fee structure primarily based on a “success fee system.” This is because it is recognized that this performance-based system offers significant advantages, such as lower initial costs for both the seller and buyer, with fees only incurred upon the successful completion of the M&A.
The “Lehman formula” is widely used for calculating success fees. This system applies tiered rates based on the M&A transaction value. However, it is important to note that what constitutes this “transaction value” can vary among brokerage firms. Generally, it is based on either the “transfer price” or the “total asset transfer.” When dealing with unique aspects of medical corporations, such as equity interests, funds, or substantial capital investments, the choice of this base can significantly impact the final fee amount.
| Transaction Value (Base Amount) | Estimated Rate |
|---|---|
| Portion up to 500 million yen | 5% |
| Portion exceeding 500 million yen to 1 billion yen | 4% |
| Portion exceeding 1 billion yen to 5 billion yen | 3% |
| Portion exceeding 5 billion yen to 10 billion yen | 2% |
| Portion exceeding 10 billion yen | 1% |
The above is merely an example of typical Lehman formula rates and may vary depending on the brokerage firm, the scale of the deal, and its complexity. Furthermore, minimum fee amounts are often set, and for small clinic succession deals, this minimum fee is frequently applied.
Calculation Criteria and Market Rates for Success Fees in Medical M&A
The calculation criteria for success fees in medical M&A are broadly categorized into two main types: “transfer price” and “total asset transfer (enterprise value).” The difference between these can critically affect the final fee amount, making it essential to confirm this before signing a contract.
Difference Between Transfer Price and Total Asset Transfer
Transfer Price: Refers to the total consideration paid to shareholders or equity holders. For sole proprietorships, it is the transfer price of business assets. For medical corporations with equity interests, the consideration for these interests corresponds to this.
Total Asset Transfer (Enterprise Value): This is based on the total economic value of the company (total assets), including liabilities (such as loans) in addition to the transfer price. Specifically, it often includes the transfer price plus interest-bearing debt plus working capital. For medical corporations with significant capital investments and substantial borrowings, there can be a considerable difference between the transfer price and the total asset transfer.
Example: Transfer Price of 50 million yen, Interest-Bearing Debt of 100 million yen
- Based on Transfer Price: Lehman formula applied to 50 million yen
- Based on Total Asset Transfer: Lehman formula applied to 150 million yen
As shown above, the difference in the base amount significantly alters the fee, making it essential to clearly define this in the contract.
In the M&A of medical corporations, the presence or absence of equity interests greatly influences the concept of transfer price. For medical corporations with equity interests, these interests are typically the subject of transfer, and their valuation serves as the basis for the transfer price. On the other hand, for medical corporations without equity interests or fund-based corporations, the concept of equity interests does not exist. In such cases, elements like business assets and goodwill are evaluated, and the transfer of business assets or claims for the return of funds become intricately involved. Whether claims for fund returns are included in the total asset transfer can be a point of contention among brokerage firms, requiring careful confirmation.
Regarding general market rates, for small clinic succession deals, the “minimum fee” is almost always applied in conjunction with the Lehman formula. This minimum fee often ranges from several million yen to around 10 million yen, but there is variation depending on the complexity of the M&A, the size of the brokerage firm, and the services provided. For complex deals involving large hospitals or multiple medical corporations, fees in the tens of millions to hundreds of millions of yen are not uncommon.
Breakdown of Medical M&A Brokerage Fees: Fees Other Than Success Fees
The total cost of medical M&A is not limited to success fees. Depending on the terms of the brokerage agreement, other fees may be incurred. It is crucial to understand these fee items in advance and carefully review the contract to avoid unexpected expenses.
- Retainer Fee: A fee paid upon signing the brokerage agreement. It is incurred regardless of whether the M&A is successful. In recent years, brokerage firms advertising success-fee-only models often do not charge this fee.
- Intermediate Fee (Retainer Fee): A fee paid at an intermediate stage of the M&A process, such as upon signing a Memorandum of Understanding (MOU). It is often considered a partial advance payment of the success fee and is generally deducted from the final success fee.
- Monthly Advisory Fee (Retainer Fee): A fixed monthly payment for M&A advisory services. This may be set when the deal is expected to be lengthy or when ongoing advice is sought.
- Due Diligence (DD) Fees: Fees for detailed investigation into the business realities of the target medical institution, including financial, legal, tax, labor, and healthcare regulatory compliance. These are typically borne by the buyer, who engages specialists (CPAs, lawyers, etc.). Brokerage firms often only introduce affiliated specialists, with fees being separate.
- Various Professional Fees: Fees for contract drafting/review by lawyers, tax advice by tax accountants, property valuation by real estate appraisers, etc. These are also often paid directly by the parties to the professionals.
- Registration and License Tax, Real Estate Acquisition Tax: Taxes incurred upon the transfer of ownership of real estate, medical equipment, etc.
These fees vary significantly depending on the scope of services provided by the brokerage firm, the M&A structure, and the size and characteristics of the target medical institution. In particular, depending on the type of medical corporation (e.g., specific medical corporations, social medical corporations), there may be tax exemptions or restrictions, making professional tax advice essential. It is extremely important to clarify which fees are included in the brokerage fee and which are incurred separately before signing the contract to understand the total cost.
