📖 Approx. 8 min
An increasing number of directors and presidents are choosing medical M&A as a means to ensure the survival of their clinics and hospitals due to a lack of successors or sudden changes in the business environment. However, in medical M&A, which involves the legal structure of medical corporations, licenses, and facility standards for medical fees, the calculation basis and breakdown of brokerage fees are extremely complex. This article objectively explains the benchmark structure of success fees, the application criteria for the Lehman formula, and points to note regarding the presence of equity from a professional perspective.
Overview and Main Cost Breakdown of Brokerage Fees in Medical M&A
Medical Institutionbusiness successionBrokerage fees incurred in M&A transactions typically involve a system where various fees are incurred from the start of consideration to the closing of the deal, not just success fees. While fee structures vary by support organization, the main breakdown can be broadly categorized as follows:
- Retainer Fee:Initial fee paid upon signing the brokerage agreement (typically ¥0 to several million)
- Interim Payment:Fee paid upon signing the Letter of Intent (LOI) (equivalent to 10-20% of the success fee, or a fixed amount)
- Retainer Fee:Monthly consulting fee for dedicated support services (tens of thousands of yen per month; free for fully success-based fee structures)
- Due Diligence (DD) Costs:Investigation costs paid to external certified public accountants and lawyers (actual expenses)
- Final Success Fee:Main fee incurred upon signing the final agreement (transfer agreement) or at closing
Unlike general corporations, medical institutions require a wide range of legal procedures and prior consultations with administrative agencies depending on the nature of the establishment entity (individual clinic, medical corporation with equity, or medical corporation without equity). Therefore, even if the fee structure appears inexpensive at first glance, it is not uncommon for administrative scrivener fees for application for approval of articles of incorporation amendments and support for notifications to public health centers and regional bureaus to be billed separately. When selecting a support organization, it is crucial to carefully examine the scope of services included in the proposed fees.
Success Fee Calculation Standard "Lehman Formula" and Differences Based on Asset Basis
The most widely adopted method for calculating the success fee in medical M&A is the "Lehman Formula." This is a progressive fee system where the rate decreases in stages according to the transaction amount, but the most contentious point in practice is"What amount is multiplied by the rate to calculate the fee (base amount)?"This point.
While standard Lehman formula tables are shown below, there are primarily three types of calculation bases: "Stock/Equity Transfer Value Basis," "Total Asset Transfer Basis (Total Assets + Liabilities)," and "Enterprise Value (Equity Value + Interest-Bearing Debt) Basis."
| Transaction Amount Tiers | Standard Rate | Practical Considerations |
|---|---|---|
| Portion up to ¥500 million | 5.0% | Applicable to many clinic-sized entities. Often subject to a minimum fee (approx. 5-20 million JPY). |
| Portion between over 500 million JPY and 1 billion JPY | 4.0% | For clinics with beds and small to medium-sized hospitalsTransfer of Equity InterestTier most likely to apply |
| Portion between over 1 billion JPY and 5 billion JPY | 3.0% | Applicable to succession of acute care/rehabilitation hospitals and large medical corporations operating multiple facilities. |
| Portion between over 5 billion JPY and 10 billion JPY | 2.0% | Applicable to integration of large hospital groups or business transfers. |
| Portion exceeding ¥10 billion | 1.0% | Comprehensive restructuring deals for mega medical corporations, etc. |
*The above are general guidelines for rate levels and vary depending on the contract details and the settings of each support organization.
Medical corporations often have significant lease liabilities for high-value medical equipment and substantial loans from financial institutions related to capital investments in hospital buildings. If the calculation basis is "Total Asset Transfer (including liabilities)" rather than "Stock/Equity Transfer Value," even if the actual net proceeds (sale price) are tens of millions of yen, liabilities of several hundred million yen are added, inflating the fee base and potentially causing success fees to skyrocket into the millions of yen.
Contract Structures, Tax, and Valuation Issues Vary by Medical Corporation Type (With/Without Equity)
The structure of medical corporation succession fundamentally differs depending on whether the target corporation is a "medical corporation with equity (grandfathered medical corporation)" or a "medical corporation without equity (fund contribution type, social medical corporation, etc.)." Consequently, the basis for calculating brokerage fees and tax costs also changes significantly.
For Medical Corporations with Equity
In corporations with equity, the transfer value of the equity directly represents economic value. Generally, a separate tax of 20.315% on capital gains from stocks, etc., is applied to the individual owner. However, in medical corporations with accumulated retained earnings, the valuation of equity can become extremely high. The final consideration is negotiated, taking into account unrealized gains on real estate within the medical institution and potential reductions in share value due to the payment of retirement benefits. The basis for discussion can diverge depending on whether the brokerage firm uses "net asset value" or "adjusted book net assets" as the starting point for valuation.
For Medical Corporations Without Equity (e.g., Fund Contribution Type)
Medical corporations without equity established after the 5th revision of the Medical Care Act in 2007 have no "equity" as property rights, so a scheme of selling equity is not possible. In practice, the mainstream method involves a combination of paying retirement bonuses to executives accompanying changes in "members/executives" and the "repayment of funds" contributed in previous years. In this case, while there is room for tax benefits such as the application of retirement income deductions to executive retirement bonuses, it is essential to carefully confirm before contract signing whether the brokerage fee will be based on the "face value of retirement benefits" or the "total assessed value of the corporation's succession."
