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Private equity

Heirless, baby boomer SME owners in search of buyers

As baby boomer owners are retiring, their offspring opt to inherit cash instead of family business

By Aug 04, 2021 (Gmt+09:00)

An automotive parts plating plant in Incheon, South Korea
An automotive parts plating plant in Incheon, South Korea


The son of a South Korean manufacturing company's owner, with a Ph.D degree in engineering, has refused to take over his father's business and instead chose to work for an IT company. The daughter of another small Korean manufacturer's founding family is demanding cash instead of shares in her father’s company because she wants to continue her career as a professional doctor.

The two companies are among the small to medium-sized enterprises (SMEs) whose founding families have recently asked a top accounting firm to find buyers.

Over the past couple of years, an increasing number of SMEs have come on the market after failing to hand over their businesses to family members.

In the first half of this year, 36 M&A deals involved the companies, a majority owned by single shareholders, according to data compiled by Market Insight. It marked the highest half-year number since 2012. Market Insight is the capital news outlet of The Korea Economic Daily.

With asset prices ballooning to their highest-ever levels, the owners of SMEs in the baby boom generation are opting to sell their companies at handsome prices in the absence of heirs, or qualified ones.

The rise of IT, platform and service businesses are rendering the family members of the traditional shipbuilding, shipping and automotive parts companies unwilling to succeed them, where South Korea boasts of its global competitivenss. Further, their offspring chose to live in the capital city of Seoul for their children's education.

“There are several reasons for the founders in their 60s or above to sell their companies. But the main reason is the absence of heirs,” said an M&A lawyer at a large accounting firm in South Korea. “They don’t either have a son to succeed their business, their kids are not interested in the company, or they are unqualified.”

“Now that IT, platform and service businesses became the mainstream businesses, the owners of shipbuilding, shipping and automotive parts makers cannot tell their children to run their manufacturing plants with diligent focus," said another accounting firm source.

A PEF head said that the overseas-educated children of SME owners prefer working for foreign companies or startups, rather than going down to their hometowns to take over their family’s manufacturing business.
Cleantopia's founder offers 100% of the country's largest laundry service franchise 
Cleantopia's founder offers 100% of the country's largest laundry service franchise 

Since the beginning of the second half, about 20 private companies have been put up for sale in the country, including South Korea's largest laundry service franchise Cleantopia.com. Its founder and Chairman Lee Bum-taek has been in talks to sell 100% of the 29-year-old franchise operator to Seoul-based JKL Partners for less than 200 billion won.

Last month, the founder and honorary chairman of Hanssem Co. signed a preliminary agreement to sell a controlling stake in the company to IMM Private Equity. Since his son died in 2012, he had sought to sell the country's largest furniture and home furnishing company.

Other SMEs whose controlling stakes are up for grabs include SM Entertainment Co., the label behind K-pop groups Red Velvet and EXO.

For the whole year of 2021, local M&A deals for privately-owned SMEs look set to surpass the previous record of 51 set in 2019.

PEFs, ACCOUNTING FIRMS SCURRY TO SECURE DEALS

In response, private equity firms and accounting companies launched teams dedicated to SMEs founded in the 1980s and 1990s, which currently make up more than half of domestic M&A deals.

"SMEs established in the 1980s and 1990s are at the top of our contact list," another PEF head told Market Insight. "We're combing through them across the country and sounding out their interest in selling their companies."
 
Cash-rich PEFs and other mid-sized, family-owned companies under new leadership are emerging as their buyers, said an investment banker.

As South Korean companies and employees have reduced their resistance to PEFs, once considered as corporate predators, PEFs are aggressively approaching them to secure private deals before they are put on the market.   

To win their hearts, PEFs, accounting companies and law firms are now providing them with health checkup services at the country’s top general hospitals. 

Moreover, they approach top-ranking executives at SMEs to be tipped off to a possible conflict at the founding family. Some PEFs are trying to build relationships with small accounting firms in provinces where the SMEs are based and gather information about the companies.

Riding on the M&A boom, South Korea-registered PEFs raised a record amount of 97.1 trillion won ($85 billion) in 2020
An SME plant in Sihwa Industrial Complex, Gyeonggi Province
An SME plant in Sihwa Industrial Complex, Gyeonggi Province


Alongside COVID 19-induced business slowdown and tightened regulations on the work environment such as shorter workweek, heavy inheritance taxes led some heirs-to-be to choose cash instead of taking over their family business.

South Korea’s inheritance tax rate is as high as 50%, but it goes up to 60% when it relates to the transfer of the largest stake in a company.

"Despite some tax breaks on the family business transfer, the successor is required to maintain their workforce. Given this, their second generation prefers to inherit cash," said an SME association official. 

One example was MS Savings Bank based in Daegu, southeast of Seoul. Its owner's family sold the savings bank to SK Securities Co. for 39.1 billion won in April of this year to avoid heavy inheritance taxes. 

Some SMEs, failing to find buyers, turned to the secondhand market to sell their company assets before liquidating the business.

The number of used machinery and equipment up for sale amounted to 735 in the first half of this year, exceeding the previous record of 601 set in the first half of 2020, according to the Korea SMEs and Startup Agency.

Unlike the past, SME owners no longer feel obliged to hand over their companies to their offspring, if they are deemed unqualified.
  
An SME founder in his 70s has abruptly decided to sell his company due to a deepening conflict among his children about the business inheritance. Another SME's owner has sold his company, after his son opted to run a convenience store rather than taking over his father’s business.

"I have no idea what to do with my son. He keeps asking me to open a screen golf shop, instead of taking over my business," a tools manufacturing company head told The Korea Economic Daily.

Write to Ji-hye Min, Jun-ho Cha and Kyung-bong Koh at spop@hankyung.com

Yeonhee Kim edited this article.

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