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More and more small and midsize enterprises (SMEs) have gone out of business due to a severe shortage of successors. The loss of technological expertise and jobs this situation entails is a major blow to the Japanese economy.
An environment needs to be created that allows such companies to agree with peace of mind to a merger or acquisition, which are effective ways to pass on a business.
The Economy, Trade and Industry Ministry has for the first time instructed 15 agents that facilitated inappropriate M&As to take measures to prevent such incidents in the future. M&As that harm small and midsize firms have become a problem, and it is believed that the intermediaries in this case did not thoroughly screen the credit records of the acquiring companies, among other information.
M&A intermediaries earn commissions by bringing together those who want to sell a company with those who want to buy one. There are no laws directly regulating this business, and no system is in place for relevant qualifications or licenses, making it easy to enter the industry.
Most M&As have been facilitated by consultancy firms and financial institutions. However, companies that lack the necessary skills are now joining the industry, and this should not be overlooked.
With the number of M&As rising, the government established a registration system in 2021. About 2,800 companies that act as intermediaries have registered, including the 15 agents involved in the recent case.
The registration system is a significant step toward making the industry sounder. However, this system is mainly based on the screening of written documents, and the recent case suggests it is difficult to identify problematic businesses.
There are also reports of a fraudulent and malicious scam that has not yet been exposed. An acquiring company first buys shares in a small or midsize firm that cannot find a successor, and then receives the cash and other assets held by the SME.
To obtain loans from financial institutions, managers of SMEs are often required to guarantee repayment by using their personal assets as collateral.
This “management guarantee” should normally be released when the SME is bought out, but in this case after the buyer obtains control of the SME, it pushes the company into bankruptcy without releasing the guarantee.
As a result, after the transfer of the business, the manager of the SME is left with nothing but debt. There has reportedly been one large-scale case in which more than 30 firms accused a particular acquiring company of causing damages.
As a first step, investigative authorities should do all they can to expose malicious buyers.
It is becoming ever more important that M&As are more wildly conducted by small and midsize firms and that such companies are supported in finding successors to their businesses. With problematic intermediaries left unchecked, many SMEs will probably hesitate to agree to a merger or acquisition.
There have been calls for a system of licenses and qualifications to ensure that the M&A industry is sound. The government should develop a way to verify the credibility of operators.
