📖 Approx. 12 min
When considering M&A or business succession for medical institutions, the choice of scheme is crucial. In particular, “stock transfer” and “business transfer” are the main options, each with its own characteristics, advantages, and disadvantages. Due to the complex legal regulations and systems unique to the healthcare industry, a specialized perspective different from general M&A is essential. This article provides a detailed explanation for medical corporation chairpersons, clinic directors, and M&A personnel, covering basic knowledge of both schemes, specific issues in medical institution M&A, tax considerations, and practical application.
Basic Knowledge of Stock Transfer and Business Transfer in Medical M&A
First, understanding the basic concepts of stock transfer and business transfer is the first step in selecting an M&A scheme for medical institutions. These differ significantly in their legal frameworks, resulting in fundamental differences in the subject of transfer, procedures, taxation, and inherited risks.
Stock transfer is an M&A method where the acquirer obtains the issued shares of the target company, thereby inheriting the company’s management rights. Since the company itself continues to exist, its licenses, contracts, employees, assets, and liabilities are generally inherited as they are. In the case of medical corporations, if it is a medical corporation with equity, the management rights are effectively transferred by transferring the equity. This typically involves procedures for changing members.
On the other hand, business transfer is a method where a company (or sole proprietor) transfers part or all of its business by selecting individual assets, liabilities, and contracts. The transferring company continues to exist, and the transferred part of the business is transferred to the acquiring company. In the case of medical institutions, the key feature is that licenses for operating clinics and hospitals, facility standards, employment contracts with employees, and patient information are individually transferred, and separate procedures for inheritance and re-acquisition are required for each.
These differences are summarized in the following comparison table.
| Item | Stock Transfer | Business Transfer |
|---|---|---|
| Subject of Transfer | Issued shares of the company (equity in the case of a medical corporation) | Individual assets related to the business (medical equipment, real estate, etc.), liabilities, contracts, licenses, etc. |
| Subject of Succession | Corporate status, all rights and obligations, licenses, contracts, employees, etc. | Individual assets, liabilities, contracts, etc., as defined in the transfer agreement |
| Simplicity of Procedure | Relatively simple (stock/equity transfer agreement, member change, etc.) | Complex, requiring individual asset transfer procedures, re-acquisition of licenses, etc. |
| Continuity of Licenses | Continues in principle | Requires new acquisition (re-acquisition) in principle |
| Off-Balance Sheet Liability Risk | High risk of inheritance | Easier to avoid the risk of inheritance |
| Taxation (Transferor) | Individual: Capital gains tax (approx. 20%) Corporation: Corporate tax |
Individual: Comprehensive or separate taxation depending on the type of asset transferred Corporation: Corporate tax, consumption tax (taxable assets), real estate acquisition tax, etc. |
| Taxation (Transferee) | Carryforward of net operating losses possible if tax-qualified requirements are met | Taxes related to individual asset acquisition (consumption tax, real estate acquisition tax, etc.) |
| Advantages | Simple procedures, continuity of licenses and contracts, easy succession of medical fees | Avoidance of off-balance sheet liability risk, ability to select only necessary assets, ease of business restructuring |
| Disadvantages | Risk of inheriting off-balance sheet and contingent liabilities, potential difficulty in post-acquisition management integration | Complex and cumbersome procedures, time and cost for re-acquiring licenses, restrictions on medical fee succession |
Cases Where Stock Transfer is Applicable and Specific Issues for Medical Corporations
Stock transfer is primarily used for M&A of stock companies and medical corporations with equity. In the healthcare industry, it is an important option, especially for the succession of “medical corporations with equity.”
Transactions Equivalent to Stock Transfer in Medical Corporations with Equity
When a medical corporation is the subject of M&A, the approach to scheme selection differs significantly depending on whether it is a “medical corporation with equity” or a “medical corporation without equity (including fund-contribution type).” In the case of a medical corporation with equity, transferring its equity allows for the effective transfer of management rights for the entire corporation. This is similar in nature to the stock transfer of a stock company.
