In recent years, an increasing number of businesses have been closed or dissolved due to the aging of their managers or the absence of successors. As a response to this trend, business succession is gaining momentum. The expansion of the business succession tax system and subsidies is also supporting this trend.
In addition to being used as a means of business succession, mergers and acquisitions are also being used to expand the size of companies and diversify their businesses.
In this issue, we will introduce the current status of M&A in small and medium-sized enterprises (SMEs) and key points from both the seller's and buyer's perspectives.

1 Trends in the number of M&As, etc.
The number of M&As (publicly announced) reached a record high of 4304 in 2022, up from 1687 in 2011 and 3050 in 2017, so the number is on the rise (based on RECOF data in the 2023 edition of the White Paper on Small and Medium Enterprises and Small Businesses).

2 Purpose and Current Status of M&A on the Buyer Side
(1) Types of M&A Objectives
Generally, there are four types of M&A objectives: horizontal combination, vertical combination, diversification, and change of business category.
(a) Horizontal combination
An M&A targeting a company in the same position as the buyer, often for the purpose of expanding market share or business area.
(b) Vertical combination
M&A targeting a distributor (manufacturer of raw materials, parts, etc.) or a distributor (distributor, dealer, etc.) from the buyer's perspective, often for the purpose of maintaining the supply chain, improving business efficiency, reducing costs, etc.
c. Diversification
M&A targeting companies engaged in businesses that are less related to the buyer's business, often for the purpose of diversifying business risks and securing sales.
(d) Change of business type, etc.
An M&A transaction in which the buyer's business type or category of business is changed to that of the target company (seller).
(2) Recent Trends
In a survey of companies interested in M&A as buyers (multiple responses allowed), "Expansion of sales/market share" accounted for 74.6%, followed by "Acquisition of human resources" at 54.8% and "Development of new business/entry into different industries" at 46.9% (see "2023 SMEs White Paper: Small-Scale M&A" by Teikoku Databank Ltd. (From "Survey on Business Succession and M&A of Small and Medium-Sized Enterprises," White Paper on Small and Medium-Sized Enterprises, Teikoku Databank, Ltd.)
(2) Many buyer-side firms are viewing M&A as a means of acquiring human resources, in addition to horizontal and vertical mergers and business diversification.
(3) Barriers to M&A
On the other hand, the results of the survey on barriers to M&A (multiple responses allowed) showed that the most common barrier to M&A was "uncertainty about whether employees of the counterparty will understand" at 51.6%, followed by "lack of information to make a decision" at 35.7% and "unsure whether the expected effect will be achieved" at 34.6%. (Source: "Survey on Business Succession and M&A of Small and Medium Enterprises," White Paper on Small and Medium Enterprises, 2023 Edition, Teikoku Databank, Ltd.
In recent years, particular emphasis has been placed on whether or not the employees of the counterparty can understand and whether or not the expected effects can be achieved, in terms of integration (PMI) after the M&A is completed. This point is discussed in "Key Points of M&A from the Buyer's Perspective" below.
Regarding the lack of information on the seller's side, there are many cases in which small and medium-sized companies do not have all the necessary documents, and this point has become a barrier to M&A implementation.

1 Key Points of M&A from the Seller's Perspective
(1) The goal of M&A from the seller's perspective is "closing.
The basic flow of M&A up to the closing is explained in our column "Iroha of M&A for SMEs" (October 19, 2022, written by attorney Yuko Nitta).
In addition to closing, the final M&A agreement usually contains a "representations and warranties" clause. This promises that the representations and warranties made are true, and also sets forth penalties for breach of the representations and warranties clause.
Therefore, even after closing, the representations and warranties clause is extremely important because the seller may be held liable if the representations and warranties are found to be untrue. It is necessary to fully confirm the contents of the final contract prior to the execution of the final contract, and to share any concerns with the buyer and discuss revisions to the provisions so that there will be no breach of the representations and warranties after the fact.
(2) Samples of final agreements and other contractual documents are provided in the reference materials of "Guidelines for Small and Medium-Sized M&A (Second Edition) - For Smooth Business Transfer to a Third Party" (September 2023, Small and Medium Enterprise Agency). It is appropriate to make arrangements according to the case while referring to these.

2 Key Points of M&A from the Buyer's Perspective
(1) From the buyer's perspective, unlike the seller's side, closing is not necessarily the goal. As a matter of course, the M&A acquisition consideration is paid to the shareholders and other owners, and not to the target company of the M&A at all. After the closing, the target company should grow and generate profits, etc., i.e., the post-M&A integration phase is the most important.
(2) Post-M&A integration is referred to as PMI (acronym for Post Merger Integration. PMI is a term used to refer to the integration process that takes place after the M&A is completed and is necessary to realize the objectives of the M&A and maximize the effects of the integration.) PMI is called "the process of integration," and has been emphasized in recent years.
Regarding this PMI, the Small and Medium Enterprise Agency published "Guidelines for Small and Medium PMI - For Successful Small and Medium M&A" in March 2022.
These guidelines position (1) "pre-PMI" as PMI up to the M&A closing, (2) PMI for a certain period of time (about one year) after the M&A closing, and (3) "post-PMI" as PMI for ongoing efforts after the M&A closing. The M&A phase is called "pre" PMI.
The stages leading up to M&A are considered to be the pre-PMI stages, and each of these stages, such as selection of sellers, evaluation of corporate value, due diligence, and conclusion of the final agreement, is considered to be the stage in which prospects for subsequent PMI are formulated and preparations are made.
(3) As mentioned above, it is important for the buyer to look ahead to after the M&A is completed, and of course, the various contracts that are exchanged during the M&A process are also important.
Here, I would like to touch on a few points to be noted in the most important final agreement.
In the final agreement, (1) preconditions for closing, (2) representations and warranties by the seller, (3) covenants by the seller up to the closing, (4) obligations by the seller after execution, and (5) indemnity clauses are important. Items (1) and (3) are important for M&A closing, while items (2), (4), and (5) are important for confirming and hedging risks after M&A closing and for the success or failure of PMI.

The number of M&As in small and medium-sized enterprises has been increasing and is basically expected to continue to increase in the future.
On the other hand, even if you are interested in M&A from both sides, it may be difficult to take the first step if you do not know what is involved.
As introduced in this report, the Small and Medium Enterprise Agency has recently published and revised M&A guidelines for sellers and buyers, respectively, and information on M&A is becoming more complete.
When considering M&A, please consult with a lawyer or other specialist.