Lack of Successors at 61%, Threatening 6.5 Million Potential Job Losses by 2025

The President is 70 ～80s to 80s Many companies with presidents in their 70s to 80s have “no successors.” ……Bankruptcy due to inability to pay for expensive business transfer M&A

A survey shows that more than 60% of managers in companies, including small, medium, and micro enterprises, have no successors. Small, medium, and micro enterprises may go bankrupt due to lack of successors as a result of the sudden ill health or death of the manager. There is a movement among managers to seek a successor from outside the company as early as possible and to buy and sell the company, but various issues remain.

Bankruptcy due to lack of successors also affects the local economy.

It can lead to a decline in the local economy, as it can cause employment problems for part-timers, employees, and other local workers,” said one business owner who spoke at the Tokyo Shoko Research Institute.

This can lead to a decline in the local economy,” says Yoshihiro Sakata, manager of the Information Division of Tokyo Shoko Research Institute. Many small, medium, and micro business owners, who do not have a retirement age like large corporations, say that they will work while they are still healthy. Mr. Sakata says, “Even if a manager is healthy now, he or she must be aware of whether the company will continue to exist and, if so, what to do about successors.

Sakata points out that one of the reasons for this difficulty in finding successors is that “managers are getting older.

The national government, too, is becoming increasingly aware of the crisis and is taking steps to address the problem. According to a study by the Small and Medium Enterprise Agency, it is estimated that the number of small and medium-sized business owners over the age of 70 will be approximately 2.45 million by 2013, and about half of them, or 1.27 million, will have no successor in mind. If this is left unchecked, the number of business closures will skyrocket, which could result in the loss of a cumulative 6.5 million jobs and approximately 22 trillion yen in gross domestic product (GDP) by ’25.

Some small and medium-sized enterprises (SMEs), such as small factories, have supported Japan’s manufacturing industry with their superior technologies, and the succession of these technologies is also becoming an issue.

The reason for the reluctance of M&A for business transfer is “public perception”!

Mergers and acquisitions (M&A) is a method of transferring companies as they are. The M&A intermediary business is to find and connect sellers and buyers of companies. A man in his 50s who is engaged in that business after retiring from a major bank also targets companies without successors for M&A. He points to “public perception” as the reason for the reluctance of business owners to use this method of business transfer, and explains as follows.

There is still an image of ‘the sword breaks, the arrow runs out, and the company is defeated.

The situation is changing, as some owner-operated companies have recently been forced to sell because they have no successors and are being pushed out by their employees.

Last year, the “no successor rate” was approximately 61%, up 1.19 percentage points from the previous year and exceeding 60% for the first time since the survey began. Tokyo Shoko Research surveyed approximately 171,000 companies. While the number of young managers of startup companies, for whom the issue of successors is less pressing, has increased, the survey also points out that there is concern that the death or ill health of an elderly manager and the absence of a successor may lead to bankruptcy.

Bankruptcies Due to Lack of Successors at Record High Level

The number of bankruptcies due to the absence of successors increased at a record high level last year. Tokyo Shoko Research analyzes that death or ill health of the manager accounted for about 90% of these cases.

According to TRC’s “Successor Absence Rate” survey, the figure is around 90% for young business owners in their 30s and 40s. On the other hand, the figures for those in their 60s, 70s, and even 80s are around 46%, 30.5%, and 23.8%, respectively. These figures reveal the reality that business succession decisions and measures are urgently needed as business owners age, yet the situation remains untouched.

According to the “Questionnaire on Management Retirement and Business Closure” conducted via the Internet last year by Japan Finance Corporation, 95.9% of the respondents “quit their businesses without looking for a successor. The most common reason for this was “did not want anyone to take over the business in the first place,” at 55%. While companies that decided to close their businesses often have only managers and no employees, the survey also noted that business succession is increasing among larger companies.

The Small and Medium Enterprise Agency analyzed that the aging of small business owners has continued, with the peak age of managers rising from their 50s to their 60s or 70s over the past 20 years. It states that the absence of successors is one of the major reasons for the closure of small and medium-sized enterprises (SMEs), and is heightening the sense of crisis that employment and technology that support the economy and society may be lost. Therefore, the government is promoting support for generational change through business succession and expansion through mergers and acquisitions as effective means for corporate growth.

Expensive “brokerage fees for M&A businesses” and “asset appraisal costs” are hindering business transfers.

According to the “Small and Medium M&A Promotion Plan” compiled last summer by the Small and Medium Enterprise Agency, the number of small and medium M&A transactions is increasing, and is estimated to be around 3,000 to 4,000 per year.

A former employee of a major bank and an M&A intermediary described the reality of the M&A business as follows.

Local regional banks look for a partner preferably within the same region, but since the economic capacity of the regions is small to begin with, there are an increasing number of cases where they ask a specialized Tokyo-based intermediary company to do the job.

However, some Tokyo firms are so focused on making a profit that they ignore confidentiality of management information and the identity of the buyer, and run around trying to sell at a high price, which sometimes causes problems.

Many small, medium, and micro businesses depend on the skills of their managers. Information that a company is looking for a successor or business successor means that the manager is stepping down, which can easily lead to problems such as business partners withdrawing from the business because they are uncertain about its future. For this reason, information surrounding M&A is considered highly confidential.

If it becomes known that a certain manager is looking for a transferee , “a competing company may pull out a whole bunch of business partners,” says Mr. Sakata of Tokyo Shoko Research, Inc. For suppliers of sales and material deliveries, it may appear safer to transfer business to an existing competitor amid uncertainty about how the new transferee’s management will operate.

As for the problems surrounding M&A, Mr. Sakata points to the high fees paid to M&A intermediaries and the high cost of asset assessments, known as due diligence, which are considered to be expensive. In addition, the success fee for M&A intermediaries is said to be about 20% of the deal value, with a minimum fee of 20 million yen, and even the lowest fee is said to be 10 million yen.

The high cost of M&A-related fees is also believed to be an obstacle to business transfers. Mr. Sakata believes that “M&A should become more accessible to small and medium-sized businesses,” and that if the M&A intermediary business becomes more transparent and easier to use, business transfers will increase and the problem of succession difficulties may be illuminated.