- Change of Members: The highest decision-making body of a medical corporation is the general meeting of members, and the composition of members affects management rights. With the transfer of equity, procedures for changing members (including the chairperson) are required and must be reported to the prefecture. This procedure is crucial for the operation of the medical corporation.
- Succession of Medical Fees: Since the corporation itself continues to exist, the billing codes for medical fees and facility standards are generally inherited. However, with the change of chairperson or other representatives, notification to administrative bodies (such as change of administrator) is necessary, and delays in this process can affect the billing of medical fees.
- Issue of Fund Return: In the case of a medical corporation without equity (fund-contribution type), there is no concept of stock transfer as there is no equity. Fund contributors have the right to receive the return of their funds based on the articles of incorporation, but this is limited to specific cases such as the dissolution of the corporation or amendment of the articles of incorporation. In the context of M&A, if the transferor is a fund contributor, the handling of the funds needs to be considered separately.
Impact on Regional Medical Plans and Continuity of Licenses
In a stock transfer, the corporate status continues, so the licenses for operating hospitals and clinics, various facility standards, and designations as insurance medical institutions are generally maintained. This is a significant advantage, especially for medical institutions where new establishment is difficult or where meeting specific facility standard requirements requires considerable effort and time. From the perspective of regional medical plans, the functions of existing medical institutions are maintained, making them less susceptible to new bed regulations.
Risk of Off-Balance Sheet and Contingent Liabilities
On the other hand, in a stock transfer where the entire corporation is inherited, the acquirer inherits all past rights and obligations. This includes off-balance sheet liabilities not recorded on the balance sheet and contingent liabilities that may arise in the future (e.g., risks of medical malpractice lawsuits, unpaid overtime wages, environmental liabilities). Detailed due diligence is essential to appropriately assess these risks.
Cases Where Business Transfer is Applicable and Challenges in Medical Institution Succession
Business transfer is often used for the succession of individual clinics or when specific departments or businesses within a medical corporation are carved out and transferred. While it offers high flexibility in selecting the subject of transfer individually, it is characterized by complex procedures unique to the healthcare industry.
Re-acquisition of Licenses and Facility Standards
In the case of a business transfer, the acquirer must newly apply for a license to operate a clinic or hospital as the establishment owner and obtain designation as an insurance medical institution. This is effectively considered a “new establishment” and poses the following challenges:
- Obtaining an Establishment License: It takes time from application to the public health center until the license is granted. It is particularly important to verify whether the location, structure, and equipment meet the legally stipulated standards.
- Re-application for Facility Standards: Various facility standards necessary for calculating medical fees (e.g., regional comprehensive care ward inpatient fees, home medical care management fees, etc.) must also be applied for anew and proven to meet the requirements. Facility standards previously obtained by the transferring institution are not necessarily inherited by the acquiring institution.
- Gap Period in Licenses: A gap period may occur during which medical services cannot be provided, between the cessation of business by the transferor and the new establishment by the transferee. This is a critical issue that affects not only patients but also the maintenance of employee employment.
Impact of Medical Fee Revisions and Regional Medical Plans
Since a business transfer is considered a new establishment, it is more susceptible to the impact of medical fee revisions at the time of succession. Furthermore, from the perspective of regional medical plans, consistency with the bed function reporting system and medical plans may be strictly scrutinized. In particular, for business transfers of hospitals with beds, it may be difficult to maintain the number of beds or change their function in areas where new bed establishment is restricted.
Treatment of Business Tax and Consumption Tax
In a business transfer, consumption tax may be levied on the transferred assets. While medical fees are non-taxable, the transfer of taxable assets such as medical equipment, land, buildings, and fixtures is subject to consumption tax. The transferor is obligated to pay consumption tax, and the transferee can consider applying for input tax credits. For the transferor, in addition to corporate tax or income tax on the capital gains from the individual asset transfers, there is also an obligation to pay consumption tax.
Decision Criteria for Scheme Selection from the Perspectives of Transferor and Transferee
The choice between stock transfer and business transfer depends greatly on the objectives and circumstances of both the transferor and the transferee. Here, we explain the decision criteria from each perspective.
