The “transfer of membership equity” in medical corporation M&A is a crucial process that cannot be avoided when selling or succeeding a medical corporation with equity. In particular, for professionals such as tax accountants, certified public accountants, and chairpersons of medical corporations, as well as management, a deep understanding of practical aspects like accurate valuation methods for membership equity, taxation associated with the transfer, and procedures for member changes at the general meeting of members is essential for the smooth realization of M&A. This article explains these complex issues in an easy-to-understand manner, directly addressing the search intent of our readers.
What is the Valuation of Membership Equity? Market Price and Calculation Methods
In M&A of medical corporations with equity, the most significant interest is likely the “valuation of membership equity,” in other words, the M&A “market price.” However, there is no clear market price for the membership equity of medical corporations, and its valuation varies greatly depending on the individual circumstances. Generally, the valuation of membership equity is calculated by comprehensively considering the following factors.
Key Factors in Membership Equity Valuation:
- Net Asset Value: The so-called dissolution value, which is the corporation’s assets minus its liabilities.
- Profitability: The corporation’s profitability over the past few years and future earnings projections.
- Business Continuity: Brand strength as a medical institution, location, treatment record, patient numbers, employee retention rate, etc.
- Transaction Examples of Similar Corporations: Referencing publicly available M&A cases to gauge the valuation of similar medical corporations.
Based on these factors, tax valuations (Inheritance Tax Act, Corporate Tax Act) and practical M&A valuations (applying methods like DCF method, comparable company analysis) are used. While net asset value tends to be emphasized, if profitability and business continuity are high, a valuation that takes these into account can be expected. For example, even for a medical corporation with a net asset value of 100 million yen, if its stable earnings and future prospects are highly valued, it is not uncommon for the valuation to be 150 million to 200 million yen or more. However, this is just an example, and a more detailed valuation will be conducted through individual due diligence.
Trends in Membership Equity Valuation by Size and Region
The valuation of membership equity also tends to differ depending on the size of the medical corporation (number of beds, number of employees, sales, etc.) and its location. Please note that the following are general trends and may differ significantly in individual cases.
| Size | Estimated Net Asset Value | Valuation Trend Considering Profitability and Business Continuity |
|---|---|---|
| Small (e.g., fewer than 20 beds, fewer than 30 employees) | Tens of millions to approx. 100 million yen | Similar to net asset value, or slightly higher |
| Medium (e.g., fewer than 50 beds, fewer than 100 employees) | Approx. 100 million to several hundred million yen | Approx. 1.2 to 1.5 times the net asset value |
| Large (e.g., 100+ beds, 200+ employees) | Several hundred million to billions of yen or more | 1.5 to 2 times the net asset value, or more |
Regional Trends: In urban areas, valuations tend to be higher than in rural areas due to rising real estate values and high medical demand. Particularly in areas with good transportation access and low competition, high business continuity is valued, and M&A on more favorable terms can be expected.
Taxes on Capital Gains: Calculation of Capital Gains Tax and Tax Saving Measures
The transfer of membership equity results in income tax (or corporate tax) for the individual (or corporation) who transferred it. The membership equity of a medical corporation with equity is generally treated as “deemed capital gains,” and income tax is levied on the capital gains. This income tax is calculated as capital gains and is subject to progressive taxation, meaning the tax burden is by no means small.
Formula for Calculating Capital Gains:
Capital Gains = Transfer Value – (Acquisition Cost + Transfer Expenses)
The “transfer value” here is the consideration for the transfer of membership equity agreed upon in the M&A contract. “Acquisition cost” is the value at which the membership equity was acquired; if unknown, 5% of the transfer value can be deemed the acquisition cost. “Transfer expenses” include M&A brokerage fees, legal fees, and tax accountant fees.
Tax Saving Measures for Capital Gains Tax:
- Utilizing Long-Term Capital Gains: If the holding period of the membership equity is over 5 years, the capital gains tax rate is reduced (15% income tax, 5% resident tax, plus special reconstruction income tax).
- Accumulating Acquisition Costs: By providing evidence such as records of past equity contributions or valuations at the time of past gifts or inheritances, accurately calculate the acquisition cost to reduce capital gains.
- Utilizing the Business Succession Tax System: If certain requirements are met, the application of the business succession tax system for small and medium-sized enterprises (tax deferral on gift and inheritance tax related to shares, etc.) may be considered. However, there are complex requirements for applying this to the membership equity of medical corporations, necessitating close collaboration with experts.
- Transfer by Corporation: If a corporation holds the membership equity, corporate tax will be levied. Since the corporate tax rate may be lower than the income tax rate, tax savings may be expected.
Procedures at the General Meeting of Members: Process for Member Changes and Officer Changes
In the M&A of a medical corporation, especially when the transfer of equity is completed, legal procedures such as approval at the “General Meeting of Members” and the accompanying “change of members (equity holders)” and “change of officers (directors and auditors)” are necessary. This is a very important process given the nature of medical corporations as non-profit associations.
Flow of Procedures at the General Meeting of Members:
- Convening the General Meeting of Members: Convene the general meeting of members based on the provisions of the articles of incorporation.
- Deliberation of Agenda Items: Submit and deliberate/resolve agenda items related to the transfer of membership equity (change of members). The details of the transfer agreement, transfer price, and transferee will be explained.
