Part 3: SMEs' Business Succession and Corporate Restructuring

November 8, 2024 [No. 129 – 2024]

Mr. Fujikazu SUZUKI
Institute of Labor Education and Culture
Research Center for Solidarity-based Society

 

 

Small and medium-sized enterprises (SMEs) account for 99% of all companies in Japan. They employ about 70% of Japan's workforce. SMEs have big influence on Japan's economy and industries. However, SME owners are becoming old, and many SMEs may have to close their business because they cannot find successors. In recent years, SMEs' "lack-of-successor-rate" has been slightly falling, but it exceeded 54.5% as of 2023. About 60% of SMEs that suspended or closed their business in the early 2010s were profitable in the fiscal year immediately before the business suspension or closure. Effective use of SMEs' business resources should be urgently considered.

Businesses can be succeeded through mergers and acquisitions (M&As). M&As are one of the options that SMEs with no successors can choose when considering how to effectively use their business resources. According to the "2021 White Paper on Small and Medium Enterprises in Japan," selling companies' reasons or purposes of considering M&As were: (1) Employee retention (53.0%), (2) Lack-of-successor (47.9%), and (3) Business growth and development (48.3%).

It is worth noting that the selling companies were most interested in employee retention. On the other hand, the acquiring companies were most interested in increasing sales and market share, among all other elements. This suggests that it is important to make adjustments between selling companies and acquiring companies in order to smoothly transfer business resources between them.

Japan Finance Corporation's survey shows changes in the top four business resources transferred by transferor companies and to transferee companies. "Employees" was the business resource transferred by transferor companies with the highest percentage of 39.1% in the period before 2010. The percentage increased to 55.2% in the period between 2011 and 2019. It remained high at 52.5% in the period after 2020. The survey suggests that transferred business resources have generally changed from physical capital to human capital.

If you look at business resources transferred to transferee companies, "Employees" came first with 45.7% in the period after 2020. Like transferor companies, the percentage had increased to 30.4% in the period before 2010 and 39.4% in the period between 2011 and 2019.

It is becoming increasingly important for both transferor companies (meaning companies which business resources are transferred from) and transferee companies (meaning companies which business resources are transferred to) to consider employees when transferring business resources. However, labor-management issues may arise at the time of corporate restructuring such as M&As. These issues need to be dealt with by trial and error. Business resources should be effectively used by letting workers express their opinions and by having their agreement. Otherwise, industrial vitality in the real sense will not be maintained or improved. Many SMEs do not have labor unions, and employees of SMEs should be able to participate in their corporate restructuring. Therefore, it may be necessary to consider taking some sort of institutional measures to enhance employee participation on this matter.