TOKYO/SINGAPORE (May 16): Shunsaku Sagami saw firsthand, the growing succession problem among entrepreneurs in Japan, which is grappling with the world’s oldest population.

The 32-year-old’s solution: using a proprietary database and artificial intelligence to broker deals for small- and medium-sized companies — largely those founded by clients now on the brink of retirement.

His M&A Research Institute Holdings Inc has surged sevenfold since listing in Tokyo last June, boosting Sagami’s fortune to about US$950 million, according to the Bloomberg Billionaires Index. 

As Sagami tells it, he owes the idea to his grandfather, who dedicated his life to running a small real estate agency in his hometown of Osaka. Unable to find a successor, he had to shut it down when he retired in his 80s.

“In his office, there was a licence for real estate agents framed up on the wall,” Sagami recalled in a recent interview.

“Seeing that taken down and thrown away was sad.”

M&A Research Institute noted in an April presentation that 620,000 profitable enterprises in Japan are forecast to be at risk of closure because of a lack of successors, and the government estimates that by 2025, there will be 2.5 million small- and medium-sized firms whose owners are over 70 years old. About half of them have no plan in place, which could lead to company shutdowns and 6.5 million jobs lost, costing ¥22 trillion (US$162 billion) in gross domestic product. 

“There are a huge number of small companies with aging founders with no obvious successor that are increasingly open to selling their business,” said Tim Morse, the director of Asymmetric Advisors, which provides recommendations on Japanese equities. “Traditionally, selling out hasn’t been seen as a culturally positive thing, but that’s changing.”

Since its founding five years ago, M&A Research Institute has grown to more than 160 employees, including some 115 advisers, and has about 500 deals in the works. It closed 62 transactions in the six months through March, up from 26 in the same period in 2022, with sales more than doubling to ¥3.9 billion. In the year ended September 2020, they were just ¥376 million.

Sagami, who studied biology and agriculture at Kobe University, knew from early on he wanted to build his own business. To hone his skills in different areas, he worked as a designer, software developer and marketing officer. He also tried setting up an e-commerce company and tutoring firm before he had his first breakthrough in 2016: a women’s fashion and makeup business he called Alpaca, after the furry South American animal known for producing quality wool. He was just 25. 

“I always listened to my grandfather tell me stories about how to be successful as an entrepreneur when I was a boy,” said Sagami, who owns 72% of M&A Research Institute. “He told me, ‘Let’s say you have a lottery ticket with a 1% but sure chance of winning. Even if you fail 99 times, you’ll win it in your 100th go. Just do it until you nail it.’”

Public relations agency Vector Inc bought Alpaca in 2017, but Sagami found the process long and inefficient. So he came up with an AI algorithm that would match buyers with sellers and simplify many of the administrative steps and paperwork, taking inspiration from Japan’s automation-machinery maker Keyence Corp.

Unlike M&A consultants, who often rely on regional banks for introductions and compete with each other for deals, M&A Research Institute uses the extensive database it built to do the matchmaking, focusing on companies with sales up to ¥500 million. Its advisers then do the negotiations, and an agreement can be completed within six months — shorter than the timeframe for a typical acquisition, even when there are no regulatory hurdles. 

Fees are charged only when a transaction is closed and can reach up to 5% for deals of ¥500 million or less. They averaged ¥60 million per sale in the latest quarter.

While retaining talent is often a challenge in the industry, Asymmetric Advisors’ Tim Morse says M&A Research Institute could benefit from a retreat of competitor Nihon M&A Center Holdings Inc, which announced an accounting probe in late 2021. It has since said that it will set up a new compliance division, but its shares are still down 73% from a high in 2021.

“I want to aim for higher goals,” Sagami said. “I want our company to grow more, complete more and more deals, and if that leads to a greater market cap, then that’d really mean something.”