M&A AND SUCCESS FACTORS

1.What is M&A?

What is M&A? It short for 'Mergers and Acquisitions,' refers to the process of corporate mergers and acquisitions. It involves the consolidation of two or more companies into a single entity (mergers) or the acquisition of one company by another (acquisitions).

In a broader sense, the meaning of M&A can encompass not only mergers and acquisitions but also partnerships, depending on the context.

2.M&A Objectives

Let's examine the specific objectives behind M&A for both the selling (transferor) and acquiring (transferee) companies.

2.1.Objectives of the Selling (Transferor) Company in M&A:

Addressing Succession Issues and Business Continuity.

M&A has become widely adopted to resolve succession issues from a lack of successors. By executing M&A and bringing in - new management through third-party succession, companies can resolve succession problems, ensuring the business's continued existence .

According to a survey by the Small and Medium Enterprise Agency, the average age of small and medium-sized enterprise owners is increasing annually, and by 2025, it is estimated that over 2.45 million owners aged 70 or above will exist. Additionally, it is suggested that around 1.27 million small and medium-sized enterprises will face succession issues by 2025.

For companies grappling with succession problems, M&A can be a choice that simultaneously addresses business succession and growth, serving as a solution when passing on the business to family members or employees is challenging.

Strengthening Business Foundations:

Acquiring resources such as facilities, technology, market channels, customer information, personnel, and know-how from the transferor company enables the transferee company to strengthen its business foundations. Furthermore, integrating knowledge and technology through synergy effects, consolidation of customers and market channels, shared operations, and joint facilities utilization can accelerate business expansion.

Additionally, through business transfers, the transferor company can divest unprofitable operations, allowing it to concentrate management resources on core business activities.

Obtaining Founder's Profits:

Many small and medium-sized enterprises are not publicly listed, making it challenging to convert shares into cash. However, owners can gain transfer profits by choosing stock transfer through M&A in exchange for shares. Owners can use these profits to step away from day-to-day management and embark on a second life with their families or initiate new business ventures with the proceeds from the transfer.

2.2.Objectives of the Acquiring (Transferee) Company in M&A:

Business Strengthening, Expansion, and Market Share Improvement:

Acquiring a company in the same industry facilitates the growth of the business and enhances market share within the industry. Integrating related businesses into the group also allows for the expansion of the business domain.

Entry into New Business Ventures:

M&A is sometimes employed as a strategy to enter new business ventures. Seeking to join new business areas as part of a growth strategy, companies may utilize M&A to incorporate other firms already active in those sectors. This approach offers the advantage of a faster expansion, including the acquisition of talent and know-how, compared to starting a new business from scratch.

Creation of Synergy Effects

In M&A, considering how the synergy effects between the two companies can contribute to their growth is highly emphasized.

Synergy effects achievable through M&A encompass visible aspects such as value chain optimization, financial resource management, and accounting efficiency. Additionally, the combination of various business operations can lead to the creation of new business ventures, fostering employee engagement, and more, contributing to the overall success of the acquisition.

3.M&A benefits

Let's take a closer look at the M&A benefits that transferor and recipient companies can enjoy.

M&A benefits for the transferring company (seller)	M&A benefits for the transferee company (buyer)
①Employee employment can be protected ②Technology and know-how are inherited ③You can strengthen your company's brand power and trustworthiness ④Personal guarantee (management guarantee) can be canceled	① You can promote business diversification ② Management efficiency can be improved by integrating the value chain ③You can secure human resources such as qualified people. ④ You can improve your own technological capabilities and productivity

3.1. M&A benefits for the Selling (Transferring) Company:

Preserving Employee Employment

M&A benefits is being able to protect the employment of employees. Especially in mergers and acquisitions involving mid-sized to small companies, "maintaining employee employment" is often listed as one of the conditions for the transferee. After the M&A, employees typically continue to be employed under the same conditions, under the new owner, and cases where customers and business partners are inherited are common.

Moreover, if the company becomes part of a publicly traded company or a major conglomerate, employees can expect a better working environment and stable employment.

Inheriting Technology and Know-How

Choosing to close a business results in the loss of long-developed technology and accumulated know-how. Through business succession in M&A, ownership, cultivated technology, and accumulated know-how can be passed on to the acquiring company.

Strengthening Corporate Branding and Credibility

If the acquiring company is a publicly traded or major corporation, the acquired company's brand and credibility can be strengthened as part of the larger group. This can lead to increased business opportunities with new business partners.

Removing Personal Guarantees (Management Guarantees)

Personal guarantees involve individuals, such as managers, providing assurance for loan repayments when a company borrows from financial institutions. In many cases, managers in small and medium-sized enterprises provide personal guarantees for loans from financial institutions. In M&A, the acquiring party can take over the loan or assume the guarantee itself, allowing for the removal of personal guarantees.

3.2. M&A benefits for the Acquiring (Transferee) Company:

Promotion of Business Diversification

Through M&A, there is an increased potential for future business diversification through entry into new businesses or creating synergies in existing operations. Diversification can lead to revenue expansion and risk mitigation.

Improvement of Operational Efficiency through Value Chain Integration

Acquiring a company in the same industry can lead to significant similarities in the supply chain, potentially resulting in cost reductions in procurement and ordering.

Furthermore, acquiring companies in related industries, such as obtaining retail outlets for a manufacturing company, can enable a seamless business expansion from production to sales, contributing to improved operational efficiency and expanded business areas.

Ability to Secure Qualified Personnel

Acquiring companies through M&A provides the advantage of securing talented personnel. Securing individuals with qualifications and specialized skills becomes crucial, especially in industries where the possession of qualified personnel and specialized skills is essential for the expansion of performance and business scale, such as the construction, transportation, pharmaceutical, and healthcare sectors.

Achievement of Enhanced Technological and Production Capabilities

Acquiring companies through M&A allows the acquiring company to gain access to the technology and know-how of the acquired company, facilitating expansion into new fields and improvement of technological capabilities. Additionally, complementing the technologies and resources of both companies can contribute to increased production efficiency.

