'My son won't take it': Aging SME owners struggle to find buyers as succession options narrow

"Six years ago the company was in serious trouble — we nearly went bankrupt, and I've only just managed to turn things around. Now we need bold investment. My son says he won't take it over, so selling is the only option."

A, the owner of a small industrial radio manufacturer in Yeongdeungpo-gu, recently explained why he has decided to sell the business his father founded more than 50 years ago. The company was once listed on Kospi, but A now runs an unlisted spinoff. It employs about 20 people.

A said he decided to sell because growing the company would require additional investment he cannot fund on his own. "Even if my son took it over, the situation isn't one where he could grow the company," he said. "He has his own career and is not in a position to take it on."

A recalled that when he tried to sell during a period of capital erosion five or six years ago, only buyers looking for a bargain came forward. "Nobody was willing to properly assess the company's value," he said. "Now that we're back on track, I need a large investment to grow further — that's why I want to sell. All I ask is that the company's objectively assessed value is preserved."

A's dilemma is becoming increasingly common. Founders and second-generation owners of small and medium-sized enterprises are aging, but their children either have no interest in taking over or lack the resources to sustain the business after a handover.

Jeon Tae-hwan, head of the M&A Support Center at Korea Technology Finance Corporation, said many children of SME owners grew up in relatively comfortable circumstances. "They've already established themselves in professional fields — as doctors, professors or finance workers — so inheriting a parent's business is no longer necessarily an option they consider," he said.

In fact, the succession problem cannot be explained by the owner's age alone. Even when a child is willing to take over, family succession becomes difficult if the company needs additional investment or requires specialized expertise in technology development and sales.

B, the head of a drug development startup, is also looking for a buyer. The company, founded in 2016, struggled to raise funds after receiving bridge investment in 2024. B concluded that continuing the Phase 1 trial-approved drug development project would require partnering with a well-capitalized firm. "Drug development is ultimately about helping patients, but the practical difficulties are significant," B said. "I wanted to find a company that could carry this work forward."

B ruled out family succession from the start. B's daughter and son work in visual design and video design, respectively. "I excluded family succession from the moment I founded the company," B said. B regards the continuation of the drug development project after any acquisition as a key condition — if a sale leads to the suspension of research and development, there would be no point in selling at all.

While the nature of business succession is changing, tax and financial support systems have yet to fully keep pace with shifting demand, experts say. Existing succession support has centered on family handovers — parents passing businesses to their children. Owners who meet certain requirements can claim a family business inheritance deduction or a gift tax special provision for family succession. Selling a company to a third party, by contrast, triggers capital gains tax on the share transfer.

For aging owners who need the proceeds to fund their retirement, taxes are a critical variable in deciding whether to sell. They must weigh the income from continuing to run the business against what they would actually pocket after a sale. The head of one agricultural corporation said she looked into the tax implications of a sale and found the burden very heavy. "I was hoping to use the proceeds as retirement savings, but it looks like that won't work out, so I'm exploring other options," she said.

The government has recognized the problem and included a new tax special provision supporting third-party business succession in this year's tax reform package, aiming to extend succession support beyond family transfers to outside sales. It is important to note, however, that what is included in the reform package and what is already in effect are two different things.

Financial support is also limited. Korea Technology Finance Corporation provides guarantees of up to 10 billion won ($7.46 million) to acquiring companies pursuing succession-related mergers and acquisitions. It also subsidizes basic consulting at 700,000 won per company and comprehensive consulting at 7 million won per company.

Jeon said unlisted small and medium-sized enterprises have no market-determined share prices and comparable transaction data is scarce, making it hard to agree on a fair price. "There is no single correct answer for an unlisted SME," he said. "What matters more than the valuation itself is the process of explaining it in a way that both the seller and the buyer can accept."

In the SME mergers and acquisitions market, the final stage is where deals most often fall apart. Shin Yu-jin, a manager at Listing, an M&A advisory firm specializing in business succession, said the final decision stage accounts for the largest share of failed deals. "About 40 percent of the contracts I have seen have fallen through at the final stage," she said.

Price is one of the biggest sticking points. Even when both sides broadly agree on a company's value early in negotiations, due diligence can uncover unexpected liabilities, costs or profitability issues that prompt the buyer to demand a lower price. The head of one acquiring company said there were cases where the purchase price simply did not work out, and others where internal data turned out to differ from what the company looked like from the outside, causing deals to collapse midway.

How long the outgoing owner stays on after the sale is also a key negotiating condition. In many small businesses, client relationships, technical know-how and staff management are concentrated in a single founder or incumbent chief. If that person leaves immediately after the sale, the new owner may struggle to take over the existing business smoothly.

For an owner selling in order to retire, however, continuing to come in and remain involved in management for years after the sale can feel burdensome. The seller and buyer often disagree over how long the former owner must effectively remain responsible after handing over control.

One solution is the earn-out arrangement. Rather than fixing and paying the full purchase price at the time of sale, the buyer makes additional payments to the seller after the transaction based on the company's performance or agreed targets over a set period.

Shin said the length of the earn-out schedule is also a key element that must be settled at the final stage, with two to five years being the most common range. The arrangement benefits buyers by reducing the risk of overpaying for a company with uncertain earnings, while sellers can receive additional recognition of the company's value if it grows as expected, she said.