General Edition Sunday, July 23, 2006 Issue No. 384
+++ INDEX
- What's new
- Services lineup
- News
- Candidate roundup
- Upcoming events
- News credits
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| +++ WHAT'S NEW |
As we've remarked in previous newsletters, the heightened interest in M&A here in Japan is quite tangible. M&A broker Recof Corporation reckons that there were about 1,409 deals in the first 6 months of this year, up 10% on last year.
While most of these were by and between major companies, more and more are involving the little guys as well.
One sector of the community that is finally starting to enjoy the trickle-down of this trend is that of domestic businesses owned by foreigners. Looking through the member's directory of the American Chamber of Commerce in Japan, by far the largest foreign business organization here, we estimate that there are about 90 or so foreign-owned local firms among its members. Since the ACCJ probably represents about 20% of all foreign-capital firms in Japan, it is also reasonable to expect that it is representative of the overall number of foreign-owned local companies too. Thus we will stick our necks out and say that we believe there are about 450 foreigner-owned locally-headquartered companies in Japan. Put another way, that's 450 foreign entrepreneurs.
Many readers will know from snippets in previous columns that our company -- OK, free plug here -- Japan Inc. is in the business of consulting to owners of such companies, who are thinking of selling. In helping such firms clean themselves up for a potential buy-out, we've found that there are some basic issues and metrics which are largely unknown to our foreign CEOs, even though they may speak excellent Japanese. Perhaps this is not surprising, given how little adult education there is here.
So for the fun of it, we thought today we'd cover a couple of the key Japan-specific issues that affect just about every company sale here.
Valuation.
There are many ways to value a company. Overseas, this usually consists of a forward look at the business, based on the company's profit trendline, and making a calculation known as the Net Present Value; the company's book value; and the past financials. If the company can be taken public, then a 4th component may be its potential value once public.
Here in Japan, however, future value is considered wishful thinking and buyers are more pragmatic. They focus instead on free cash flow and historical profits. Then, with predictable numbers in hand, the buyers apply a set of standard valuations that pretty much ignore things such as what business you're in. At present these valuations rank as follows:
1) For a company with profits of 5% of less and little growth, the valuation is likely to be around 4-5 times earnings.
2) For a company with profits of 10-20% and with a slow but steady growth rate, the valuation will be around 5-7 times earnings.
3) For a company with profits of 20%+ and a strong growth rate, the price rises to 7-10 times earnings.
4) Lastly, for a company with rapidly growing profits -- such as a software or internet company just coming out of a classic J-curve, one can feasibly expect a price of 10-20 times earnings. BTW, "earnings" usually means pre-tax
(EBITDA) on last year's results.
As an example, let's look at a translation company. By its very nature is often owned by a bilingual foreigner. Also, interestingly, since the recent IPO of Honyaku Center, there is also a strong interest by M&A specialists in buying them. Therefore, if you own a modest business with 5-10 people, are doing around JPY200m of business annually
-- up 10% from the year before, and are enjoying profits of JPY15-20m a year, then you're probably worth around JPY75m-JPY140m. Quite a wide range, but worth considering if you're itching to head back to your home country or to do something else...
Taxation.
We're not tax experts, and you will definitely need one of these if you're going to sell your business. However, the major thing to remember about selling a company privately is that you will get hit at the high personal income tax rate. This is obviously quite different to paying tax on the sale of publicly traded shares -- and we agree that it is unfair that the two classes of shares are treated so differently. But that's life.
Anyway, you will soon find that not only will you be taxed at high rates, you will also be taxed for the entire buy-out amount from the day you receive the first payment, even though you may be being paid over a series of months or years. For this reason, it is a good idea to ask the buyer to pay at least 70% up front, or to split the consideration up into sale proceeds and salary over succeeding years. That way you can serve as a Director or in some similar executive capacity and only pay the tax as and when you get paid the salary.
Your Employees.
Company owners know that employees often react badly to uncertainty, and of course a change in company ownership will tip you into that situation. Experienced "M&A'ers" say that one way to soften the impact is to get the employees involved financially and to ensure some continuity at the top levels of management. This means that unless you're heading overseas for retirement, you will probably need to stay on as a director for 1-3 years, and also to insist that other shareholder/executives do as well.