4. Points to Note and Drawbacks of M&A

Let's explore the considerations and drawbacks that the selling (transferring) and acquiring (transferee) companies should be aware of when engaging in M&A transactions.

4.1. Drawbacks and Considerations for the Selling (Transferring) Company in M&A:

Potential Changes in Contracts and Relationships with Existing Customers and Business Partners

When considering M&A, reviewing the contracts with existing customers and key business partners is essential. The Change of Control clause (COC) is a crucial point to be aware of. This provision allows restrictions or termination of contracts if there is a change in control due to M&A. In such cases, it may be necessary to notify and obtain consent from the contracting party.

M&A can lead to a reassessment of terms with existing customers and business partners, potentially resulting in the termination of transactions. Understanding the situation of contractual parties and considering how to communicate with them is vital.

Potential Changes in Employee Employment Conditions and Working Environment

Protecting and inheriting the employment of employees is a crucial aspect. Especially in business transfers, renegotiating employment contracts may lead to changes in employment conditions. To prevent the loss of valuable talent, negotiations, and agreements should focus on employment continuation and maintaining favorable employment conditions.

Mismatch in Corporate Cultures

Even if complicated aspects such as HR, internal systems, and organizational structures can be integrated, unifying the corporate cultures established by each party takes time. Attempting to forcefully align aspects like welfare benefits, delegated authority, work practices, and after-hours interactions can lead to employee resistance. It is crucial to proceed cautiously, possibly utilizing external experts such as PMI consultants, to navigate this aspect.

Inability to Sell at the Anticipated Price

The acquiring company determines the sale price with an eye on the selling company's future business operations. If the perceived profitability is low, the sale price may fall below expectations. Measures to enhance the company's value, such as improving profit margins, become necessary to avoid such scenarios.

4.2. Considerations and Drawbacks for the Acquiring (Transferee) Company in M&A:

Limited Synergies in the Short-Term

It is said that it takes approximately one and a half years from considering M&A to execution and completion. The real challenge begins after the M&A execution. Cases where companies with different histories and corporate cultures seamlessly integrate overnight are rare.

To realize post-M&A synergies, a long-term commitment is necessary.

Challenges in Smooth Organizational Restructuring Post-Integration

M&A-driven integration may not progress smoothly if approached incorrectly. Therefore, it is crucial to deepen integration strategies at the stage of the basic agreement. Initiatives such as simplifying organizational structures and preparing for post-merger integration (PMI), including alignment of information systems, HR, and business processes, are essential.

Potential Incurrence of Off-Balance Sheet Liabilities

"Off-balance sheet liabilities" refer to debts not recorded on the balance sheet. In small and medium-sized enterprises, using "tax accounting" during the classification process may lead to off-balance sheet liabilities.

Thorough due diligence (M&A audit) before acquisition is crucial to avoiding unexpected off-balance sheet liabilities.

Risk of Impairment of Goodwill

Goodwill represents the value of intangible assets such as brand, personnel, technology, and know-how included in the intangible fixed assets on the balance sheet. The value of goodwill is not constant and may change due to internal and external influences. If anticipated synergies fail to materialize after the acquisition, there is a risk of goodwill impairment.

Proper due diligence or addressing the situation through a smooth PMI process is necessary to mitigate this risk.

5. Important things for M&A success

There are three key points for M&A success, especially for small and medium-sized enterprises:

Combination (matching)
Terms negotiation/execution
After-merger M&A management (PMI, post-merger integration)

5.1.Combination (Matching)

The key for M&A success lies in finding negotiation counterparts that align with one's own company. It's not always the case that only financially strong and well-known companies are the ideal partners. To achieve this, it is crucial to assess the strengths, weaknesses, and challenges of one's own company. By doing so, the essential managerial resources needed for one's own company will naturally emerge, and the criteria for finding suitable partners will solidify.

What constitutes a "good combination" in M&A:

Synergy effects are easily realized.
Complementary or strategically significant roles are fulfilled.
Similar corporate cultures exist.

5.2. Points of Condition Negotiation and Execution

No matter how much synergy is generated in a "good combination," for M&A success, it can be jeopardized depending on the negotiation conditions. It is advisable to be mindful of the following points:

The acquirer (buyer) and the target (seller) are in an equal position, especially with the acquirer aiming to take over the target company with the stance of "acquiring an important company."

The acquirer should grasp the reality of the target company as early as possible, considering the actual situation and future integration, to assess whether the benefits justify the costs.

Risks should be thoroughly identified, and specialists should be employed to devise mitigation strategies, keeping them within acceptable limits.

In M&A, the procedures involved from strategy consideration to closing (execution) are also critical for M&A success. After matching with a potential company, be aware of the following procedures:

Strategy consideration
Corporate valuation
Negotiation
Signing of a letter of intent
Due diligence
Signing of the final contract (closing)

5.3. After M&A Management (PMI: Post-Merger Integration)

The post-deal integration process, which follows matching and execution, is crucial for M&A success. Let's be mindful of the following three aspects in the integration process known as PMI (Post-Merger Integration):

The acquiring company (buyer) strives to select the best personnel to be dispatched to the target company (seller).
Planning for After M&A, including PMI, should be conducted from the stages of the M&A consideration phase.
Focus on enhancing the motivation of employees from the selling side (seller).

Japan PMI Consulting, a part of the Japan M&A Center Group, provides comprehensive support services for the PMI process.

6. M&A Process

This section outlines the specific steps involved in the M&A process, primarily from the perspective of the selling company (seller) considering the transfer of business to an operating company.

By the way, the flow of M&A follows the diagram below.

6.1. M&A Consideration

The execution of M&A is a crucial strategic decision that can significantly impact the fate of a company, requiring careful consideration. To begin with, it is essential to gather accurate information.

