For healthcare organization executives seeking to understand the market rates, calculation methods, and breakdown of brokerage fees for medical M&A. Medical M&A brokerage fees are generally set at a few percent of the transaction value and are typically calculated using the Lehman formula. However, the proportion of fees for consultation, retainer, and success fees can vary significantly depending on the brokerage firm and the M&A structure. This article clearly explains the estimated brokerage fees in medical M&A, provides specific calculation examples using the Lehman formula, and details the cost burden for both the seller and the buyer. We recommend this information for those considering M&A.
What are the Market Rates for Medical M&A Brokerage Fees?
Medical M&A brokerage fees primarily consist of a success fee upon transaction completion. While many brokerage firms offer free consultation or retainer services, some do charge for these. The success fee rate typically varies with the transaction value, generally ranging from approximately 5% to 10% of the transaction value. However, this is just a general guideline, and the actual rate can fluctuate significantly based on the complexity of the M&A, the scope of services provided, and the brokerage firm’s policies.
[Important] Estimated Medical M&A Brokerage Fees
Success Fee: 5% to 10% of transaction value (rate tends to decrease as transaction value increases)
Consultation Fee/Retainer: Often free, but sometimes charged
*The above are general estimates and vary depending on the specific M&A deal conditions and brokerage firm.
Medical M&A Brokerage Fee Calculation Method: What is the Lehman Formula?
The most common method for calculating success fees in medical M&A is the “Lehman formula”. The Lehman formula is a tiered calculation method where the fee rate is applied progressively based on the M&A transaction value (enterprise value). It is designed so that the fee rate decreases as the transaction value increases, ensuring fairness by applying relatively higher rates for smaller M&A deals and lower rates for larger ones.
Below is a general rate table and calculation example for the Lehman formula.
| Transaction Value (Enterprise Value) | Fee Rate | Calculated Amount |
|---|---|---|
| Up to 200 million yen | 5% | Transaction Value × 5% |
| Over 200 million yen to 1 billion yen | 4% + 2 million yen | (Transaction Value – 200 million yen) × 4% + 2 million yen |
| Over 1 billion yen to 5 billion yen | 3% + 12 million yen | (Transaction Value – 1 billion yen) × 3% + 12 million yen |
| Over 5 billion yen | 2% + 62 million yen | (Transaction Value – 5 billion yen) × 2% + 62 million yen |
[Lehman Formula Calculation Example]
If the enterprise value of the medical institution to be transferred is 800 million yen, the brokerage fee using the Lehman formula would be calculated as follows:
(800 million yen – 1 billion yen) × 3% + 12 million yen
= (800 million yen × 3%) + 12 million yen
= 24 million yen + 12 million yen
= 36 million yen
In this example, the brokerage fee is 36 million yen. However, this is a calculation based on general rates, and the actual rates and calculation methods vary by brokerage firm. It is crucial to confirm the details before signing a contract.
Breakdown and Timing of Medical M&A Brokerage Fees
Medical M&A brokerage fees typically consist of the following three components:
- Consultation Fee/Retainer: Fees incurred for M&A consultations, initial investigations, and advice. Many brokerage firms offer this for free, but it may be charged for highly specialized cases or those with a strong consulting element.
- Interim Fee: Fees incurred when the M&A negotiations reach a certain stage (e.g., signing of a Letter of Intent). This may be part of the success fee or set separately. Many companies do not charge this, but it may be billed according to the progress of the deal.
- Success Fee: Fees incurred when the M&A transaction is finally concluded (contract signed). This is the largest fee, calculated using methods like the Lehman formula explained above.
The timing of these fees depends on the brokerage firm’s contract terms. Consultation and retainer fees are generally paid at the beginning of the contract, interim fees at negotiation milestones, and success fees after the transaction is completed.
[Important] Fee Timing and Precautions
– Consultation Fee/Retainer: Free for many firms, but confirm before contracting.
– Interim Fee: May be incurred based on deal progress. Many firms include this in the total success fee.
– Success Fee: Incurred upon transaction completion. Lehman formula is common, but rates vary by firm.
