In August 2024, Japan’s “SME M&A Guidelines” (Chusho M&A Guidelines) were revised and published as the Third Edition.
The revision updates items of particular importance to owners of small and medium-sized enterprises (SMEs), including fees, conflicts of interest, personal guarantees by owner-managers, and measures against inappropriate buyers.
This article explains the most important changes in the SME M&A Guidelines (Third Edition), together with practical points to keep in mind.
1. Purpose of the Revision
The revision responds to several problems: the presence of inappropriate buyers, disputes over owner-managers’ personal guarantees, and excessive solicitation and advertising by M&A service providers. Its aim is to make the SME M&A market healthier and to improve the quality of M&A support.
The Third Edition adds to the guidance for SMEs. It also expands the responses and points of attention expected of intermediaries and financial advisors (FAs).
2. Main Points of the Revision
(1) Fees and Services of Intermediaries and FAs
- SMEs are now advised to check not only the fees but also the content and quality of the services provided, and to consider negotiating fees where appropriate.
- Intermediaries and FAs are expected to explain their fees in detail. They must also explain the services provided at each stage of the process, and the qualifications, years of experience and track record of closed deals of the staff in charge.
Commentary
In the M&A industry, the “Lehman formula” is widely used to calculate fees. However, even under the same Lehman formula, the fee can differ significantly depending on the base used: equity value, enterprise value or total transferred assets. It is therefore important to confirm the specific calculation basis and fee rates in advance, not just the name of the formula.
The revision is expected to make fee structures and service scope more transparent. This should make it easier for clients to assess and compare the reasonableness of an offer before signing a contract.
(2) Explicit Prohibitions on Advertising and Solicitation
- Intermediaries and FAs are expected to stop their solicitation activities when the recipient of advertising or solicitation indicates that they do not wish to receive it.
Commentary
As the SME M&A market has grown, solicitation by intermediary firms through direct mail and telephone has also become more active. In some cases, excessive solicitation has become a problem, such as repeatedly approaching companies that are not considering M&A or have already declined.
In light of this, the revision sets out the rules on solicitation more clearly. M&A is an important decision that shapes a company’s future. It is therefore important not to rely solely on a salesperson’s explanation, and to review the contract terms, fee structure and services provided carefully.
(3) Specific Prohibitions on Conflicts of Interest
- Intermediaries are now specifically prohibited from favoring parties that pay additional fees, or repeat clients, in ways that prioritize matching contrary to the parties’ needs or steer the transfer price.
- Intermediaries are also expected to stipulate these prohibitions as their obligations in the intermediary agreement.
Commentary
In M&A intermediation, a single firm may be engaged by both the seller and the buyer and receive fees from both. This structure can give rise to structural conflicts of interest. Suppose an intermediary receives additional fees from one party, or favors a buyer with whom it has a continuing relationship. If this results in matching contrary to the client’s needs, or in steering of the transfer price, the fairness of the transaction could be compromised.
The revision specifies such practices as prohibited. When using an intermediary, it is important to confirm not only the fee amount but also what kinds of fees the firm receives from the seller and from the buyer.
(4) Rules on Name Clearance and Tail Provisions
- Before “name clearance” (disclosing the seller’s name to the buyer), intermediaries and FAs are required to obtain the seller’s consent.
- For tail provisions, the Guidelines now clarify the scope of application and the treatment where there is no exclusivity clause.
Commentary
“Name clearance” refers to an M&A intermediary or FA disclosing the seller’s company name, or information that could identify it, to prospective buyers. In the early stages of M&A, approaches are typically made using an anonymized “non-name” document, and the process moves to name clearance once a prospective buyer shows interest.
If the fact that a company is considering M&A reaches its business partners, employees or financial institutions unintentionally, it may affect operations and creditworthiness. The revision clearly requires obtaining the seller’s consent before the company name and similar information are disclosed.
A “tail provision” is a clause under which a fee remains payable if, even after the intermediary agreement has ended, an M&A transaction is completed within a set period with a counterparty introduced by that firm. The revision sets out clearer rules on the scope of such provisions and on their treatment where there is no exclusivity clause.