Collecting information and exploring all possibilitiesIf you are interested in M&A, it is advisable to first consult with executives who have experience in M&A around you. This is the best way to hear candid insights not found on the internet and to receive valuable advice. If there are no such individuals in your network, you may consider reading books like the one mentioned in this text or participating in free M&A seminars. With the widespread availability of online seminars, you can join from anywhere in the country, gaining access to firsthand experiences shared by business leaders. When contemplating the future as a business leader, retirement plans, company growth, and the future of employees, family, and business partners, it is crucial to consider all possibilities in making decisions.

However, it is essential to avoid delaying the decision-making process through overly cautious considerations, as there is a risk of missing the optimal timing for conducting M&A. After conducting a certain level of deliberation, it is advisable to take concrete actions.

Seek Professional Advice and Don't Face it Alone

"If considering the option of M&A..."

Once you start contemplating this, consulting with trusted professionals is crucial. Seek advice from your regular accountant, close contacts in local financial institutions such as banks or credit unions, and securities brokers and public institutions like business succession and transfer support centers. Some may worry about consulting financial institutions, fearing potential impacts on future loans, but with an increasing focus on M&A activities, many banks are now willing to provide proper guidance. If possible, having a one-on-one conversation with the branch manager can be beneficial.

If engaging an M&A intermediary firm (boutique), they can advise on potential M&A partners based on past cases and provide a simplified company valuation if you have documents such as financial statements. While this valuation is informal and not equivalent to a formal one, it serves as a helpful reference, and every company should be aware of its value. Consulting with professionals gives a more precise understanding and concrete image of the M&A process.

6.2. M&A Preparation

The initial preparations for M&A involve the "collection of necessary documents," "share price calculation," and "creation of a corporate profile."

Conducting share price calculations from various perspectivesIt involves entering into a collaborative intermediary agreement when seriously considering M&A and engaging an M&A intermediary firm for partner search. By gathering and submitting documents such as financial statements, asset ownership, and organizational information, the M&A intermediary firm conducts a formal company valuation and creates a corporate profile. To prevent the leakage of M&A information, necessary documents must be collected discreetly, without the knowledge of employees such as accounting personnel. While the variety of required documents may be challenging, thorough collection at this stage allows for smooth responses during negotiations when potential acquiring companies request document disclosure, enhancing trustworthiness.Share price serves as the foundation for the transfer price, providing an estimate of how much one's company is likely to sell for.

The price calculated through share price calculation is merely an indicative figure, but it is crucial to understand the actual state of one's company and determine M&A conditions.

There are various methods of calculating stock prices, including (1) cost approach, (2) market approach, and (3) income approach .

Not only for M&A, but also for determining future business strategies, as a business owner, you want to know your company's inheritance tax assessed stock price and stock price at the time of M&A. We have a simulation that reflects some of the elements of the “transaction example method'' of the income approach and allows you to quickly understand stock prices, so please take advantage of it.

Creating a company profile that conveys its characteristics and appealM&A procedures involve a lot of paperwork, but in the case of small and medium-sized companies, when we ask them to provide a detailed written summary of their company, they often say, “What is necessary is in the president's head.'' It is not uncommon for companies to have only financial statements and a pamphlet that briefly introduces the company, but no website. However, this does not convey the company's characteristics and appeal to companies considering M&A.Therefore, our consultants interview managers and create a detailed company profile based on the interviews.This 30- to 50-page proposal summarizes corporate information such as the transferor company's profile, business content, workflow, business partner structure, financial details, organizational structure, shareholder list, history, industry trends, risks faced, etc. It's a book. Photos, diagrams, and recent videos are used to highlight the attractiveness of the transferee company in an easy-to-understand manner, and to convey to candidates the potential for future growth that cannot be expressed by numerical data in financial statements alone. A company profile is like a “matchmaking photo.''

A crucial point in creating a corporate profile is to transparently communicate everything, including potential drawbacks, to the consultants of the M&A intermediary firm. Concealing information that later comes to light during the negotiation process can lead to issues raised by the acquiring company or, in the worst-case scenario, a breakdown of the deal. By sharing information with consultants from the early stages, you can consider strategies to address risks.

6.3 Find your partner

Once the initial preparations are complete, we move on to matching (choosing a partner).

Matching that determines everything about M&AOnce the project is completed, matching (choosing a partner) begins. We believe that matching is everything regarding M&A for medium-sized and small-to-medium-sized companies. Like human marriage, everything is determined by “Who will you marry?'' = “Which company will you M&A with?'' If you are not compatible with the other person, no matter how wonderful the wedding you have or how wonderful the contract is, you will not be successful. In a sense, there are few options for M&A for large companies. However, when conducting M&A for small and medium-sized companies, they must select a truly compatible partner from among tens of thousands of potential recipient companies.

When selecting a partner company, there are three essential points to consider: (1) quantitative information such as business size and performance, (2) whether the company is in the same industry or a different industry, and (3) company culture. Regarding ②, the synergies that can be expected differ greatly between companies in the same industry and different industries, so it is necessary to consider the options from the beginning from a broad perspective without narrowing down the possibilities, taking into account the purpose of the transfer and the acquisition purpose of the other party.

Proposals to potential takeover companiesFirst, proposals are made to candidate transferee companies with anonymous materials summarizing the company's profile anonymously to prevent the transferor company from being identified. This is a straightforward description of the industry, company size, reason for transfer, characteristics, etc., and serves as an initial proposal. We will conclude a confidentiality agreement with the candidate company if we are interested in the initial proposal. Since it is a big deal for the transferring company to reveal its name, it is essential to guarantee that the company's name will not be known to third parties. Information management is the key for M&A success from beginning to end. After going through this process, we will provide you with a corporate profile of the transferor company so that you can conduct a more in-depth review.

The receiving company will consider issues such as "growth strategy," "synergy effects," and "business succession." Once we have determined that we want to seriously consider the matter, we will enter into a partnership brokerage agreement with our company and disclose information.