Further, it is important to remember that an M&A is not an IPO, and so all those stock options you got your senior managers excited about will become worthless upon consummation of the deal. Thus, unless you want to have a company melt-down soon after the deal is done, you need to factor in sharing the deal proceeds around. This is a well-known strategy, known as implementing "golden handcuffs" and here in Japan, an amount of 10-15% of the proceeds shared over a period of 2-3 years with the top
3-5 employees is probably more than adequate.
For those readers not running their own company yet (OK, 99% of readers), but who plan to do so in the future, it might be worth noting that in a recent straw poll we did among foreigners who have sold companies in Japan over the last 5 years indicates an average period from start-up to sale of about 10 years. This shows that although running your own business is not a short-cut to riches, it is nonetheless a proven route to financial security, even for foreigners in Japan.
Lastly, our sister company, LINC Media, is looking for an additional internal recruiter and a recruiting coordinator, as it continues to build it's outsourcing business. If you are bilingual, have IT HR or recruiting experience and want to work with some of the largest foreign multinationals in Japan, this is an ideal opportunity to advance your career.
Contact Tomo Tsunoda at [email protected].
...The Information Janitors/
| +++ SERVICES LINE-UP |
Contact [email protected] if you want your company here.
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[email protected] Ph: 03-3499-3040
Logistics: The So-Fast Corporation========Why Choose the So-Fast Corporation? Failed logistics is a frequent reason why foreign import/retail companies in Japan eventually pull out. In the start-up phase, management is focused on just getting the business up and running, and so it is tempting to abdicate the logistics to a large trading or transportation firm. But the reality is that the convenience is soon replaced by frustration -- as any change request, any problem resolution takes forever and becomes "too hard to do". Now, So-Fast Corporation offers its "Start Logistics Package" which includes: One customer that did switch is Guthy-Renker, featured alongside So-Fast in the Spring 2005 issue of J@pan Inc, www.japaninc.com/article.php?articleID=1429. Guthy-Renker is one of Japan's largest TV marketing companies. If logistics are a key part of your success in Japan - get connected with So-Fast. |
| +++ NEWS |
- Record debt financing
- Robot inventor makes copy of himself
- 30-year weather forecasts
- Households getting smaller
- More international social security agreements
-> Record debt financing
Softbank is about to take Japan's largest ever asset-backed bank loan, to pay for the Vodafone Japan acquisition made earlier this year. The loan will be for JPY1.4trn (US$12bn) in amounts repayable in staggered tranches over a period of up to 12 years. The loan comes from the same banks that gave Softbank their original JPY1.28trn (US$11.13bn) 1-year credit line to get the deal done, and is reputedly 10 times larger than the previous largest asset-backed loan. The banks are: Citigroup, Deutsche Bank, and Mizuho. ***Ed: Mr.
Son is the leader of a generation of Japanese businessmen who are finding foreigners to be a boon rather than a threat. As a result, he now owns a 17% share of Japan's cell phone market.** (Source: TT commentary from bloomberg.com, Jul 21, 2006)
->Robot inventor makes copy of himself
Osaka University researcher, Prof. Hiroshi Ishiguro, is back with another realistic looking robot -- one that looks exactly like himself. Ishiguro first stepped into the limelight of the robotics world with his eerily realistic Repliee 2 female visitor greeting robot, at the recent Aichi trade fair. The new robot, whose photograph appears in the linked website below, was built to test a theory that Ishiguro and collaborating scientest Karl MacDorman have posited. They believe that if a robot looks too real it can turn its human owners off, because they feel the robot looks creepy. This theory is known as the Uncanny Valley syndrome. ***Ed: There are some really interesting papers on the www.androidscience.com site. Check out the one about 18-month old infants who will extrapolate intended actions by a robot only if a machine's active part (i.e., the part doing the action) looks likelike. If the infant sees steel and pincers in the same action, they lose interest and do not follow through with a response. Thus, it seems that humans are pre-coded to relate to realistic renditions of themselves and not just with the action itself. (Source: TT commentary from blog.scifi.com, Jul 21,
2006)
http://blog.scifi.com/tech/archives/2006/07/21/mad_scientist_c.html
http://www.androidscience.com/
->30-year weather forecasts