Transferor’s Perspective
- Maximizing Founder’s Profit and Tax Burden: In a stock transfer, individual shareholders (or equity holders) have a clear net amount after paying only capital gains tax (approx. 20%). On the other hand, in a business transfer, the tax rate varies depending on the type of asset transferred, and consumption tax liability also arises, making the calculation of the net amount complex. Generally, stock transfers are preferred due to lower tax burdens and simpler procedures.
- Simplicity of Procedures: Stock transfer mainly involves contract execution and name change, making it relatively simple. Business transfer involves a wide range of procedures, including individual asset transfer, cancellation and re-acquisition of licenses, and employee transfer, requiring time and effort.
- Avoidance of Residual Risk: With a business transfer, liabilities and contractual relationships not included in the transfer remain with the transferor, limiting residual risks.
Transferee’s Perspective
- Avoidance of Off-Balance Sheet and Contingent Liability Risks: Business transfer allows for the selection and inheritance of only necessary assets and liabilities, providing a significant advantage in avoiding the risks of off-balance sheet and contingent liabilities of the transferring company. This is a crucial factor, especially in healthcare institutions where risks such as past medical malpractice and unpaid overtime wages are a concern.
- Flexibility in Selecting Business Content and Restructuring: Business transfer is suitable when the transferee desires only specific business divisions or wants to restructure the business into a form that is easily integrated with its own. Efficient business succession is possible without inheriting unnecessary assets and liabilities.
- Possibility and Timeline of Obtaining Licenses: Re-acquisition of licenses is necessary in a business transfer, making its possibility and the timeframe for M&A execution important factors. In some regions, new establishment may be difficult, which can be a bottleneck.
The process of selecting a scheme generally proceeds in the following steps:
Steps for Selecting a Medical M&A Scheme
- Clarify the objectives of the M&A and the intentions of the transferor and transferee
(e.g., For the transferor: maximizing sale price or smooth succession? For the transferee: risk avoidance or rapid business expansion?) - Confirm the corporate form of the target medical institution
(e.g., Medical corporation with equity, without equity, individual clinic, stock company?) - Identify the scope of assets, liabilities, and licenses to be succeeded
(e.g., Buildings, land, medical equipment, patient data, employees, bank loans, etc.) - Estimate the tax implications for each scheme
(Compare and consider capital gains tax, corporate tax, consumption tax, real estate acquisition tax, etc., for both transferor and transferee.) - Assess potential risks through due diligence
(Thoroughly investigate off-balance sheet liabilities, legal and labor risks, license status, etc.) - Consult with experts (M&A intermediaries, lawyers, tax accountants) and decide on the optimal scheme
(Comprehensively evaluate the advantages, disadvantages, risks, and costs of each scheme.)
Important Tax Considerations in Medical M&A
The choice of M&A scheme significantly impacts the tax burden for both the transferor and the transferee. It is important to understand the tax issues unique to medical M&A and take appropriate measures.
Tax Considerations in Medical M&A
- ✅ Capital Gains Tax (Individuals): In a stock transfer, a separate filing tax of approximately 20.315% (income tax, special reconstruction income tax, and resident tax) applies to capital gains for individuals. In a business transfer, taxation is either comprehensive or separate depending on the type of asset transferred (land, buildings, depreciable assets, etc.), making the tax rates and calculation methods complex.
- ✅ Corporate Tax (Corporations): When a corporation transfers stock or conducts a business transfer, corporate tax is levied on the capital gains. In corporate M&A, the possibility of carrying forward net operating losses is also an important issue.
- ✅ Consumption Tax: Stock transfers are generally non-taxable transactions. On the other hand, in a business transfer, the transfer of land and securities is non-taxable, but the transfer of taxable assets such as buildings, medical equipment, and fixtures is subject to consumption tax. The transferor bears the obligation to pay consumption tax, and the transferee can consider applying for input tax credits.
