OSAKA (Kyodo) With small and midsize companies folding at an annual rate of about 290,000, there is a growing reservoir of top managers willing to hand over their businesses.
Also fueling this trend are new tax relief steps on business inheritances and a stock market fall that has reduced levies on company stock given away as gifts. On top of this, aging managers of many small companies are casting about for people who can take over their businesses.
Financial institutions are trying to cash in by mediating between aging business managers and younger entrepreneurs.
A resident of Osaka Prefecture in his 70s sold his entire chain of 20 prescription drugstores run by his health care service firm last summer.
“After thinking about the remaining years of my life, I decided to sell the stores to another company and hand over the rest of my firm to relatives,” he said.
His 20 years in the drug business ended after he thought his drug retail operation could not survive with just 20 outlets.
Shigenori Sotani, a senior official of the private banking department of Sumitomo Trust & Banking Co., brokered the deal.
“We spent a whole year talking the matter over with the business owner and tried to honor the company employees’ wish for job security,” Sotani said.
Sumitomo Mitsui Banking Corp. has lent more than ¥300 billion since April 2007 in connection with similar deals. The number of such transactions that competitor Bank of Tokyo-Mitsubishi UFJ will likely propose to businesspeople is estimated to reach 7,000 in the year ending this month.
Sumitomo is trying to win over new clients by assisting in the transfer of business owners’ private assets through testamentary trusts and other means.
Because the smooth transfer of smaller firms is crucial for the growth of the overall economy, the government has reworked the regulatory system for such activities.
Under the amended tax code for the year beginning in April, the 80 percent tax assessed on inherited company stock, which is not traded on any exchange, can be deferred when certain conditions are met. A tax deferral will also be available for a gift given by a business owner. The tax abatement measure is retroactive to October 2008.
“Because of the revised tax rules, new business owners are taking over larger blocks of company stock, whereas such holdings used to be divided by various people to avoid taxes,” said Masanobu Ishibashi, a senior official at Sumitomo Mitsui’s department handling business transfers.
An owner of a manufacturing company in Hyogo Prefecture is planning to give his stock to his oldest daughter this month.
“Now is a great opportunity because the stock price of my company has fallen 60 percent since last year,” he said. The lower the value of his stock holdings, the lower the gift tax when he gives the shares to his daughter.
The tax has been a headache for him, and now the levy is expected to be reduced almost by half. But the shares in his private company have gone down in value in tandem with those of exchange-listed stocks of firms operating in similar business segments.
As of December, share values had plummeted 70 percent for building and services firms and 80 percent for real estate companies from the 2005 level.
There are other roadblocks making it difficult for small company managers to hand over their businesses to successors.
For example, sometimes no one emerges to take over their operations, and even if successors appear, it is also unclear whether the new company leaders can win a sufficient level of trust from customers or business partners. Money can also become an issue when aging entrepreneurs are being succeeded by younger people.
There can also be cases where family feuds ensue about who should take over the business. A well-known example is Ichizawa Hanpu Co., a Kyoto family business known for its popular cloth bags with unique designs. After its former chairman died in 2001, his two sons battled it out all the way to the Supreme Court.
And amid the serious recession, some business owners have concluded it is important to prioritize keeping their companies afloat rather than finding successors, observers say.
“It’s desirable that managers think from a long-term perspective and begin preparing for the handover of their business responsibilities and assets when they are still in their 50s,” said Seiichi Kubo, an official with Medium and Small Business Research Institute.
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