6.4.Top management interview

Once both companies have determined that they wish to proceed with the discussion, a “top meeting'' will be held where the top management and owners of each company will meet face-to-face. This meeting is set up as a place to not only ask questions about the business, but also to understand each other's humanity and management philosophy, which cannot be gleaned from written documents, and deepen mutual understanding.

Confirm compatibility during the top interviewIf both companies decide that they would like to consider M&A with this partner, the top executives will actually meet face-to-face. Everyone gets nervous when they meet for the first time, but I want to try to create a relaxed atmosphere as much as possible. If you make a good first impression, things will go smoothly from then on. It's not good to be too familiar, but being formal is suffocating. The best thing to do is to face each other sincerely so that we can have a sense of trust and security. In that sense, it is better to focus on the details of the transaction from the early stage and avoid bombarding the other party with questions about financial figures and the like. I am often asked what to look for in interviews with top management, but in reality, the most important factor for M&A success of a small and medium-sized business may be whether or not the employees get along well with each other. While relaxing with themes such as the weather, food, and hobbies, we ask questions with points as appropriate. If you can communicate that “I'm interested in your company,'' the conversation will become more lively. The way this conversation works is probably the same as how you communicate with customers in your regular sales activities.

It is important for both parties to understand the purpose of the top management meeting, and on the day of the meeting to be mindful of not negotiating terms directly, clarifying the vision for the future and expected effects, and interacting on an equal footing. You will be asked for it.

6.5.Adjustment of acquisition conditions and conclusion of basic agreement

The period from the end of the top management interview to the signing of a basic agreement is said to be the most important phase for both parties. Let's look at the key points from the perspective of the transferee (buyer).

Things the recipient company should consider before making a decision for the receiving company, the most important phase is the consideration from the top management meeting to the basic agreement contract. I understood the other party's “company overview,'' and I also understood the other party's “president's personality and culture.'' Now that you have a deeper understanding of the company you are acquiring, what kind of growth strategy will you develop and what kind of synergies will you create when you incorporate this company into your company? We must consider this thoroughly until we are satisfied. Another important issue is who will manage the company after the acquisition. You can also manage the company yourself, you can second an executive from your own company to make him the president, you can ask the current management to continue management for a few years, you can have the No. 2 person at the current transfer company take over the management, you can have someone else take over the management. There are many options, such as hunting. It is also important to determine the approximate conditions. How much should the stock price be? What is the transition period for the current management? How much should I pay for retirement? How should real estate owned by individual business owners be handled? In some cases, it may be necessary to consider how to handle company-owned antiques, paintings, golf course memberships, company cars, etc. Additionally, you must discuss matters such as how to take over financial institutions and business partners, contracts with tenant management landlords and franchisors, and continuing relationships with major business partners. In addition to internal consideration, we also expanded our image by touring the transferred company's factory, tempo, warehouse, etc., held detailed meetings with the current management, and even received advice from M&A consultants.

On the other hand, the points that the transferor should keep in mind when concluding a basic agreement contract are as follows.

The basic agreement is a statement of determination for M&AOn the other hand, the transferor company conducts top-level interviews with the transferor company, looking at questions such as "Does the culture fit?'' "Do they value their employees?'' "Do they have the leadership and sense of responsibility to entrust the company to them?'' It is necessary to keep it.Once you are determined to proceed with negotiations in your own way, you will enter into a basic agreement with the other company that includes certain conditions. By exchanging this contract, we are expressing our determination to continue negotiating with your company toward a final M&A agreement, unless something happens. Some people may secretly think that there is a better company out there and want to look for another partner, but by exchanging a basic agreement, you are giving the other party exclusive negotiating rights, and you are not feeling well. At the top of the page, add a line that says, "I am dedicated to this company.'' This is a matter of mutual trust. In a wedding, it's like an engagement. From here, we will begin confirmation and negotiations towards a final contract.

6.6. Execution of acquisition audit (due diligence)

After the basic agreement is signed, the candidate company will conduct an acquisition audit (due diligence, hereinafter referred to as DD). It is like a medical checkup, investigating whether the transferor company has any problems in finance, taxation, legal affairs, and labor. To ensure that no major issues are discovered after an M&A, candidate companies request third-party experts, such as certified public accountants, to conduct on-site inspections.

We will introduce the points to note for both the transferor and the transferee candidate.

First, as a note on the seller's side, DD is often conducted on Saturdays and Sundays so that employees do not notice. Since I can't get the support of my employees, I have no choice but to inconvenience accountants who do DD. We will discuss accommodation, transportation, copy machines, tea, etc. arrangements with the M&A consultant to ensure no inconvenience.
Also, it is extremely important to expose the entire truth through DD. There is always a section called representations and warranties in the final contract. This item says, "I clearly discussed all the problems in the DD, etc. If any other problems arise, I will accept compensation for damages.'' Therefore, clarifying all issues through DD will help avoid leaving behind any problems and gain trust.

There are two things buyers should keep in mind. First, it is important to inform them what you want to research and what materials you will need. In small and medium-sized enterprises, many tasks, including document management, are outsourced to tax advisors, and in addition, most matters remain in the head of the president, and are not adequately managed in writing. Even if you suddenly request materials from DD, they often don't come out.
The other thing to do is to have sufficient discussions with the certified public accountant who requests the DD.
Small and medium-sized enterprises and large companies not only in financial accounting and tax accounting, but also in the management systems themselves, so it is important to discuss the key points of DD with the specialist you request in advance.

There are few cases in which small and medium-sized enterprises have a perfect management system, and several issues are often discovered through DD. Rather than focusing on each of them one by one, it is important to first clarify the issues that need to be resolved and consider countermeasures.