- ✅ Real Estate Acquisition Tax and Registration and License Tax: When land or buildings are transferred in a business transfer, the transferee is subject to real estate acquisition tax, and registration and license tax is levied for registration procedures. In a stock transfer, since the ownership of the corporation itself is transferred, these taxes do not apply.
- ✅ Business Tax: In a business transfer of a medical corporation, business tax may be levied if taxable sales exceed a certain amount. Particular attention should be paid to the transfer of revenue-generating businesses such as private practice and sales of goods conducted by medical corporations.
Since these taxes significantly affect the total cost of M&A and the net proceeds for the transferor, it is essential to collaborate with a tax accountant from the early stages of M&A to accurately estimate the tax burden for each scheme. For example, while the tax burden for the transferor tends to be simpler in a stock transfer, the transferee may have lower future depreciation expenses as the book value of acquired assets is inherited. In a business transfer, the transferee can record acquired assets at fair market value, potentially allowing for larger depreciation expenses and tax savings, but the initial tax burden will be higher. It is necessary to balance these factors and choose the optimal scheme for both parties.
Practical Approach and Expert Utilization for Successful Medical M&A
To ensure the success of medical M&A, not only the selection of the scheme but also a practical approach and the utilization of experts are indispensable. It is necessary to proceed carefully with a deep understanding of the unique circumstances of the healthcare industry.
Thorough Due Diligence Implementation
Regardless of whether it is a stock transfer or a business transfer, due diligence is one of the most critical processes. In medical M&A, in addition to financial and tax aspects, it is essential to thoroughly investigate the following items specific to medical institutions:
- Legal Due Diligence: Compliance with laws such as the Medical Care Act, Physician Act, and Pharmaceuticals and Medical Devices Act, validity of licenses, past administrative guidance and litigation risks (e.g., medical malpractice lawsuits), and confirmation of employment contracts and labor conditions (unpaid overtime wage risks).
- Medical Due Diligence: Status of designation as an insurance medical institution, compliance with facility standards, medical fee billing status (risk of assessment reduction), treatment results, consistency with regional medical plans, maintenance status of medical equipment, etc.
- Labor Due Diligence: Employment contracts for professionals such as doctors and nurses, working conditions, retirement benefit rules, presence of labor unions, etc. Securing medical personnel is crucial for stable management after M&A.
Proper Contract Drafting and Representations & Warranties/Indemnification Clauses
M&A contracts form the basis for clarifying the rights and obligations of both parties and mitigating future risks. In particular, the design of “representations and warranties” and “indemnification clauses” for risks discovered during due diligence or contingent liabilities that may arise in the future is extremely important. In medical M&A, it is necessary to specifically include risks such as claims for repayment of medical fees and the scope of responsibility for past medical malpractice.
Consideration for Stakeholders and Smooth Transition
M&A affects many stakeholders, including patients, employees, and business partners. Especially for patients, it is important to carefully explain that high-quality medical care will continue after M&A to alleviate their concerns. For employees, consideration is required to maintain motivation and prevent turnover through careful communication, such as maintaining employment conditions and presenting career paths. In the case of a business transfer, employee consent for transfer is required, which requires particular attention.
Importance of Utilizing Experts
Medical M&A is highly specialized compared to general M&A, requiring deep knowledge of legal, tax, and healthcare system matters. Collaborating with experts in each field, such as M&A intermediaries, lawyers, tax accountants, and certified public accountants, and proceeding with their appropriate advice is the shortcut to success. In particular, M&A support organizations specializing in the healthcare industry possess extensive knowledge regarding issues unique to medical corporations, administrative procedures, and consistency with regional medical plans, and can strongly support everything from optimal scheme selection to execution.
The choice between stock transfer and business transfer in medical M&A is a crucial management decision that will shape the future of your institution. We recommend consulting with experts based on the information provided in this article. At M&A Medical, our specialized team for medical institution M&A and business succession will carefully listen to your institution’s situation and intentions, and provide comprehensive support from proposing the optimal scheme to executing specific procedures. We also offer free consultations, so 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 of clinics and medical corporations facing succession issues, 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 (proceeding under NDA)
- Support for all 47 prefectures and 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.