📖 Approx. 9 min
When considering M&A or business succession for medical institutions, brokerage fees are a significant cost factor. In the M&A industry, where success fees are the prevailing model, understanding their market rates, breakdown, and specific considerations for the healthcare sector beforehand is crucial for smooth negotiations and selecting the optimal partner. This article provides an expert perspective, explaining everything from the basics of brokerage fees in medical M&A to specific calculation methods and key points for maximizing cost-effectiveness.
Basic Structure of Brokerage Fees in Medical M&A and the Principle of Success Fees
M&A brokerage fees are compensation for services provided by M&A advisors or brokerage firms. While the basic structure for medical M&A is similar to that of general corporate M&A, specific regulations and customs unique to medical corporations can have an impact. Brokerage fees are broadly categorized into: an upfront fee paid upon contract signing (‘advance fee’), intermediate fees or monthly retainers paid as the M&A progresses, and a ‘success fee’ incurred when the M&A is finally concluded.
Among these, the ‘success fee’ model is the most common and primary in medical M&A. A success fee is a cost incurred when the M&A agreement is finally signed and the transaction price is determined, with the ‘Lehman formula’ typically used for its calculation. The Lehman formula is a method where the fee rate is applied in stages based on the M&A transaction value (transaction price). The success fee model incentivizes the brokerage firm to make maximum efforts towards the M&A’s completion and offers the client the advantage of not incurring high costs unless the M&A is successful. However, the specific fee rates and the scope of the ‘transaction price’ used for calculation vary depending on the brokerage firm, the scale of the M&A, and its complexity, making prior confirmation essential.
Understanding the ‘Market Rate’ of Success Fees: Applying the Lehman Formula and Characteristics of Medical M&A
The market rate for success fees in medical M&A is generally calculated based on the Lehman formula. A characteristic of the Lehman formula is that the fee rate gradually decreases as the transaction value increases. The calculation of the transaction price comprehensively considers factors such as the net assets, liabilities, real estate, medical equipment, as well as the value of the service area and future profitability of the medical institution. For medical facilities, in particular, the impact of revisions to medical fee schedules, compliance with facility standards, and the possibility of transferring licenses and permits also influence the valuation.
The following table shows general guidelines for Lehman formula fee rates. Please note that this is just an example, and rates may vary depending on the brokerage firm, the complexity of the M&A, and the transaction value. It is also common to have a minimum success fee, which should be confirmed.
| Transaction Value (Transaction Price) | General Fee Rate Guideline |
|---|---|
| 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% |
As an example calculation using the above rates, if the transaction price is 700 million yen, 5% (25 million yen) would apply to the first 500 million yen, and 4% (8 million yen) would apply to the remaining 200 million yen, resulting in an estimated success fee of 33 million yen. However, medical M&A can involve various structures, such as the succession of medical corporations with equity interests, changes in membership and fund repayment for fund-contribution-type medical corporations, or business transfers including MS corporations (Medical Service Corporations). Each of these can have complex components and valuation methods for the transaction price. These healthcare-specific issues can affect the final success fee amount, making the selection of a brokerage firm with specialized expertise crucial.
Fees Other Than Success Fees: Considerations for Advance Fees, Intermediate Fees, and Monthly Retainers
While success fees are the main component of M&A brokerage fees, ‘advance fees,’ ‘intermediate fees,’ and ‘monthly retainers’ may also be incurred. These fees are set to cover the brokerage firm’s initial expenses and ongoing consulting costs during the M&A process.
- Advance Fee: This is an initial fee paid upon signing the M&A brokerage agreement. It is generally non-refundable even if the M&A is unsuccessful. Some brokerage firms offer free advance fees, but in such cases, the success fee rate might be set higher, or the minimum success fee might be higher than with other firms.
- Intermediate Fee: This fee is incurred at specific stages of the M&A process, such as upon signing a basic agreement (MOU). It is often considered part of the success fee and deducted from the final success fee, although this depends on the contract terms.
- Monthly Retainer: This is a fixed monthly fee paid when the M&A process is expected to be lengthy, for particularly complex cases, or when ongoing strategic advice is provided. Like advance fees, it is generally non-refundable even if the M&A is unsuccessful.
The existence and amount of these fees other than success fees vary significantly among brokerage firms. It is important for clients to clearly confirm the conditions under which these fees are incurred and their relationship with the success fee before signing a contract. Medical corporation M&A, in particular, tends to involve more complex legal, tax, and administrative procedures than typical business succession, and due diligence requires specialized knowledge. Therefore, it is essential to carefully assess whether these fees are commensurate with the quality of services provided.
Fee Evaluation and Points to Note by Medical Corporation Type
The valuation methods and legal/tax treatments for M&A of medical institutions vary significantly depending on their corporate structure. This also affects the ‘transaction price,’ which serves as the basis for calculating brokerage fees, making it important to understand these differences beforehand.
Corporate Structure in Medical M&A and Impact on Fees
Medical Corporation with Equity Interests:
Equity interests have financial value, making their transfer a major part of the transaction price. As equity interests are transferred concurrently with changes in membership, valuation is relatively straightforward, but attention must be paid to capital gains tax and gift tax implications.
Medical Corporation without Equity Interests / Fund-Contribution-Type Medical Corporation:
Since there are no equity interests, the transaction price is primarily valued based on business assets, goodwill, or the waiver of claims for fund repayment. As the main change involves membership (e.g., the representative director), valuation of the service area and the fund repayment scheme (for fund-contribution-type corporations) can be complex. The scope of the ‘transaction price’ for fee calculation must be clearly defined.
