📖 Approx. 8 min
For clinic directors struggling with a successor shortage, the choice between “closure” and “medical institution succession (M&A)” will likely be the final major decision of their careers. This decision significantly impacts not only the director’s own retirement plans but also the employment of long-serving staff and, most importantly, the future of patients who have relied on the practice for their healthcare. It is essential to calmly consider the merits and demerits of both options from an economic perspective, not just an emotional one. This article will provide a detailed explanation of the economics of closure and succession, taking into account the unique legal and tax issues specific to the medical industry.
Economic Impact and Process of Choosing Closure
Closing a clinic involves more than just shutting the doors; it incurs various economic burdens. These costs can often be higher than anticipated.
- Restoration Costs: For leased properties, expenses are incurred to restore the interior, medical gas piping, and electrical systems to their original condition. The removal of specialized medical equipment often requires professional services and tends to be more expensive than for general offices.
- Medical Waste Disposal Costs: Medical waste is classified as specially controlled industrial waste and must be disposed of by specialized contractors under strict legal regulations. Upon closure, costs are incurred for the proper disposal of remaining pharmaceuticals, medical supplies, and infectious waste.
- Employee-Related Costs: If employees are terminated, severance pay and retirement benefits must be paid in accordance with labor laws. It is also necessary to settle unused paid leave and any unpaid wages. Consideration for long-serving staff is important not only economically but also emotionally.
- Settlement of Lease Agreements and Loans: If there are outstanding lease agreements for medical equipment or loans for operating funds and equipment investment, lump-sum repayments or penalties for contract termination may be required at the time of closure.
- Tax and Legal Fees: Fees for tax accountants and judicial scriveners are required for final tax returns, corporate dissolution registrations, and liquidation procedures.
On the other hand, there is a possibility of generating income by selling remaining medical equipment, supplies, and owned real estate. However, medical equipment has limited versatility, and its value in the used market tends to depreciate significantly over time. Since capital gains from sales are subject to capital gains tax, it is crucial to accurately estimate the net proceeds. It should be recognized that closure is a choice that carries not only economic burdens but also a social responsibility for creating a void in regional healthcare and significantly impacting the lives of patients and employees.
Economic Benefits and Considerations of Medical Institution Succession (M&A)
Medical institution succession, or M&A, in contrast to closure, offers the option of receiving economic consideration by transferring the business to a third party. A key feature is that the entire business is evaluated, going beyond a mere sale of assets.
- Acquisition of Business Transfer Consideration: The patient base within the service area, regional brand, medical equipment, facilities, employees, and the director’s accumulated clinical expertise and management track record can be evaluated as “goodwill” and added to the transfer consideration. This is a value that cannot be obtained through closure.
- Maintenance of Employee Employment: It is common for the successor to continue employing existing staff. This significantly reduces employment adjustment costs such as severance pay and protects the livelihoods of staff who have shared many years of challenges and successes.
- Continuity of Patient Care: The ability for patients to continue receiving care in a familiar setting without needing to transfer to another clinic is a significant benefit from the perspective of contributing to regional healthcare.
- Tax Incentives: For the transfer of individual clinics, certain deductions related to capital gains from the sale of business assets may apply (e.g., a special deduction of 8 million yen for capital gains from the sale of real estate and machinery). For medical corporation M&A, tax treatment differs depending on whether it is a transfer of equity or a business transfer, but selecting the appropriate scheme can potentially reduce the tax burden.
While the economic benefits of succession are diverse, it is also true that it requires a certain amount of effort and time, including negotiating terms with the successor and cooperating with due diligence. Furthermore, the transfer consideration can vary significantly depending on the market and the clinic’s condition, making an objective valuation by experts indispensable.
Tax and Legal Issues in Succession Based on Medical Institution Type
In the succession of medical institutions, the procedures and tax treatment vary significantly depending on the type of corporation.
- Medical Corporation with Equity (Shareholder Type): Common in older medical corporations. In this structure, management control is transferred by selling equity. The transfer consideration is the market value of the equity, and the transferor is subject to capital gains tax. Approval from the general meeting of members and procedures for changing the representative director and officers are required.
- Medical Corporation without Equity (Fund Contribution Type): Most medical corporations established today fall into this category. Since there is no equity, there is no exchange of consideration through equity transfer. In the case of the fund contribution type, it is possible to return the fund, but generally, the contribution amount is the upper limit, and no further consideration can be paid. Succession is typically carried out through a change in representative director or a business transfer (transfer of the clinic’s business assets from one corporation to another).
- Individual Clinic: For individual practitioners who have not incorporated, the business assets such as the right to practice, medical equipment, and real estate are transferred individually. Capital gains tax is levied on the transfer profit.