Specific Issues in Medical M&A and Their Impact on Fees
Medical M&A involves unique legal regulations and practices that differ from general business succession, and these factors can influence the calculation of brokerage fees and the process itself.
- Type of Medical Corporation and Equity Interests: The M&A structure, valuation methods, and the concept of transfer price fundamentally differ depending on whether it is a medical corporation with equity interests or one without (or a fund-based corporation). For corporations with equity interests, the valuation of these interests is central. For those without, the transfer of business assets, business transfer, or the handling of claims for fund returns becomes an issue. This complexity increases the difficulty of brokerage work and can consequently affect fees.
- Fund System and Return Claims: In fund-based medical corporations, the valuation of claims for fund returns is a critical issue in M&A. Whether these funds are included in the total asset transfer can significantly alter the base amount for success fees. Clear agreement is required with the brokerage firm at the time of contract signing regarding this point.
- Medical Fee Schedule Revisions and Facility Standards: The profitability of medical institutions is heavily influenced by revisions to the medical fee schedule and compliance with facility standards. These factors become important items in due diligence when evaluating future profitability after M&A, impacting valuation and the difficulty of M&A completion. For highly specialized medical institutions with complex facility standards, brokerage work may require deeper expertise, which could be reflected in the fees.
- Licenses and Business Succession: Licenses for establishing medical institutions, designations as healthcare providers, and various specialized medical licenses must be continuously obtained and maintained after M&A. Particularly when changes in management or corporate status are involved, new license applications and notifications are necessary, and the complexity and expertise required for these procedures can increase the burden on brokerage services.
- Treatment of Business Tax: Medical corporations are generally exempt from business tax. However, if the business structure changes due to M&A, or if a non-medical entity (e.g., a stock company) takes over the medical business, it may become subject to business tax. Tax implications directly affect post-M&A management, requiring careful consideration by specialists. Whether the brokerage firm possesses deep knowledge of tax matters can also be an important selection criterion.
- Capital Gains Tax: If the seller is a sole proprietor or an equity holder in a medical corporation with equity interests, capital gains tax will be incurred. The amount of this tax varies depending on the M&A structure, necessitating the development of an optimal structure in collaboration with a tax accountant. Brokerage firms are expected to provide advice considering such tax implications.
- Regional Medical Plans: Regional medical plans being promoted in various areas encourage the reorganization and functional conversion of medical institutions in the future. The positioning of the target medical institution within this plan and its potential impact on future management can also influence valuation and the feasibility of M&A.
Points and Precautions for Reducing Medical M&A Brokerage Fees
Since medical M&A brokerage fees tend to be high, a strategic approach is important to appropriately reduce costs while receiving high-quality services.
- 1.
Obtain Quotes from Multiple Brokerage Firms
M&A brokerage firms differ significantly in their service content, fee structures, Lehman formula base (transfer price or total asset transfer), and minimum fees. By obtaining proposals from multiple firms and comparing them, you can find the optimal conditions for your specific deal. At this stage, it is important to evaluate not only the low fees but also the firm’s track record in medical M&A, expertise, and the reliability of the assigned representative.
- 2.
Thoroughly Scrutinize the Contract Terms
The brokerage agreement is a legally binding and important document. Carefully review the success fee calculation criteria, minimum fee amount, presence of retainer/intermediate fees, scope of services (DD support, specialist referrals, etc.), duration of exclusive contract, and termination conditions in detail. If anything is unclear, be sure to ask the brokerage firm questions and seek explanations until you are satisfied. Consider having a lawyer review the contract if necessary.
- 3.
Choose Specialists Focused on Medical M&A
Medical M&A requires specialized knowledge (medical law, physician law, pharmaceutical and medical device regulations, medical fee systems, regional medical plans, etc.) that differs from general business succession. By selecting a brokerage firm with in-depth knowledge and a proven track record in these areas, you can expect smoother negotiations, appropriate valuations, and avoidance of legal/tax risks. Ultimately, this leads to an increased probability of M&A success and a reduced risk of unforeseen troubles or additional costs.
- 4.
Ensure Smooth Information Provision by Both Seller and Buyer
In the M&A process, providing necessary information (financial statements, business plans, licensing information, etc.) promptly and accurately directly contributes to the efficiency of brokerage services. Delays or inaccuracies in information provision can lead to prolonged or repeated due diligence, stalled negotiations, and consequently, time costs and additional expenses. A cooperative relationship between both parties is essential for a smooth M&A.
By considering these points, you can optimize medical M&A brokerage fees and achieve a cost-effective M&A.
Due to its complexity, medical M&A requires specialized knowledge and experience. Understanding the general market rates and identifying the most suitable fee structure for your specific deal is key to success. At M&A Medical, our advisors, who possess extensive experience and specialized knowledge in the healthcare industry, provide free consultations to address your questions and concerns, offering meticulous support from the planning to the execution of your optimal M&A strategy. Please feel free to contact us.
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 everything from the transfer of clinics and medical corporations struggling with successor shortages to strategic acquisitions on a success-fee basis.
- Initial Consultation & Preliminary Assessment: Free
- Retainer Fee & Monthly Fees: 0 yen (Success Fee Only)
- Strict Confidentiality (Proceeds after NDA signing)
- Service available nationwide (all 47 prefectures) and for all medical specialties
Whether you “just want to know the market rate,” “have no successor,” or “are considering joining a group,” please consult us early in your consideration phase.