Comparative Analysis of Full Success Fee and Retainer/Upfront Fee Models
M&A brokerage firms exist in both "full success fee" models, where fees are only charged upon closing without upfront or monthly retainers, and "retainer/upfront fee" models that require initial costs and fixed advisory fees. When considering the sale or acquisition of a medical institution, it is necessary to objectively compare the incentive structures and risks of both.
| Fee Model | Advantages | Disadvantages/Points to Note |
|---|---|---|
| Full Success Fee | No fees are incurred unless a deal closes, completely suppressing initial cash outflow. The financial hurdle during the consideration phase is low. | There is a concern that the strong incentive for closing may lead to the prioritization of deals with difficult conditions (e.g., demands for bed reductions due to regional medical policies), potentially causing them to be postponed. Minimum fees tend to be set at a relatively high level. |
| Retainer/Upfront Fee Model | An exclusive dedicated representative is likely to spend ample time from the outset, organizing complex ownership structures, preparing for administrative negotiations, and facilitating meticulous matching. | In the event of a failed transaction, upfront fees and monthly retainer fees are generally non-refundable. Cumulative costs can escalate if the period to closing is prolonged. |
While smaller, non-bed facilities often prefer a success-fee-only model due to minimum success fees acting as a barrier, in complex cases involving the reorganization of long-term care beds in areas with excess capacity or coordination with specialized function hospitals, support structures that guarantee a dedicated team are sometimes selected.
Transaction Process Progress and Fee Milestone
Medical M&A transactions, due to procedures such as obtaining approval for articles of incorporation from administrative bodies, tend to have a longer closing period of six months to 1.5 years compared to stock transfers in general corporations. It is crucial for financial planning to understand the standard milestones and when payment obligations arise at each stage.
Following the execution of a Non-Disclosure Agreement (NDA), a formal agreement is established with the support institution. If the model involves an upfront fee, payment is due at this point (zero for success-fee-only models).
Following top-level meetings with potential candidates, the basic framework for the transfer price and succession conditions is agreed upon. Institutions with an interim payment system require payment of 10-20% of the success fee or a fixed amount (approximately 1-3 million JPY).
The buyer side meticulously examines financial, legal, labor, and medical functions (compliance with facility standards). In addition to brokerage fees, actual expenses for specialists (certified public accountants, social insurance labor consultants, etc.) are incurred.
After fulfilling prerequisites such as approval for articles of incorporation by the prefecture, the settlement of consideration and changes in officers/registration are carried out. The full success fee (or the remaining balance if interim payments have been made) is settled here.
One frequent source of disputes is whether the interim payment is refundable if the transaction fails due to defects discovered during due diligence or risks of reimbursement of medical fees after the LOI. The contract terms must be scrutinized in detail.
Impact of Administrative Approvals and Medical Fee Facility Standards on Brokerage and Ancillary Costs
When considering medical M&A fees, it is essential not only to account for payments to the brokerage institution but also to anticipate"ancillary costs associated with administrative and practical procedures unique to medical practice succession."Unlike general business succession, the succession of medical institutions is subject to strict administrative regulations.
- ✅ Fee for Application of Approval for Articles of Incorporation:Prefectural approval is required for changes in officers and articles of incorporation of medical corporations. Is the allocation of administrative scrivener fees (estimated: 300,000 - 1,000,000 JPY) clearly defined?
- ✅ Cost of Survey for Maintaining Medical Fee Facility Standards:Is the cost of a specialized survey included to assess the risk of losing previously met facility standards (e.g., nurse staffing, dedicated rehabilitation physicians) due to changes in management or attending physicians?
- ✅ Confirmation of Continuity of Business Tax Exemption Measures:Has a preliminary simulation by a tax accountant been conducted to ensure that the exemption/reduction measures for business tax on social medical insurance fees are correctly carried over after succession?
- ✅ Regional Medical Care Plan and Bed Utilization Feasibility:In regions targeted for bed function reorganization, are consulting fees for risk mitigation of revenue reduction due to low bed occupancy rates and procedures for designation changes included?
Proceeding without considering these factors can lead to a significant decrease in billable medical fees due to the inability to maintain facility standards post-M&A, or unexpected additional consulting fees that disrupt the final investment recovery plan. It is crucial to assess whether a team of specialists well-versed in the medical system and fee structure is providing support, rather than solely focusing on the low brokerage fees.
Brokerage fees and tax schemes in medical M&A vary greatly depending on each medical corporation's asset/liability status and approval conditions. "M&A Medical," operated by CentralMedience Co., Ltd., as an M&A support institution certified by the Small and Medium Enterprise Agency, offers free individual consultations tailored to the specific circumstances of medical institutions, covering fair valuation of equity interests, transparent fee structures based on the Lehman formula, and preliminary confirmation of administrative procedures. Directors and physicians concerned about succession costs and processes are encouraged to contact us.
For medical succession consultations, contact M&A Medical
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,Successor ShortageWe support successful transfers from clinics and medical corporations struggling with [unspecified issues] to strategic acquisitions on a success fee basis.
- Initial Consultation & Preliminary Appraisal Free
- No upfront or monthly fees (success fee only)
- Strict Confidentiality (proceeds under NDA)
- Supports all 47 prefectures and all medical specialties
Please consult us early, even if you only want to know the market price, have no successor, or are considering joining a group. We are here to help from the initial stages of consideration.