The treatment of business tax is also important. For individual businesses, a business transfer is generally considered a capital gain and is not subject to business tax. On the other hand, in medical corporation M&A, it is subject to corporate tax and corporate business tax, so the tax burden can change significantly depending on the chosen scheme. Close collaboration with M&A specialists and tax accountants is indispensable for these complex tax and legal issues.
Continued Medical Practice and Contribution to Regional Healthcare Vision After Succession
The succession of a medical institution is not merely a transfer of management rights but holds significant meaning directly related to the maintenance and development of the regional healthcare system. Several key factors are involved in ensuring smooth continuity of medical practice after succession.
- Compliance with Medical Fee Revisions and Facility Standards: Medical institutions must adapt to periodic medical fee revisions and maintain or acquire appropriate facility standards. Whether the successor can continuously meet these requirements and aim for higher medical fees with a new medical system significantly impacts post-succession management stability.
- Transfer and Acquisition of Licenses: Numerous licenses are required, including permits for establishing medical institutions, designation as insurance medical institutions, and various specialized medical institution designations. Succession necessitates procedures for transferring or acquiring these licenses, making the support of specialists familiar with administrative procedures essential.
- Alignment with Regional Healthcare Vision: The national regional healthcare vision promotes the differentiation and collaboration of medical functions, looking ahead to future healthcare demand and supply. The extent to which succession can maintain or strengthen regional medical resources and contribute to a healthcare provision system aligned with the vision can be an important factor in selecting a successor.
When selecting a successor, choosing a party that understands and respects the director’s established medical philosophy and practice approach, not just the economic terms, leads to the best outcome for patients and employees. It is crucial to assess whether the new director can continue and develop community-based healthcare.
Specific Steps for Considering Closure or Succession
Regardless of whether you choose closure or succession, it is important to proceed with the process in a planned and phased manner. Succession, in particular, requires specialized knowledge and experience.
- Analyze Current Situation and Clarify Issues: First, concretely identify your clinic’s financial status, patient numbers, employee composition, assets (medical equipment, real estate, etc.), and your own future plans. Clarifying strengths, weaknesses, and potential challenges for succession forms the foundation for the next steps.
- Consult with M&A Specialists: Medical institution M&A involves many unique circumstances different from general corporations. Consulting with specialists such as intermediaries, tax accountants, and lawyers specializing in medical M&A at an early stage to obtain advice from multiple perspectives is key to success.
- Business Valuation (Due Diligence): In the case of succession, an objective business valuation by specialists will be conducted. This involves a detailed investigation of the clinic’s profitability, asset status, risks, etc., and forms the basis for the transfer consideration. Understanding the gap between the desired selling price and market value is also important.
- Search for and Select Succession Candidates: Through specialists, search for succession candidates who align with your clinic’s philosophy and practice approach. It is important to build a relationship of trust by aligning management policies and future prospects through meetings with candidates.
- Negotiate Terms and Basic Agreement: Negotiate specific terms such as transfer consideration, employment conditions, and handover period. If an agreement is reached, a basic agreement will be signed, and preparations for the full final contract will begin.
- Finalize Contract and Handover: After final legal and tax reviews, the final transfer agreement will be signed. Subsequently, proceed with a smooth handover process, including explanations to patients and employees, various notifications to administrative bodies, and the transfer of medical information.
A Path to the “Optimal Choice” with Specialists
When faced with the issue of a successor shortage, the choice between closure and succession requires a very complex and specialized judgment. Medical industry M&A, in particular, involves a wide range of legal regulations such as the Medical Care Act, the Medical Practitioners Act, and tax laws, requiring specialized knowledge different from general corporate M&A.
Specialized medical M&A organizations like M&A Medical accurately assess the current situation of your clinic and formulate the optimal succession strategy. For example, they provide comprehensive support including proposing appropriate schemes tailored to the type of medical institution (with or without equity, or individual clinic), maximizing transfer consideration, and considering measures to mitigate tax risks. They also play a crucial role in managing information leakage risks and mediating smooth negotiations with potential successors.
To make decisions based on economic rationality and future prospects from an objective perspective, rather than being swayed by emotional judgments, the presence of trusted specialists is indispensable. To protect your valuable clinic and the future of your patients and employees, we strongly recommend consulting with a specialist first.
M&A Medical offers free consultations regarding medical institution succession. We will help you consider the best options tailored to your situation and take the first concrete step. 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 the success of transfers for 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 after NDA signing)
- Services available nationwide in all 47 prefectures and for all medical specialties
Please consult us early, even if you only want to know the market value, have no successor, or are considering joining a group. We are here to help.