Who Bears the Medical M&A Brokerage Fees? Differences Between Seller and Buyer
Regarding the burden of medical M&A brokerage fees, it is generally customary for both parties to the M&A to enter into separate contracts with the brokerage firm and bear their respective costs. This means both the seller and the buyer pay brokerage fees.
However, depending on the brokerage contract, the following scenarios may occur:
- Contract where only one party bears the fee: In very rare cases, only one party may contract with the brokerage firm and bear the entire brokerage fee.
- Negotiating the fee sharing ratio: Some brokerage firms may allow for flexible arrangements in the fee sharing ratio between the seller and the buyer, considering the M&A structure and the parties’ intentions.
In many cases, brokerage firms will request fees from both parties, such as “Success fee: Seller pays XX%, Buyer pays XX%”. For example, a contract where the seller pays 5% of the transaction value and the buyer pays 5% (total 10%). However, this sharing ratio also varies depending on the brokerage firm and the M&A conditions.
[Seller and Buyer Fee Burden]
| Party | Typical Fee Burden | Notes |
|---|---|---|
| Seller | Portion of success fee (e.g., XX% of transaction value) | Objective is to receive consideration for the M&A. Fee burden is negotiable. |
| Buyer | Portion of success fee (e.g., XX% of transaction value) | Objective is business expansion or new market entry. Fee burden is negotiable. |
Regardless of which party you are, when entering into a contract with an M&A brokerage firm, it is extremely important to receive a thorough explanation of the fee amount, rate, calculation method, payment timing, and burden sharing ratio in advance, and to proceed with the contract only after you are satisfied.
Costs Other Than Brokerage Fees for Medical M&A
In addition to M&A brokerage fees, there may be other costs incurred during the M&A process. These are often billed as actual expenses, separate from the brokerage fees.
- Due Diligence (DD) Costs: Fees paid to specialists (accountants, tax advisors, lawyers, etc.) by the buyer when conducting detailed investigations (due diligence) into the financial, legal, and medical aspects of the target medical institution. Typically borne by the buyer.
- Professional Fees: Fees for engaging specialists such as lawyers, certified public accountants, and tax advisors for M&A structure design, contract drafting, and tax/legal advice. In principle, borne by the party who engages them.
- Miscellaneous Expenses such as Stamp Duty: Actual expenses such as stamp duty for contracts, registration-related fees, and travel expenses.
These costs can vary significantly depending on the size and complexity of the M&A. When contracting with a brokerage firm, it is wise to confirm not only the brokerage fees but also these associated costs in advance to understand the total expected expenses.
FAQ Regarding Medical M&A Brokerage Fees
Q. Should I choose a brokerage firm with free consultation and retainer fees?
A. Many medical M&A brokerage firms offer free initial consultations and retainer services. This is to make it easier for executives considering M&A to consult without hesitation. However, free services do not necessarily guarantee high-quality service. What’s important is not just the fee structure, but also the brokerage firm’s expertise, track record, compatibility with the assigned representative, and the ultimate probability of M&A success. The fee structure should be considered as part of the overall contract terms.
Q. Are there any fee calculation methods other than the Lehman formula?
A. While the Lehman formula is the most common, some brokerage firms may use a “fixed rate formula” that applies a constant rate regardless of the transaction value, or an “individual quotation method” that is set individually based on the difficulty of the M&A and the scope of services. Be sure to confirm which calculation method is used and its details before signing a contract.
Q. What happens to the fees paid if the M&A is not successful?
A. Success fees are generally only incurred if the M&A transaction is successfully completed. Regarding fees paid before the transaction completion, such as consultation fees, retainer fees, and interim fees, it depends on the contract terms. In most cases, these fees are non-refundable regardless of whether the transaction is successful or not, although some contracts may have refund provisions. Before signing the contract, be sure to confirm the details regarding the handling of fees in the event the M&A is unsuccessful.
Medical M&A is a process that requires specialized knowledge and experience. Brokerage fees are an important consideration for a successful M&A. Using the information explained in this article as a reference, please conduct thorough preliminary research and confirmation to select a reliable brokerage firm and proceed with the M&A under satisfactory terms.
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