6.7. Final condition adjustment

When adjusting the final conditions, the transferor (seller) should be careful of two things: (1) not to postpone deciding on preferred terms or the sale, and (2) not to leave decision-making to others. In particular, you need to be careful about point 2, as if you cannot decide what to do and ask others for judgment, your decision may be delayed, and the other party may decline negotiations. On the other hand, the points that the transferee (buyer) should keep in mind are (1) being prepared to take on the acquisition, including the risks, and (2) deciding on treatment that takes into account the position of the transferor company's management. To avoid risks, there are cases in which the transferor continues to make unreasonable demands, resulting in the deal breaking down. In addition, it is necessary to carefully consider the management treatment so that the handover can be completed smoothly.

Happenings that tend to occur during negotiations toward a final contract
Once we have completed the post-DD inspection work, we will begin negotiations for a final contract. We reconfirmed the basic conditions with M&A intermediary companies, lawyers, and judicial scriveners. Confirm the purchase price and its payment method, the retirement benefits of the president of the transferring company and subsequent processing, and the treatment of employees. Arrangements should be made regarding so-called detailed matters, such as what to do with the paintings and antiques collected as a hobby, golf memberships, and the disposal of a vacation home, to avoid any problems later on.
Happenings often occur just before the final decision is made.
There are presidents of the transferor companies who rush in with a nervous look on their faces and say, "Wait a minute,'' and there are managers of the transferor companies who ask, "Are you sure this is okay?'' No wonder. It's only natural that you feel so shaken up at this final stage before making a big decision. When this happens, try to calm down a little and try to re-evaluate the situation. If you take the time to think calmly, it will go away naturally.

6.8. Final contract conclusion/delivery (M&A execution)/settlement

Once we have agreed on all the terms and conditions that we have worked out so far, we will sign a final contract. The main contents to be included in the contract are as follows. (In the case of stock transfers) Be sure to include representations and warranties, especially on the transferee side. If a promise is not made, it will be difficult to claim damages even if a problem is discovered after the transfer.

Share transfer agreement
Transfer price
How to pay consideration
representations and warranties
Covenants (obligations up to the date of transfer and after the date of transfer)
Side agreement (if there is an agreement in line with the execution of M&A)
Compensation for damages or cancellation of compensation
General terms

After signing the final contract, stock certificates and important items will be delivered and payments will be made.

Points to keep in mind during delivery and settlement include closing conditions and handover. Please note that settlement cannot be made unless the closing conditions are met, so even after the final transfer agreement has been signed, the M&A may be canceled in the worst case. Also, depending on the case, it may be necessary to hand over a number of important items (company representative seal, bankbook, etc.), so it is best to do so on the same day so that you do not forget to hand over the items.

6.9. Disclosure to related parties (Disclosure)

After the final contract, we provide explanations and information disclosure to employees, business partners, and other related parties. The timing of disclosure (information disclosure) is generally immediately after carrying out an M&A, but if necessary, important business partners, executives, and employees who will be heavily involved in the M&A process (accounting staff, etc.) It may be disclosed in advance. In some cases, prior disclosure and consent from key business partners and executives may be a condition for closing (funding settlement conditions).

The main targets for disclosure are as follows.

Employee of the transferor (seller)
Business partner company of the transferor (seller)
The financial institution of the transferor (seller) (main bank, etc.)
Press (newspaper companies, etc.)
Stock exchange *For listed companies

Of course, it is important to be careful about information leaks before the announcement, but a careful scenario, such as the timing of the announcement, how to communicate it, and advance communication to executives, is an important key to success. Proceed carefully by listening to the advice of an M&A brokerage firm with a proven track record and extensive experience.

6.10.PMI (Post Merger Integration)

PMI (=Post Merger Integration) refers to the "management integration process" after the completion of M&A.

Refers to a series of initiatives such as building a new management system, formulating plans to realize the management vision, building a system for collaboration between the two companies, business operations, and integrating IT systems, minimizing risks and maximizing results through M&A. The purpose is It can be said that it is an essential process from the time the deal is concluded until the future you are aiming for is realized through M&A.

Achieving PMI success with respect for the transferor companyNext, we must consider the actual operations after M&A. For the acquiring company, this can be considered the real stage of M&A. Whether PMI can be smoothly recommended during the post-M&A integration process is directly linked to the new company's sustainable development. For the receiving company, information about the other company obtained through the M&A process becomes valuable when considering business development. In that sense, PMI must devise strategies within the recipient company even before the M&A is concluded. List the issues that need to be tackled by item, such as rebuilding the management vision, introducing systems, unifying accounting procedures, reviewing work styles, and personnel exchanges, etc., and start PMI with a sense of speed to immediately implement the developed strategies after the M&A is completed. .

7. M&A methods/schemes

There are a variety of M&A methods, including share transfers, new stock subscriptions, stock exchanges, business transfers, mergers, and company splits, which can be summarized as follows. In practice, around 90% of M&A (in a narrow sense) for medium-sized and small-to-medium-sized companies involves a stock transfer.

Here, we will examine "Acquisition," "Merger," and "Divestiture," all of which are related to corporate acquisitions.

7.1. Acquisition

In the context of M&A (Mergers and Acquisitions), acquisition refers to the process of acquiring the shares or business of the selling party to transfer managerial control to the acquiring party. The methods of acquisition are categorized based on the target of acquisition, which includes "Stock Acquisition" involving the purchase of the company itself and "Business Transfer" involving the acquisition of the business (partially or entirely) operated by the target company.

a. Stock Acquisition

As the name suggests, stock acquisition involves gaining managerial control (ownership) through the acquisition of shares of the target company. Specific methods for stock acquisition include "Stock Transfer," "Subscription for New Shares," and "Stock Exchange."

Stock transfer

Stock Transfer is a M&A method in which the shareholders of the target company transfer their ownership of shares to the acquiring party (buyer).

It is a smooth and straightforward procedure to complete M&A through the buying and selling of shares, and it is commonly chosen in M&A transactions involving medium-sized and small enterprises, as shareholders (transferor owners) can receive consideration for the sale. If stock certificates are issued, the physical certificates are transferred; however, for non-issuing companies, physical transfer is not necessary. In M&A transactions involving medium-sized and small enterprises, the acquiring party (buyer) typically seeks to acquire 100% of the shares, especially in business succession-type M&A where successors are absent.

