Priorities for the Japanese Economy in 2021 (January 2021): Using the COVID-19 Crisis as a Chance to Revive the Japanese Economy

Overcome the Coronavirus Crisis and Seize the Opportunity for Business Succession

YAMORI Nobuyoshi
Faculty Fellow, RIETI

Coronavirus Crisis Aggravating the Business Succession Environment

In 2020, the business environment for small and medium-size enterprises (SMEs) continued to be very harsh due to the duration and severity of the coronavirus crisis. Fortunately, despite the severe deterioration of business performance, the number of corporate bankruptcies has remained stable thanks to strong governmental support and financing. For example, according to Tokyo Shoko Research, the number of corporate bankruptcies totaled 6,646 in January-October 2020, down slightly (a drop of 4.4%) from the same period of last year (Note 1).

On the other hand, the number of temporary and permanent business closures and dissolutions across the nation in January-October 2020 surged 21.5% from the same period of last year to 43,802. At this pace, the number of temporary and permanent business closures and dissolutions in the whole of 2020 is set to be much higher than the level in 2018 (46,724), which was the highest since 2000, according to Tokyo Shoko Research. While the number of temporary and permanent business closures and dissolutions has been on an uptrend in recent years, there are concerns that the number of SMEs that decide to dissolve the business rather than attempt to continue operations because of the coronavirus crisis may increase in the future.

Let's examine the results of the "Daido Life Insurance Survey: Business Succession and Fostering of Successors," which was conducted by Daido Life Insurance in September, and to which around 13,000 companies across the nation responded (Note 2). First, the percentage of companies that indicated a desire to implement business succession was 58%, down as much as 15 percentage points from the number in the same survey in January 2019 (73%) (Note 3). As much as 16% replied that the coronavirus crisis changed their mind concerning business succession. On a sector-by-sector basis, the percentage of companies with that reply was particularly high, in the accommodation and food and beverage service sector, which has been severely disrupted by the coronavirus crisis, at 24%.

Of the companies that changed their plans in such a manner, 32% expressed a desire to postpone the timing of business succession. Meanwhile, as much as 8% expressed a new desire for a permanent business closure. On a sector-by-sector basis, in the accommodation and food and beverage service sector, 48% expressed a desire to postpone the timing of business succession, and 10% expressed a desire for a permanent business closure. These results suggest that the coronavirus crisis encourage the postponement of business succession and increase permanent business closures.

In the case of companies that have decided on successors and have been exploring the timing of succession, a temporary decline in corporate value may encourage business succession because it is easier to pass on shares to the successors because of a decrease in the value of the stock. However, the reality appears to be that concerns over implementing successions in this time of deteriorating business performance and unclear future prospects are discouraging more companies from undertaking business successions. In Japan, where the aging of the owner-manager population is ongoing, postponing the timing of business succession increases the risk of losing such an opportunity, ultimately leading to a permanent business closure.

Business Succession as Opportunity

According to the results of a survey that I conducted in February 2019 with corporate clients of Credit Guarantee Corporation of Hyogo-Ken, majority of companies increased their revenues and profits after business succession. Moreover, it was found that the younger the successor is, the higher the growth in profit (Table 1) (Note 4). Similar results were also reported in the 2019 White Paper on Small and Medium Enterprises in Japan, so it can be said that younger successors tend to be successful in increasing corporate profit (Note 5). This is likely because younger managers find it easier to implement business innovation.

Looking toward a post-coronavirus era, there is no doubt that the way of doing business must change drastically. As the maxim "Pour new wine into fresh wineskins" indicates, now may be the right time to pass the baton to new managers. If the coronavirus crisis triggers a quick renewal of management, it may cause a flourishing of companies operating on innovative business models. We must use the adversity of the coronavirus crisis as an opportunity to mold business successions into fortunes.

Table 1. Current Net Profit Compared with the Level at the Time of Succession
Overall Successor's age
39 or younger 40-49 50-59 60 or older
Steep increase 8.5% 15.3% 6.0% 7.1% 6.5%
Increase 32.0% 29.9% 37.1% 25.2% 25.8%
Flat 42.3% 39.6% 42.3% 48.8% 37.1%
Decrease 13.4% 11.8% 11.2% 15.0% 24.2%
Steep decrease 3.8% 3.5% 3.4% 3.9% 6.5%
Respondents 610 144 267 127 62

Expectations for Regional Financial Institutions Extend beyond Financing Support

The Small and Medium Enterprise Agency will strengthen measures to support business succession under budget requests for fiscal 2021. For example, under the program that provides comprehensive support for business succession, business succession networks supporting intra-family succession will be integrated into business succession centers that support succession by third parties, with a total of 168,000 cases per year expected to undergo "business succession diagnosis." In addition, the business succession subsidy program (for cases of management change) will provide support for capital investment and sales channel expansion for SMEs that are implementing management innovation during the business succession.

The main difficulty in finding a successor is the requirement that outgoing and incoming owners provide personal guarantees. On this point, in December 2019, special provisions were developed for the Guidelines for Personal Guarantee Provided by Business Owners that focus on practices at the time of business succession. In principle, the special provisions prohibit dual guarantee requirements that demand personal guarantees from both the outgoing and incoming owners prior to business succession. As a result, dual guarantee requirements have decreased considerably. At a time when there are significant concerns over the future, it is fortunate that the measures that ease the burden of the guarantee requirement for owner-managers have already been adopted.

Finally, I would like to point out that if those policy efforts are to produce effective results, supporters close to business owners have an important role to play. In particular, I am expecting regional financial institutions to play their role not only in financing support but also in other areas. I hope that regional financial institutions will act in a supporting role by examining business potential, considering necessary measures and moving forward together with business owners in order to prevent the owners from becoming overly worried and from inadvertently letting viable companies go out of business. Regional financial institutions should be able to undertake this role if they have developed firm relationships with companies. In 2021, the distinction between which financial institutions are valuable contributors to their regions and which are not will become clearer.

December 24, 2020
  1. ^ Tokyo Shoko Research, "Survey on Trends in Temporary and Permanent Business Closures and Dissolutions in January-October 2020 (preliminary data)," November 26, 2020.
  2. ^ Daido Life Insurance, "Questionnaire Survey with Small and Medium-Sized Enterprise Managers—Daido Life Survey in September 2020."
  3. ^ When the author recalculated counting only the replies from managers who responded to both the September 2020 and January 2019 surveys (866 managers) based on individual data provided by Daido Life Insurance, the percentage also declined steeply, from 77.7% to 64.4%. The sector-by-sector figures cited hereafter were calculated by the author based on individual data.
  4. ^ This survey covers SMEs that implemented business succession between July 2011 and November 2018. For further details, refer to Business Succession Support by Regional Financial Institutions and the Credit Guarantee System—Toward Regional Finance Capable of Contributing to Development of Regional Companies (Chuokeizai-Sha, August 2020), edited by Yamori Nobuyoshi.
  5. ^ Source: Figure 2-1-24 in this white paper.

February 12, 2021