Japan Warns Against Bad-Faith Buyers in Small Business Mergers & Acquisitions

19 Nov, 2024

Japan Warns Against Bad-Faith Buyers in Small Business Mergers & Acquisitions

Japan has experienced an increase in problems related to mergers and acquisitions (M&As) involving small and medium-sized enterprises (SMEs), primarily due to deceptive buyers who fail to uphold contractual obligations. As M&As gain traction as a solution for business succession, the Small and Medium Enterprise Agency, working alongside industry groups, has implemented countermeasures such as updated guidelines to increase awareness and protect companies.

According to M&A research firm Recofdata, 702 publicly disclosed M&A deals involving SMEs for succession took place in 2023—almost triple the number from ten years prior. Despite many SMEs being profitable, numerous owners face closure due to aging and a lack of successors. To address this, the Japanese government is actively promoting M&As to preserve jobs and essential social resources.

The Small and Medium Enterprise Agency acknowledges M&As as a key option for business owners seeking continuity. However, Japan currently lacks legislation to fully protect M&As from unscrupulous actors. For instance, the M&A intermediation industry has faced criticism for potential conflicts of interest, with intermediaries often representing both sellers and buyers. Nontransparent brokerage fees and withheld information during negotiations have also raised concerns.

A notable example involves Tokyo-based confectionery operator Theliault, which faced financial difficulties during the COVID-19 pandemic and sold its business to Lucian Holdings. Post-transaction, Lucian allegedly transferred millions from Theliault’s funds and ceased communication, failing to honor commitments, leaving Theliault’s former president burdened with debt. Similar incidents have reportedly impacted over 30 SMEs acquired by Lucian.

Authorities and industry experts have called for stricter oversight, emphasizing the need for intermediaries to conduct comprehensive checks. Revised guidelines by the Small and Medium Enterprise Agency now require intermediaries to disclose buyer financial information and cancel debt guarantees for company managers. The M&A Intermediaries Association is also sharing lists of bad-faith buyers to foster safer M&A engagements for SMEs.