"...Good morning folks, and it's going to be a hot one on Monday July 24th, 2037..." Well, OK, perhaps the forecasts of the future won't be quite as detailed, but they will be that far ahead. The Japanese Ministry of Science has said that it has set a goal for itself of creating 30-year weather forecasts, with the help of its massive Earth Simulator supercomputer. The forecasts will be used to predict storms, heat waves, flooding, and other significant weather events. The Earth Simulator, which does 35.6 teraflops, was written up in the November 2003 issue of the Japan Inc. magazine (link below). (Source: TT commentary from cbsnews.com, Jul 18, 2006)
http://www.japaninc.com/article.php?articleID=1228
->Households getting smaller
The National Institute of Population and Social Security Research says that Japanese households are shrinking and now consist of just 2.8 people per dwelling. Pointing to the continuing disintegration of the nuclear family, the organization also said that 20% of households now have just one person, and that there is a downwards trend of adult children looking after aged parents. About 33% of people aged 65 or over live with their sons, down from 38% in 2001, and 14% live with their daughters. (Source: TT commentary from nikkei.co.jp, Jul 21, 2006)
http://www.nni.nikkei.co.jp/AC/TNKS/Nni20060721D21JFN05.htm
-> More international social security agreements
The Japanese government has said that it is working to eliminate the anomaly of disparate and disconnected international social insurance payments. The problem is that foreigners and Japanese employees of multinational firms who are returning home do not benefit from the contributions made to the social insurance systems of the host country. Japan is planning, instead, to contract with a number of countries to create complimentary systems that allow all contributions to count towards a person's pension in their home country. The latest country to sign a deal with Japan, following the US-Japan deal earlier this year, is France. Now, French nationals in Japan and Japanese nationals in France will be able to deduct local social insurance costs in their respective host countries from their tax bills. The two conditions for French people to receive the deductions are that the person has to be contributing into a social insurance program in their own country and they can only make the tax deductions for the first 5 years of being in Japan. (Source: TT commentary from nikkei.co.jp, Jul 18, 2006)
http://www.nni.nikkei.co.jp/AC/TNKS/Nni20060718D18JFN04.htm
NOTE: Broken links
Many online news sources are now removing their articles after just a few days of posting them, thus breaking our links -- we apologize for the inconvenience.
| +++ CANDIDATE ROUND UP |
DaiJob, Inc's executive placement team, Daijob Consulting
-----------------------------------------------------------------------------------------------
DaiJob has great candidates. Contact Andrew Peters at
[email protected], or Ph: 03-3499-3040 for details.
-> H/W Engineer
Male, 39, fluent Japanese, English, Chinese, Urdu-Pashto Permanent Resident Visa
Experience:
- 10yrs corporate experience in Japan
- Field Application Engineer, Chief Engineer, Project Leader in computer hardware, semiconductors, high-tech equipment, mobile communications equipment
Technologies:
- CPLD, FPGA architecture: VHDL, Verilog HDL, Able language
- Analog and Digital Circuits Design
- ?P, Power IGBTs, IPMs etc.
- Semiconductors, inverter regulators
- Tools: ispLEVER, Leonard Spectrum, Synplify, Modelsim
- Languages: C and Assembler.
*Looking for JPY8M. Available 1 month's notice.
--------------------------------------------
-> PR / Marketing Communication Manager
Male, mid 40s, Native Japanese, Fluent English
Experience:
- 20yrs marketing, ad firms and in-house teams, consumer products, luxury brands.
- Events Promotion/Brand Manager, Trade Promotion Management
- Deep understanding of strategic brands marketing.
- Strong knowledge in overall marketing planning
* Looking for JPY7.5M. Available immediately.
- 3yrs Automotive market forecasting
- Market Analysis of auto market trends, manufacturer program intelligence, marketing & production strategy, sales forecasting
- Widely quoted in the media as an Auto industry authority
- Excellent presentation skills.
- U.S. MBA
- Previously, cost accounting, accounts payable in the Securities industry
--------------------------------------------
-> Market Analyst
Male, Early 30s, native Japanese, fluent English
Experience:
* Looking for JPY9M. Available 1 month's notice.
DaiJob has great candidates. Contact Andrew Peters at
[email protected], or Ph: 03-3499-3040 for details.
+++ UPCOMING EVENTS/ANNOUNCEMENTS |
ICA Events DATE July 26 Time: 6:30pm - 8:30pm Location Holland Hills Mori Tower, Kamiyacho |
IT events announcements are priced at JPY50,000 per week. |
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| +++ ABOUT US |
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