Government invests in funds to promote business succession through M&A.
The shortage of successors in small and medium-sized enterprises (SMEs) in Japan has become a critical issue. According to estimates by the Small and Medium Enterprise Agency, by 2025, approximately 2.45 million SME leaders over the typical retirement age of 70 will be without designated successors, totaling about 1.27 million individuals. The government is targeting this problem by investing in private funds that support mergers and acquisitions (M&A) for business succession.
A telling indicator of the severity of successor shortage is the number of profitable businesses closing down. Tokyo Shoko Research reports that about 55% of SMEs that ceased operations or dissolved in 2022 were profitable at the time of closure, with many citing the absence of a successor. Nobuo Tomoda, Director of Information Division at Tokyo Shoko Research, comments, “More than 60% of profitable closures are due to the lack of successors.”
The number of bankruptcies driven by successor difficulties reached a record high of 487 cases in fiscal 2022, according to Teikoku Databank.
Challenges include not only the scarcity of human resources but also the financial burden. Tomoda points out, “In many SMEs, the president handles everything. Illness can leave such businesses without a successor, making continuation difficult. Complicated tax procedures during business succession also add to the burden.”
Recently, the government and private sector have been focusing on supporting business succession through M&A. This approach allows continuation of businesses without successors and can help small operators with challenges like marketing and streamlining HR and administrative functions.
An example is Takawa Seisakusho in Akita City, a chair upholstery business. Its former president, Kazuo Takahashi, a highly skilled craftsman whose work was recognized overseas, struggled to find a successor after turning 75. Eventually, he handed over the business to a long-term trading partner, a wooden furniture component manufacturer, through M&A, ensuring the continuation of valuable skills.
According to the Organization for Small & Medium Enterprises and Regional Innovation, the number of SME M&As related to business succession increased to 1,681 in fiscal 2022, 2.4 times more than five years ago.
In fiscal 2024, the Small and Medium Enterprise Organization will begin supporting private funds that invest in companies undergoing business succession through M&A. The government has allocated 12 billion yen in the fiscal 2023 supplementary budget for this initiative. This funding will enable the organization to invest in the funds.
SMEs play a vital role in supporting local industries and employment. Closure of these businesses could significantly impact regional economies. The Small and Medium Enterprise Agency’s estimates suggest that if the 1.27 million SME leaders over 70 without successors were to close their businesses by 2025, up to 6.5 million jobs could be lost.
The agency estimates that around 300,000 SMEs in Japan could potentially undergo business succession through M&A. An agency official noted, “Companies that have taken over businesses often see increased growth rates after M&A.”
The government is also starting to dispatch experts like small business consultants and tax accountants to investee SMEs to participate in management. In the fiscal 2024 tax reform, the government and ruling party plan to extend the application deadline beyond March 2024 for the system that defers or exempts gift and inheritance tax on unlisted stocks, further supporting business succession through tax measures.