Employee Buyouts (EBO) in Japan

six woman standing and siting inside the room 1181622 - Employee Buyouts (EBO) in Japan

If you don’t have succession plan for your business you may consider passing ownership to the directors or employees of your company.

The benefit of doing this is that people who are taking over your business are already familiar with it and know how to operate it in an effective manner. 

On the other hand, the new prospective owners may not have enough money to purchase your company. And, if you company has outstanding loans in which you are guarantor, the new owners will be required to replace you as the guarantor after you sell the business. 

That said, if your company is performing well financially and has enough assets on the balance sheet, there may be funding options from banks, venture capital, and private equity funds. 

The company could also issue preferred shares with limited or no voting rights. So you would be able receive dividends while the successors have the necessary shares and voting rights to control the company. 

If the number of shares with voting rights is only a small portion of the total shares issued, the amount of money needed for the buyout will be lower.  

According to Japanese tax laws, shares with voting rights can have the same valuation of those without voting rights. Therefore, if the majority of the existing shares are non-voting shares, the valuation of the shares with voting right can be limited.

As the selling owner, you’d still want to keep more than 1/3 of the voting shares in order to give you the power to veto a resolution.  If not, you risk having the new management issuing news shares to dilute your shares and reduce your right to receive dividends. 

You should avoid giving shares to your employees for free as there will be gift tax. Gift taxes can be higher than the capital gain tax that you would have to pay when you sell your company. 

At the top end the gift tax can go as high as 55 percent, while the capital gain tax is flat 20.42 percent. 

You maybe abel to work around the gift tax and provide the same benefit to your employees by raising their salaries and letting use the extra salary to purchase shares in the company.