Mergers and acquisitions (M&A) have become an essential tool for small and medium-sized enterprises (SMEs) in Japan to facilitate business succession, particularly for those without a successor. However, recent trends indicate a rise in cases where businesses face post-transaction troubles due to unreliable buyers. Foreign companies looking to acquire Japanese businesses should exercise caution to avoid falling into such pitfalls.

 

COMMON RISKS ASSOCIATED WITH UNRELIABLE BUYERS

 

Several patterns have emerged where sellers encounter difficulties after an M&A deal has been closed. These include:

Failure to Release Personal Guarantees: A buyer may neglect to transfer or release the seller’s personal guarantees even after repeated requests, leaving the seller burdened with debt.

Deferred Payment Issues: Buyers may propose a lower upfront payment with promises of a significant balance to be paid later, only to default on their commitments.

Asset Stripping: The buyer acquires the company's assets, such as cash reserves or real estate, but does not inject the necessary funds to continue business operations, ultimately leading to bankruptcy.

 

CASES OF M&A DISPUTES

 

CASE 1: PERSONAL GUARANTEE RETAINED AFTER ACQUISITION

A seller transferred ownership of their business under the condition that their personal guarantee would be released. Despite numerous requests, the buyer did not facilitate the transition. Meanwhile, the buyer extracted the company's cash reserves but failed to invest in operational funds, forcing the company into bankruptcy. As a result, the original owner remained liable for the outstanding debts and had to declare personal bankruptcy.

 

CASE 2: DEFERRED PAYMENT NOT HONORED

A seller agreed to a deal where the initial purchase price was low, with the understanding that a substantial retirement allowance would be paid later. However, when the due date arrived, the buyer failed to fulfill the obligation, leaving the seller without compensation for their years of business ownership.

 

HOW TO PROTECT YOUR BUSINESS FROM UNRELIABLE BUYERS

 

1. CONDUCT THOROUGH DUE DILIGENCE

Before proceeding with an M&A transaction, investigate the buyer’s financial standing, reputation, and track record. Key areas to examine include:

Financial statements and credit history

Past M&A transactions and litigation history

Industry reputation and references from previous sellers

 

2. ENGAGE LEGAL AND FINANCIAL EXPERTS

Hiring M&A specialists, including lawyers and financial advisors, can help uncover red flags and structure agreements that protect the seller. Consulting organizations such as the Japan Federation of Bar Associations or local Business Succession and Transfer Support Centers can provide guidance on mitigating risks.

 

3. STRUCTURE PAYMENTS TO MINIMIZE RISK

To avoid financial losses, consider the following payment strategies:

Demand a substantial upfront payment rather than relying on deferred compensation.

Establish escrow accounts where funds are held until obligations are met.

Include clear penalty clauses for non-payment.

 

4. VERIFY PERSONAL GUARANTEE RELEASE PROCEDURES

If a seller’s personal guarantee is part of the transaction, ensure that the release process is clearly stipulated in the contract. Buyers should provide proof of liability transfer before the transaction closes.

 

5. CHOOSE A RELIABLE M&A INTERMEDIARY

Many fraudulent buyers gain access to potential acquisitions through M&A brokers and intermediaries who fail to vet their clients properly. Work with established and reputable M&A advisors who conduct rigorous buyer screenings and adhere to industry regulations.

 

GOVERNMENT ACTIONS AND INDUSTRY RESPONSES

The Japanese government has taken steps to address fraudulent M&A activities by revising M&A guidelines and encouraging industry groups to improve due diligence processes. Organizations such as the M&A Intermediary Association have started blacklisting unreliable buyers and promoting ethical standards within the industry.

 

Source: Japanese government, Tokyo news, NHK news

 

FINAL THOUGHTS

 

Foreign investors and companies looking to acquire businesses in Japan must exercise extreme caution and implement strong risk mitigation measures. By conducting thorough due diligence, engaging professional advisors, structuring secure payment terms, and verifying legal protections, sellers can reduce their exposure to unreliable buyers.

 

For foreign companies considering M&A in Japan, taking these precautions can mean the huge difference between a smooth acquisition and a disastrous financial loss.