Subscription for New Shares

Subscription for New Shares is a M&A method where new shares are issued, and payment is received as consideration. The consideration entering the selling company improves its cash flow. In Subscription for New Shares, if shares are issued to specific third parties (third-party allocation of new shares), the voting rights ratio of the selling company changes based on the number of shares issued. Therefore, if the acquiring party's ownership exceeds half, managerial control can be transferred, and if the ownership does not reach half, the transfer of managerial control may not occur.

Stock Exchange

Stock Exchange refers to a situation where a corporation acquires all of its issued shares from another company. The company whose entire issued shares are acquired becomes a wholly-owned subsidiary, and the acquiring company becomes the ultimate parent company. If the consideration for the stock exchange is shares of the ultimate parent company, the shareholders of the wholly-owned subsidiary before the stock exchange become shareholders of the ultimate parent company after the stock exchange. On the other hand, if the consideration for the stock exchange is cash, the shareholders of the wholly-owned subsidiary before the stock exchange are considered to have transferred their shares to the ultimate parent company. When the consideration is in the M&A form of shares, it can be conducted without using cash, but this method is not widely used in cases where the acquiring company (buyer) is not a publicly listed company.

b. Business transfer

Business Transfer is a M&A method in which the transferring party (seller) transfers a part or the entirety of its business to the acquiring party. The acquiring party takes over the business, and after the M&A, it operates the acquired business.

One benefit for the transferring party is the ability to continue operating the current company even after the business transfer. This becomes advantageous when there is a need to "continue owning the current company" or "put the consideration into the target company rather than the shareholders."

Another benefit for the transferring party is the ability to conduct M&A even if there are shareholder issues. In a typical stock transfer, obtaining the consent of all shareholders is necessary to transfer all shares, which may be challenging. A business transfer can be executed through a special resolution at a shareholders' meeting (approval by more than two-thirds of the voting rights of shareholders present, with more than half of the total voting rights). If it qualifies as a simplified business transfer, it can be executed through a resolution of the board of directors (for companies without a board of directors, the decision of the majority of directors).

When choosing a business transfer, the transferring party should be aware of provisions that may prohibit competition for a certain period or in a specific region.

For the acquiring party, a significant benefit is an ability to inherit only what is desired selectively. The investment amount can be kept minimal by taking over only the essential assets, the liabilities, and contracts necessary for the business.

Another advantage for the acquiring party is the ability to isolate risks. Unlike stock transfers, where the entire company is transferred, a business transfer only involves taking over the business, leaving the original target company responsible for any associated risks.

A third benefit for the acquiring party is the ability to capitalize on goodwill (commonly known as tax-related goodwill) if applicable, as it can be deducted as an expense.

Business transfers come in two forms: "Partial Transfer," where a part of the business is transferred from the transferring party, and "Complete Transfer," where the entire business of the transferring party is transferred.

7.2.Merger

A merger is a method of combining two or more companies into one. It is characterized by being selected for purposes such as streamlining management and reducing costs. Furthermore, mergers can be divided into two types: absorption-type mergers and incorporation-type mergers.

a. Absorption-type merger

This is an M&A method of abolishing one company's corporate status and having the other company succeed to all rights and obligations. A dissolved company is dissolved without taking any liquidation procedures. When it comes to mergers among domestic companies, absorption-type mergers are often chosen.

b. Merger

This is an M&A method in which all companies involved in the merger are dissolved and a newly established company takes over the rights and obligations. Because the merger can proceed on an equal basis, it is used when the dissolving company feels resistance to an absorption-type merger.

New mergers require re-approval and approval, and listed companies need to go through listing procedures again, so the procedures can be said to be complicated.

7.3. Corporate Split

Corporate split, as the name suggests, refers to the organizational restructuring where the contents of a company are divided, and a portion of its business is succeeded by a separate entity. In this context, the original company from which the business is carved out is referred to as the "splitting company," and the entity receiving the separated business is called the "successor company."

Corporate splits are categorized into "Newly Established Split," where the business or assets are succeeded by a newly created company, and "Absorption Split," where an existing company takes over the business.

Furthermore, Absorption Splits and Newly Established Splits are further distinguished into "Division-type Split" and "Subsidiary-type Split," depending on who receives the issued shares as consideration for taking over the business.

Hence, there are a total of 2x2=4 patterns.

a.New establishment split

This is an M&A method of having a newly established company take over the business and assets. Its distinctive feature is that it is used in cases where business departments are made independent to improve management efficiency.

Furthermore, incorporation-type company splits can be divided into two types, depending on the target to which shares are allocated:"split-type split'' and"split-type split.''

Split-off type new company split

This is an incorporation-type company split in which the target of stock allocation is the split company. For spin-off-type incorporation-type company splits, a method combined with stock transfer has been chosen.

There are cases where a subsidiary's non-core business is taken over by a newly established company, the shares of the newly established company are transferred to another company, and the subsidiary is liquidated. In a business transfer, rights and obligations are inherited individually, so it can be said that an incorporation-type company split is chosen in consideration of the time and cost of the procedure.

Split type new establishment split

This is an incorporation-type split in which shares are allotted to the shareholders of the split company. A spin-off type split is used in organizational restructuring to create sibling companies.

However, split-type company splits were abolished with the revision of the Companies Act in 2006. Although it is no longer available, it was a method that could produce the same effect as a split-type company split by distributing surplus funds to shareholders after a company-type split.

b. Absorption split

This is an M&A method of having an existing company take over the business and assets. If stocks are chosen as the consideration for succession, it is possible to succeed the target business even if there is no financial strength, so it is used in M&A of large companies by venture companies.

If you choose stocks as the consideration for succession, you can get an effect similar to capital participation, and if you choose cash as the consideration, you can get an effect similar to that of a business transfer.

