<\/span><\/h2>\n\n\n\nA business transfer is one method of M&A where a part or all of a company’s business is sold to a third party. Selling a part of the business is referred to as a “partial sale,” and selling the entire business is called a “complete sale.”<\/p>\n\n\n\n
A business encompasses various elements such as intangible assets like “goodwill” and “brand,” intellectual property such as patents and know-how, technology, personnel, management organization, sales channels, licenses and approvals, various suppliers and business partners, and facilities like factories.<\/p>\n\n\n\nWhile it is generally a principle to bundle these elements when inheriting a business, a distinctive feature of a business transfer is the ability to selectively buy and sell only what is needed<\/strong>.<\/p>\n\n\n\nThere are other methods of business succession, such as “company split.”<\/p>\n\n\n\n
<\/span>Reasons Why Buyers Choose Business Transfers<\/span><\/h2>\n\n\n\nIn a survey conducted by Mitsubishi UFJ Research & Consulting in 2020 (Gregorian calendar year) targeting approximately 30,000 small and medium-sized enterprises nationwide, the top two reasons why buyers chose business transfers were as follows:<\/p>\n\n\n\n
\nThey were able to select the assets, employees, and contracts with clients they wanted to acquire – 65.6%<\/li>\n\n\n\n They were able to avoid taking over off-balance-sheet liabilities and unexpected risks – 29.6%<\/li>\n<\/ul>\n\n\n\nFrom the buyer’s perspective, the greatest advantage of a business transfer is the ability to selectively acquire only what they want, while avoiding unnecessary items and risks.<\/strong><\/p>\n\n\n\n<\/span>Benefits for Sellers in Business Transfers<\/span><\/h2>\n\n\n\n<\/span>Solution to Successor Issues<\/span><\/h3>\n\n\n\nThe biggest problem faced by aging small and medium-sized business owners is the lack of successors.<\/p>\n\n\n\n
Shutting down a business can have negative impacts on employees and business partners such as suppliers. Therefore, transferring the business can ensure its continuity<\/strong>.<\/p>\n\n\n\n<\/span>Ability to Separate Unprofitable Businesses<\/span><\/h3>\n\n\n\nEven if the main business is doing well, having an unprofitable division can negatively affect the overall management of the company. In such cases, selling the unprofitable business can reduce losses and enable business reconstruction.<\/p>\n\n\n\n
<\/span>Ability to Raise Funds<\/span><\/h3>\n\n\n\nThe funds obtained through a business transfer can be used for strengthening and expanding the main business, or investing in technology development and facility enhancement for new businesses<\/strong>.<\/p>\n\n\n\n<\/span>Ability to Preserve the Company<\/span><\/h3>\n\n\n\nThe credibility of the company built over many years, assets such as land and buildings, and relationships with business partners can be preserved by choosing to transfer the business.<\/p>\n\n\n\n
<\/span>Disadvantages for Sellers in Business Transfers<\/span><\/h2>\n\n\n\n<\/span>Complex and Time-Consuming Procedures<\/span><\/h3>\n\n\n\nUnlike corporate transfers, business transfers require the transfer and relocation of various elements necessary for business succession. Therefore, compared to other M&A methods, the procedures are more numerous and time-consuming.<\/p>\n\n\n\n
Some procedures, such as contracts with business partners and employment contracts with employees involved in the business, cannot be completed solely between the seller and the buyer.<\/p>\n\n\n\n
<\/span>Special Resolution Required at the General Meeting of Shareholders<\/span><\/h3>\n\n\n\n*We will explain in detail in the “Points to Note in Business Transfer Procedures” section below.<\/p>\n\n\n\n
<\/span>Corporate Tax is Applicable<\/strong><\/span><\/h3>\n\n\n\nTax is applied to the “transfer profit”, which is the transfer amount minus the book value of the transferred assets. However, if you transfer at a price lower than the book value, it will result in a negative transfer profit<\/strong>. In this case, the negative portion of the corporate tax will be deducted.<\/p>\n\n\n\n<\/span>Potential Loss of Excellent Personnel<\/strong><\/span><\/h3>\n\n\n\nPersonnel with the necessary knowledge and experience are required to actually operate the inherited business. Therefore, it is not uncommon for personnel to move at the buyer’s request along with the business transfer.<\/p>\n\n\n\n
There is a possibility that some employees may wish to transfer because they find fulfillment in the business, and there is a risk of losing excellent personnel in exchange for the business transfer<\/strong>.<\/p>\n\n\n\n<\/span>There is an Obligation to Avoid Competition<\/strong><\/span><\/h3>\n\n\n\nThe Japanese Companies Act stipulates the following non-competition obligations for sellers of businesses:<\/p>\n\n\n\n
\nUnless otherwise indicated by the parties, within the same municipality and adjacent municipalities, the same business cannot be conducted for 20 years from the date of the business transfer.<\/li>\n\n\n\n If the transferring company has made a special agreement not to conduct the same business, the agreement will be effective for a period of 30 years from the date of the business transfer.<\/li>\n\n\n\n Even if the previous two items do not apply, the transferring company must not conduct the same business with the intention of unfair competition.<\/li>\n<\/ul>\n\n\n\n<\/span>Process of Business Transfer<\/span><\/h2>\n\n\n\nThe basic process of a business transfer, which involves many procedures, is as follows:<\/p>\n\n\n\n
\nListing of transferable assets and creation of a transfer plan<\/li>\n\n\n\n Estimation of transfer price (valuation)<\/li>\n\n\n\n Creation of a project summary document<\/li>\n\n\n\n Selection of the transferee, negotiation, and conclusion of a basic agreement contract<\/li>\n\n\n\n Resolution of the board of directors<\/li>\n\n\n\n Conclusion of the business transfer contract (concluded on the condition of approval by the general meeting of shareholders)<\/li>\n\n\n\n Approval of the business transfer contract by the general meeting of shareholders<\/li>\n\n\n\n Submission of an interim report<\/li>\n\n\n\n Notification or announcement to shareholders<\/li>\n\n\n\n Special resolution of the general meeting of shareholders<\/li>\n\n\n\n Procedures for changing the name of assets, and contracts with business partners and employees<\/li>\n<\/ul>\n\n\n\n<\/span>Key Points in Business Transfer Procedures<\/span><\/h2>\n\n\n\n<\/span>Estimating the Transfer Price<\/span><\/h3>\n\n\n\nWhen transferring a business, it is necessary to objectively evaluate the value of your own business and calculate the transfer price. While you can directly apply the company valuation method, it can be time-consuming and costly, and the results may vary significantly depending on the calculation method, so it is not highly recommended for small and medium-sized enterprises.<\/p>\n\n\n\n
A commonly used method for business valuation is to consider the business value as the total amount of “fair value transfer assets” and “business rights (goodwill)”<\/strong>.<\/p>\n\n\n\nBusiness rights (goodwill) include intangible assets such as brand, technology, know-how, operating organization, and relationships with clients, which are difficult to monetize. Therefore, a common calculation method is to use the “past 2-5 years’ net profit” \u00d7 “valuation multiple” as a guideline. The valuation multiple varies depending on the industry and trends.<\/p>\n\n\n\n