- Resolution for Change of Members: Pass a resolution to approve the admission of new members (equity holders) and the retirement of existing members (transferors).
- Resolution for Officer Changes: If necessary, pass a resolution to change officers such as the chairperson, directors, and auditors.
- Preparation of Minutes: Prepare minutes that accurately record the resolutions of the general meeting of members.
Registration of Officer Changes: If officer changes are resolved at the general meeting of members, an application for registration of officer changes must be filed with the Legal Affairs Bureau. This typically needs to be done within two weeks of the general meeting of members.
Points to Note:
- Confirmation of Articles of Incorporation: Always confirm the provisions stipulated in the medical corporation’s articles of incorporation regarding the procedures for convening the general meeting of members and the requirements for resolutions.
- Special Resolution at the General Meeting of Members: When changing members or amending the articles of incorporation, a special resolution (typically, a majority of all members present, with at least two-thirds of the voting rights in favor) may be required.
- Notification to Administrative Bodies: For changes in officers, etc., notification to the relevant public health center or regional bureau may be required.
M&A Schemes for Membership Equity Transfer
In M&A of medical corporations with equity, various schemes other than the transfer of membership equity can be considered. Each scheme has its advantages and disadvantages, and the optimal choice varies depending on the medical corporation’s situation and the objectives of the M&A.
| Scheme | Overview | Advantages | Disadvantages |
|---|---|---|---|
| Transfer of Membership Equity | Existing equity holders (members) transfer their membership equity to a buyer (individual or corporation). | – Can sometimes be transferred through relatively simple procedures. – The corporate status of the medical corporation can be maintained. |
– Capital gains tax is incurred. – Valuation of membership equity is complex. – The buyer may be limited due to regulations on the establishment and operation of medical corporations. |
| Establishment of a New Medical Corporation | The buyer establishes a new medical corporation and takes over the business of the existing medical corporation. | – High degree of freedom in taxation and organizational management. – Reduces the risk of inheriting liabilities and off-balance-sheet debt. |
– Obtaining licenses and permits can take time. – Maintaining business continuity and brand image can be challenging. |
| Business Transfer | The business (assets, liabilities, licenses, contracts, etc.) is separated from the medical corporation and transferred to a corporation established by the buyer, etc. | – The scope of the business to be succeeded can be limited. – Easier to avoid the risk of off-balance-sheet debt. |
– Licenses and permits cannot be transferred, requiring re-acquisition. – Transfer procedures for individual assets and liabilities are cumbersome. |
Key Points for a Successful Membership Equity Transfer
The transfer of membership equity is not merely a sale of assets but the succession of a highly public service like a medical institution. For success, it is important to consider the following points.
- Forming a Team of Experts: It is essential to form a team of experts well-versed in medical M&A, including tax accountants, certified public accountants, lawyers, and M&A advisors, and proceed with multifaceted advice.
- Thorough Due Diligence: Both the buyer and seller must conduct thorough due diligence covering financial, legal, tax, and operational aspects of the medical institution to identify risks and reflect them in the price and terms.
- Smooth Communication: Maintaining smooth communication with all stakeholders, including the transferor, transferee, employees, patients, and the local community, to gain their understanding and cooperation for the M&A is crucial for post-succession business continuity.
- Confirmation of Licenses and Notifications: M&A of medical corporations involves applications for licenses and notifications to administrative bodies such as public health centers and regional bureaus. It is important to confirm these procedures in advance and proceed without omissions.
- Maintaining Employee Employment: Securing and retaining employees, including doctors and nurses, is extremely important for the continuity of a medical institution. The buyer must consider concrete measures for employment retention, such as improving employee benefits and offering career path development.
The transfer of membership equity in a medical corporation is a complex process requiring specialized knowledge. We strongly recommend consulting with experts regarding the optimal approach tailored to your medical corporation’s specific situation.
We will provide a free preliminary assessment of your clinic’s membership equity value.
Frequently Asked Questions (FAQ)
Q1. Is the transfer of membership equity relevant in M&A of medical corporations without equity?
A1. In medical corporations without equity, the concept of membership equity does not exist. M&A involves the succession of the medical corporation’s operational control and business through decisions made by the chairperson, board of directors, or the general meeting of members. The procedures differ from the transfer of membership equity.
Q2. Are all employees transferred in the case of membership equity transfer?
A2. In principle, the transfer of membership equity is conducted while maintaining the corporate status of the medical corporation, so employees are transferred as they are. However, depending on the M&A terms and the buyer’s intentions, there may be a review of some contracts or personnel reassignments. It is important to discuss employee employment retention thoroughly with the buyer in advance.
Q3. How long does M&A involving the transfer of membership equity take?
A3. It varies greatly depending on the scale and complexity of the M&A, the speed of agreement among stakeholders, and the status of administrative procedures. Generally, it can take several months to half a year or more from the basic agreement to closing. In particular, due diligence and applications for licenses and permits often take time.
Q4. Are the membership equity of medical corporations subject to inheritance tax?
A4. Yes, the membership equity of medical corporations with equity is subject to inheritance tax as “deemed inherited property” under the Inheritance Tax Act. The valuation is calculated based on net asset value, profitability, etc., similar to M&A valuations. Consultation with a specialist (tax accountant) is essential for inheritance tax filing and payment.
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