Similar to incorporation-type company splits, absorption-type company splits can be divided into two methods, depending on the target of stock allocation: "split-type absorption-type company split" and "split-type absorption-type company split."

Spin-off type absorption-type split

This is a method of allocating shares of an existing company to a split company. Allocating stocks creates a capital relationship, whereas cash does not create a capital relationship.

Split type absorption split

This is a method of allocating shares of an existing company to the shareholders of a split company. This has also been abolished, just like the spin-off-type company split, so the effects of the split-type split can be obtained through an alternative method of

spin-off type split and use of surplus funds as dividends.

8. Corporate Valuation (Valuation) in M&A

Corporate valuation in M&A refers to the assessment of the value of a company, considering not only the value of the assets it owns but also the potential earnings and the intangible assets that will contribute to those earnings in the future.

Breaking it down, Corporate Value includes Business Value (the value generated from the company's operations) and non-operating assets (assets not essential for conducting business but still owned by the company).

From this Corporate Value, deducting the portion attributable to non-equity stakeholders such as creditors (excluding shareholders) results in the value attributable to shareholders, known as the "Equity Value."

Determining Corporate Value (Equity Value) involves utilizing three valuation approaches outlined in valuation theory (Valuation Theory) in M&A.

Approach	Overview	Calculation image	Merit	Demerit
Cost approach	Focus on current net assets	Asset market value. Liability market value	A simple and objective way to understand the actual situation BS	Unable to reflect market prices that make it difficult to take into account profitability
Market approach	Focus on the stock market prices of similar companies	Profit x magnification	Can reflect trends close to the trading market	Difficult to select similar companies. Most small and medium-sized enterprises are too different from listed companies
Income approach	Focus on future profitability	Profit ÷ Discount rate	The most theoretical in terms of investment decisions	Valuation theory is difficult to understand because it is difficult to determine future profit forecasts and discount rates and is prone to arbitrariness.

8.1. Cost approach

This is an evaluation method based on the transferor's net assets. Generally, the method chosen is to replace assets and liabilities with market values and add goodwill to the market value method, which subtracts liabilities from assets.

It is characterized by its simplicity and objectivity as it does not require complex calculations. Although it cannot reflect the market price of stock prices, by adding goodwill to the market value of net assets, it is possible to calculate corporate value that takes into account the profitability of the transferring company, so it is often used in M&A of small and medium-sized companies.

Cost approaches are categorized as follows: Of these, the "market value net assets + goodwill method'' is most often used in M&A practices for small and medium-sized enterprises.

Method	Features
Book value net asset value method	● Method of calculating stockholders' equity by subtracting liabilities from assets on the books.● The book value method is an extremely easy calculation method, but generally speaking, assets and assets listed on the books based on the historical cost method Since the amount of debt cannot be said to represent the current value, it is not often used directly when calculating stock value for the purpose of stock sales transactions, and it is often used to calculate the stock value of subsidiaries with small importance. It is used in.
Market value net asset value method	● A method of evaluating a company's assets and liabilities at market value and calculating the difference in market value and net asset value as shareholder equity.● Calculation using the market value and net asset value method can be said to represent the true economic reality more than the book value and net asset value method. However, the calculation requires a certain amount of work. Furthermore, it cannot be said that future corporate value is taken into account.
Market value net assets + goodwill law	● A method of expressing going concern value that takes into account not only liquidation value or replacement value but also future corporate value by considering goodwill, which is a company's excess earning power, in addition to market value net assets.

8.2. Market approach

This is a method of evaluating relative value by comparing financial indicators of similar listed companies in the same industry and similar transaction cases.

It has the advantage of being able to reflect actual market sentiment and trends, but it requires finding "similar companies in the same industry." There are few listed companies whose businesses are similar to those of small and medium-sized enterprises, and even if they are similar, the scale of the companies is completely different, making it extremely difficult to compare them on the same level. Even for similar transactions, there are high hurdles to using this method due to issues such as collecting data on M&A transactions.

Market approaches are classified as follows: Although it is not always applicable to M&A practices for small and medium-sized companies, when it is applied, the "similar company comparison method (multiple method)" is most often used. In addition, the method that can best reflect market prices and trends is the "transaction example method."

Method	Features
Market value method	● A method of calculating stock value based on stock prices in the stock market● This method can be applied when the purpose is to buy or sell minority interests in listed companies or companies whose shares are actively traded.● The market value method is not applied to the stocks of unlisted small and medium-sized enterprises because they are not traded on a stock market such as a stock exchange, and there are usually no recent transactions between independent third parties.
Similar industry comparison method	● The dividend amount per share, the profit amount per share, the net asset value per share, and the corresponding stock price published by the National Tax Agency for each industry are used as benchmarks, and the dividend amount per share of the target company, the per share amount, and the corresponding stock price are used as benchmarks. This method calculates the stock value of the target company from the amount of profit and net asset value per share, and is often used to calculate inheritance tax and gift tax.● The similar industry comparison method is a calculation method for unlisted stocks stipulated in the inheritance tax assessment notification, and is a calculation method suitable for considering inheritance measures and transfer of stocks between family members, but it is an independent calculation method. It is not appropriate to use it when calculating transaction prices between third parties.
Similar company comparison method (multiple method)	● The basic idea is the same as the similar industry comparison method, in which stock value is calculated by selecting several listed companies that are similar in size and industry to the target company and benchmarking their stock prices, profits, net assets, etc.● The adoption of the similar company comparison method requires the ability to select multiple listed companies that are similar in size and industry to the target company, so when targeting small and medium-sized enterprises, the cases in which it can be adopted are limited.
Transaction case method	● A method that selects buying and selling cases of companies with similar business contents, regions, financial indicators, etc. from past M&A cases, and calculates the value based on that buying and selling record.● Excellent method as it can best reflect market prices and trends However, there is no publicly available database of M&A transactions of small and medium-sized enterprises, and as it is difficult to collect data, the number of evaluators who can adopt the transaction case study method is limited.