M&A Including MS Corporations (Medical Service Corporations):
M&A involving MS corporations that collaborate with medical corporations are often valued separately from the main medical corporation’s business or stock transfer, adding complexity to the overall M&A picture. The assets and profitability of the MS corporation are also factored into the transaction price, and brokerage fees are calculated based on the total amount.
Business Transfer vs. Stock/Equity Transfer:
In a business transfer, individual assets and liabilities are transferred, which can make valuation and procedures cumbersome. In a stock or equity transfer, the corporate entity is inherited as is, simplifying procedures, but the valuation of the shares or equity interests being transferred is crucial. The method of calculating capital gains tax also differs.
These specific issues related to medical corporations not only affect the amount of the transaction price but also increase the complexity of the entire M&A process, including the scope of due diligence, contract drafting, and the procedures for transferring licenses and permits. Consequently, the scope and workload of the services provided by the brokerage firm may increase, which could be reflected in the fee structure. Furthermore, with the advancement of regional healthcare plans, M&A of medical institutions in certain regions or specialties may strongly reflect the intentions of administrative bodies, requiring more specialized negotiations.
Key Points for Selecting a Brokerage Firm to Maximize Cost-Effectiveness
To ensure a successful medical M&A and maximize the cost-effectiveness of brokerage fees, selecting the right brokerage firm is extremely important. Use the following points as a guide to find the best partner for your institution.
-
Specialization and Track Record in the Healthcare Industry: Medical M&A involves unique regulations and customs different from general corporate M&A. It is essential to choose a brokerage firm with expertise in the healthcare industry, including knowledge of medical corporation structures, medical fee systems, facility standards, licenses, and regional healthcare plans. Review their past medical M&A track record specifically and check if they have experience with transactions similar in scale and specialty to yours.
-
Transparency of Fee Structure: Confirm that the advance fees, intermediate fees, monthly retainers, and success fees are clearly presented with their respective conditions and amounts. Specifically, ask for a detailed explanation of the scope of the ‘transaction price’ used for success fee calculation (what is included, such as net assets, liabilities, real estate, goodwill, etc.). Do not hesitate to ask questions until you are satisfied with the answers.
-
Scope and Quality of Support: Clarify the specific support provided by the brokerage firm throughout the M&A process. Understand the extent of their assistance, from initial consultations, target identification, negotiation, due diligence support, contract drafting, to post-closing follow-up. Their collaboration with tax and legal experts is also important.
-
Rapport with the Assigned Representative: M&A is a long-term process, and a trusting relationship with the assigned representative is essential. Beyond specialized knowledge, ease of communication and their ability to accurately understand your intentions are also important selection criteria.
-
Comparison with Multiple Brokerage Firms: It is advisable not to limit yourself to one firm but to receive proposals from several companies and compare their fee structures, track records, and support services. This will help you understand market rates and potentially negotiate more favorable terms.
By carefully selecting a brokerage firm based on these points, you can minimize unnecessary costs and increase the probability of a successful M&A.
Consumption Tax and Tax Considerations in Medical M&A
Consumption tax is levied on brokerage fees for medical M&A, as brokerage services are considered ‘provision of services.’ Therefore, you must factor in that consumption tax will be added to the quoted fee. For example, if the success fee is 33 million yen, adding 10% consumption tax would result in a total of 36.3 million yen.
Furthermore, there are numerous tax considerations for the M&A as a whole. For the seller, the type of tax incurred and its rate will differ depending on the nature of the transaction price (business assets, goodwill, equity interests, etc.). For instance, if an individual clinic owner transfers their business, capital gains tax is typically imposed. Transferring equity interests in a medical corporation also falls under capital gains tax, but complex judgments may be required depending on the valuation method and past tax treatments. For the buyer, the valuation and depreciation of acquired assets, or the accounting treatment of goodwill, are important. In medical M&A, the tax treatment of the medical corporation’s business tax, as well as real estate acquisition tax and registration license tax, must also be considered. These tax treatments can significantly impact post-M&A management, making it essential to conduct detailed simulations in advance in collaboration with experts such as tax accountants, not just the brokerage firm. In particular, external environmental changes such as medical fee schedule revisions and regional healthcare plans can affect future profitability and asset values, necessitating tax strategies that incorporate these factors.
Considering medical M&A is a process that requires extensive specialized knowledge and careful judgment. Success hinges on a comprehensive perspective, starting from understanding brokerage fees, navigating the complex issues unique to the healthcare industry, and considering tax implications. M&A Medical offers free consultations for medical M&A and business succession. Our experienced professionals will support you in developing the optimal M&A strategy tailored to your institution’s situation, so please feel free to contact us.
Consultations on Medical Succession with M&A Medical
M&A Medical is a specialized M&A and business succession support service for medical institutions. As a certified M&A support institution by the Small and Medium Enterprise Agency, we support the succession of clinics and medical corporations facing successor shortages, as well as strategic acquisitions, on a success fee basis.
- Initial consultation and preliminary assessment are free
- No advance fees or monthly charges (success fee only)
- Strict confidentiality (proceeds under NDA)
- Services available nationwide across all 47 prefectures and all medical specialties
Whether you just want to know the market rates, have no successor, or are considering joining a group, please consult us early in your consideration process.