Recently, the aging of small and medium-sized enterprise (SME) representatives has intensified, rapidly spreading the movement of 'third-party succession'. Particularly, instead of passing the company down to their children, the method of transferring it externally, that is, mergers and acquisitions (M&A), has emerged as a new alternative.
However, not everyone who wants to sell their company succeeds in doing so. Experts point out that in order to capture attention in the market, the criterion of 'growth potential' must be met.
According to the '2022 SME Succession Survey' by the Ministry of SMEs and Startups, the proportion of CEOs over the age of 60 in manufacturing SMEs has increased 2.4 times over the past decade due to changes in population structure, reaching one-third of the total.
As SME CEOs age, the demand for succession is also increasing. Particularly, as children are reluctant to inherit the business, 'third-party succession' is emerging as an alternative. In a Ministry of SMEs and Startups survey, 33.3% of companies without plans for child succession responded that 'the children do not wish to succeed.' Among methods of 'third-party succession', 29.2% of companies opted for selling their business.
Jeong Hee-seok, executive managing director of Deal Advisory at Samjeong Accounting Corporation, said, 'As most SMEs are manufacturing-based, many are located in rural areas,' adding that 'the need for children to receive inheritance from the sales of the companies rather than run the corporations is high.'
Most children of SMEs have often entered the finance or consulting sectors through studying abroad or pursuing an MBA, which makes it difficult for them to abandon that foundation and jump into business management.
In fact, Company A, a manufacturer of household goods and OEM equipment based in Gyeonggi Province, was recently sold to Company B, which has emerged as a strategic investor.
The founder hoped to retire, but as none of the children participated in management, they opted for management succession through M&A. Company A found a new owner after defining the corporate value, discovering acquisition candidates, and conducting due diligence through an M&A advisory firm from the Ministry of SMEs and Startups.
Company C, which had been engaged in the waste battery recycling business for 23 years, was also sold to Company D, an SME in the same industry, because child succession became difficult. In this process, Company C received support from the Korea Technology Finance Corporation (KOTEC) under the Ministry of SMEs and Startups for management interviews with acquiring companies, on-site investigations, and guarantees for acquisition funds.
However, just because a company desires to sell does not mean all corporations will succeed in the M&A market. The key is 'growth potential.' Since most acquirers are private equity (PE) firms, they prefer corporations that possess profitability and growth potential.
An M&A expert emphasized, 'Since PE firms structure their acquisitions to improve revenue and resell at a higher price, growth potential is the most important consideration.'
The same applies to large companies, mid-sized companies, and SMEs that act as strategic investors. They prioritize reviewing growth-oriented corporations to secure new growth engines or quickly enter new markets.
However, there are not many SMEs with high growth potential. This is because manufacturing SMEs have lost their growth engines and find it difficult to sustain growth as they did during the first generation of entrepreneurship. He stated, 'Among the properties on the market, only a few SMEs have guaranteed growth potential.'
Information gaps are also an issue. Most SMEs are experiencing M&A for the first time, and they struggle to execute even if they desire M&A due to a lack of knowledge about the procedures and methods.
They ultimately look for advisory firms to help with M&A, but this is also not easy. Advisory firms receive a commission of 3% to 5% of the total amount if the transaction is successful, so they often prefer SMEs with annual revenues below 30 billion won due to low profitability.
Opaque accounting practices also serve as a major obstacle to SME M&A. SMEs with annual revenues below 10 billion won are not subject to external audits, which can cause a decline in the trustworthiness of financial statements. When combined with a lack of growth potential in the situation, accounting risks can deter potential acquirers from the transaction itself.
Some suggest that 'accounting issues can be filtered out through corporate due diligence,' but due diligence incurs significant costs and time, which can increase the burdens on buyers.
Experts point out that the success or failure of third-party succession ultimately depends on the growth potential of corporations.
Kim Dae-eop, executive managing director of BridgeCode's M&A Center, noted, 'What is crucial when a corporation considers third-party succession is not just the simple performance, but a clear corporate value and future growth potential.'