We have a simulation that reflects some of the elements of the "Transaction Example Method" and allows you to easily find out stock prices, so please take advantage of it.

8.3. Income Approach

The Income Approach is a method of evaluating the value by focusing on the future profitability of the target company.

The Income Approach is categorized as follows. While it may not be universally applicable in M&A practices for medium-sized and small enterprises, when applied, the "Discounted Cash Flow (DCF) method" is commonly used.

Method	Features
DCF method (discounted cash flow method)	● A method of calculating stock value based on the total amount of cash flows that a company is expected to obtain in the future, discounted to their present value.● According to this calculation method, there are cases where the stock value becomes zero or a small amount. In such cases, a trial calculation using the DCF method may be considered based on the business plan and reflecting risk factors accordingly.● Please note that in order to adopt this method, a reliable business plan of at least 3 to 5 years is required.
Profit return method	● A method of calculating stock value by dividing a company's expected profits by the capital return rate.● To calculate stock prices using the earnings capitalization method, highly reliable planned profit or cash flow values are required, just like the DCF method. becomes.
Dividend return method	● A method of calculating stock value by dividing the amount of dividends from a company by the capital return rate.● While the earnings return method focuses on a company's ability to earn profits, the dividend return method focuses on the company's dividend amount. This method calculates stock value from the perspective of investment efficiency. Therefore, it is rarely used in ordinary M&A seeking business synergies.

9. Fees and expenses paid to M&A intermediary companies and platforms

9.1. Fees paid to M&A brokerage company

The following items are generally the expenses paid to an M&A intermediary company at the stage from pre-contract to closing. Prices and fee structures vary by company, so it is important to carefully consider the details.

Consultation fee	This is a fee to be paid before requesting mediation. We will pay a fee for consultation on matters such as the possibility of M&A, M&A methods, transfer price, execution process, and availability of negotiation partners. Many companies offer free consultations.
Deposit	This is the fee paid when requesting M&A mediation. These costs include preparing materials, searching for a negotiating partner, and calculating corporate value.Having an initial deposit conveys to both the giver and the buyer that the other party is serious about the deal, and reduces the risk of negotiating with a less motivated party.Some companies do not require a deposit, but from the brokerage company's point of view, they will not receive income unless they close the deal, so they will be forced to close the deal no matter what, and there is a possibility that matching will be done just to close the deal. will increase.If you are aiming for M&A success rather than closing a deal, we recommend using an intermediary company that provides a deposit that guarantees a serious attitude.
Intermediate money	This is an expense to be paid in accordance with the basic agreement contract. This is an expense for M&A procedures reaching a certain stage. Intermediate payments are expenses that will not be refunded even if M&A negotiations break down. Even if a basic agreement is reached, there is a possibility that the contract will be annulled later due to an investigation.
Monthly fee (retainer fee)	This is a monthly consultant fee. The total amount can be determined from the contract period specified in the contract, but if M&A negotiations take a long time, it may lead to the payment of large amounts of money.
Success fee	This is an expense paid at the time of conclusion of this contract as compensation for completing the M&A deal. In many cases, the Lehmann method is used to calculate costs.

9.2. Platform usage fee

When users use a platform to find a partner company on their own, there are many cases where the transferee is free of charge, but the transferee is charged a usage fee or closing fee.

However, depending on the platform, you may have to pay a monthly fee to use certain functions, so please consider the position and functions you will use when choosing a platform.

10. Tax Implications in M&A

In terms of expenses incurred in M&A, aside from the costs paid to M&A intermediary firms, it is essential to understand the tax implications. Having a grasp of the applicable taxes enables the identification of M&A methods suitable for the company, avoiding unexpected financial burdens.

10.1. Considerations for the Transferor

In cases where the owner-president, who is a shareholder of the transferor, sells shares in an M&A or when the transferor company pays retirement benefits, income tax (including reconstruction tax) and resident tax are imposed.

The chosen scheme may not be limited to stock transfers; in some cases, a business transfer approach may be adopted, subjecting the transferor company to corporate taxes. Additionally, considerations for consumption tax, real estate acquisition tax, registration license tax, stamp duty, and other indirect taxes may be necessary in certain situations.

Moreover, when considering schemes involving organizational restructuring or post-M&A asset management options, a comprehensive understanding of tax matters is required in the evaluation of M&A.

10.2.Considerations for the Transferee

For the transferee, considerations involve examining factors that impact tax calculations in the transferor company not only during the execution of M&A but also for several years after.

This evaluation encompasses various aspects, including individual items such as retirement benefits for owners retiring due to M&A and carryforward loss of the target company, as well as tax-related issues arising from different M&A schemes.

10.3.Key Taxes Under Consideration

When contemplating M&A in medium-sized and small enterprises, a broad understanding of tax matters is required for both the transferor and transferee, covering a range of issues as outlined below.

*1 Assumes long-term real estate holdings.

*2 Real estate sales require separate consideration of distribution taxes (real estate acquisition tax, registration license tax, consumption tax, stamp tax, etc.)

11. History and future prospects of M&A

The number of M&A transactions in Japan continues to set new records year after year.

Let's look back at trends in domestic M&A by decade.

1980s	Cross-border M&A by large companies became active during the bubble period.
1990s	The bubble burst, and we entered the "lost decade."A succession of management rights began to become an issue among small and medium-sized enterprises.
2000s	Stock prices rise due to the IT bubble, and the number of M&A increases2006 The Small and Medium Enterprise Agency formulates "Business Succession Guidelines" and M&A begins to be recognized as a means of business succession.
2010s	The number of M&A deals for small and medium-sized enterprises is increasing, and industry restructuring and growth strategy-type M&A are also on the rise.
2020s (~2021)	Rise of online M&A platforms2020 "Small and medium-sized M&A promotion plan'' formulated, moving towards public-private partnership type M&A

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