(5) Post-Signing Risks Between the Parties
- For SMEs, the Guidelines add explanations of risks that may lead to disputes between the parties after the final agreement and closing.
- Intermediaries and FAs are also expected to explain such risks to their clients in specific terms.
Commentary
After closing, disputes may arise, such as “the actual situation differed from what was explained beforehand” or “off-balance-sheet liabilities were discovered.” To prepare for such risks, final agreements commonly include representations and warranties, indemnification provisions and post-closing obligations.
The revision emphasizes the importance of thoroughly confirming and explaining the anticipated risks and responses before the final agreement is signed.
(6) Treatment of Personal Guarantees by the Seller’s Owner-Manager
- To promote the release of personal guarantees, or their transfer to the buyer, through M&A, the Guidelines suggest that SMEs consult professionals, the Succession and Business Transfer Support Centers, and financial institutions before the M&A is completed. They also suggest that SMEs consider how guarantees are handled in the final agreement.
- Intermediaries and FAs are expected to explain that consulting professionals or financial institutions is an option, and to adjust the treatment of personal guarantees in the final agreement.
- Financial institutions are also expected to consider appropriate responses with due regard to the “Guidelines on Personal Guarantees by Business Owners” and related guidelines.
Commentary
Among Japanese SMEs, it is not uncommon for the owner-manager to personally guarantee the company’s bank borrowings. Transferring the company to a third party does not automatically release the guarantee. Release or modification requires coordination with the financial institution.
To prevent personal guarantees from remaining in place after the M&A is completed, the revision calls for prior consultation with financial institutions and appropriate adjustment of how guarantees are handled in the final agreement. For the seller’s owner-manager, it is important to confirm early on not only the transfer price but also when, and under what conditions, the personal guarantee will be released.
(7) Excluding Inappropriate Operators
- Intermediaries, FAs and M&A platform operators are expected to conduct a certain level of investigation into the buyer, and to report its outline and results to the client.
- Where they obtain information about inappropriate conduct, they are expected to consider a cautious response. They are also expected to explain to the client how an industry-wide information-sharing mechanism is being built and whether they participate in it.
Commentary
In M&A, it is important to judge carefully not only the price and terms but also “who will take over the company.” If a transaction proceeds without adequately checking the buyer’s business substance and financial capacity, disputes with employees and business partners may arise after closing. The business may also not be operated as originally anticipated.
The revision expects intermediaries, FAs and others to conduct a certain level of investigation and confirmation regarding the buyer, and to report its outline and results to the client.
In Closing
This revision of the SME M&A Guidelines sets out more specific rules and points of attention on fee structures, the scope of intermediaries’ services, conflicts of interest, personal guarantees by owner-managers, and the handling of inappropriate buyers.
M&A is an important decision that affects not only the future of a company or business, but also many stakeholders, including its owner-manager, employees and business partners. Beyond the transfer price and fees, it is necessary to examine carefully the terms of the intermediary agreement and the final agreement, the counterparty’s creditworthiness, and the risks that remain after closing.
If you have questions or concerns, it is advisable to proceed with caution and, where necessary, consult professionals such as certified public accountants, licensed tax accountants and attorneys.
Translation notes
- Title: I replaced “Autumn” with “2024 Revision.” The seasonal reference could confuse readers in the southern hemisphere, and it does not match the August publication date in the body.
- Official English names: I used “SME M&A Guidelines” and “Guidelines on Personal Guarantees by Business Owners.” Please check both against the Small and Medium Enterprise Agency’s English publications before posting.
- Source attribution: The reference link is kept at the top. Section 1 still follows the official wording closely, so I recommend adding a line such as “Source: SME M&A Guidelines (Third Edition), Small and Medium Enterprise Agency, METI.”
- Buyer-oriented lead: The readers you are targeting are mostly prospective buyers. If you like, I can draft a short lead paragraph explaining why items (1), (4), (6) and (7) matter to them, and why the Guidelines support transaction safety on the buyer side as well.
I can also put this translation into a file, such as a Word document, if you would like one.