Shunsaku Sagami, founder and CEO of Tokyo Stock Exchange-listed M&A Research Institute, has used AI to give his M&A business a competitive advantage, and now the 33-year-old wants to replicate that success overseas.
An avid mahjong player, Sagami Shunsaku uses skills like risk assessment, careful observation and strategic thinking to beat his opponents, but this isn’t so different from his approach to business. Six years ago, the entrepreneur took a gamble by starting an M&A brokerage firm targeting small and medium-sized Japanese companies, many of which are run by elderly owners with no successors. Sagami is not the first to target a sector shy of big banks, but he has proven disruptive in a market dominated by entrenched rivals.
Today, the 33-year-old’s M&A Research Institute Holdings is one of Japan’s top four M&A firms for publicly listed small and medium-sized enterprises by market capitalization, and it has outperformed three rivals — Nihon M&A Center, Strike and M&A Capital Partners — in revenue growth and number of closed deals per advisor. In the six months ended March 31, the number of M&A deals closed nearly doubled to 123, compared with 333 for Nihon M&A Center, 130 for Strike and 96 for M&A Capital Partners.
The company’s shares have quadrupled since it listed in Tokyo in 2022, making Sagami a billionaire in April 2023 with his then 73% stake. The company’s secondary public offering and a decision in March to sell shares to improve liquidity, according to company filings, have reduced Sagami’s holding to 53%, but he remains in that position as of the time of writing.
M&A Research Institute’s competitive edge is based on AI algorithms that match buyers and sellers, proprietary software that digitizes documents, a simplified fee structure and aggressive recruitment. “I don’t think our business model itself is that great,” Sagami said in May at the company’s headquarters in Tokyo’s bustling Marunouchi business district. But, he added, “we have developed an overwhelmingly powerful system that is difficult for competitors to imitate.”
For example, the workflow software has gone through “more than 10,000 iterations,” making it “absolutely impossible” for competitors (many of whom still perform administrative tasks manually) to catch up, says Sagami, a self-taught software engineer. As a result, M&A Research Institute says it can close deals in just under seven months on average. The average in the SME M&A industry is 10 to 12 months, says Shinji Tanioka, a Tokyo-based Macquarie analyst, in an email. Similarly, the firm’s advisors each close roughly twice as many deals per year as their competitors, Tanioka says. In a 2023 report, the analysts wrote that the firm is “revolutionizing the labor-intensive process of sourcing and executing M&A” by using data to improve productivity.
Source: Macquarie Research
The firm’s growth is due in part to an aggressive hiring drive: Sagami increased its headcount of advisors by a third to 242 in the six months through March, and plans to nearly triple that number to 700 by the end of September 2026. By comparison, Nihon M&A Center had 645 as of March 31, Strike had 241 and M&A Capital Partners had 187, according to the companies’ financial reports.
The M&A Research Institute identifies sellers, which AI algorithms then match with potential buyers in the company’s private database. As is common in SME M&A transactions, the advisors negotiate and complete the transactions on behalf of both the seller and the buyer.
Sagami targets companies with sales of 500 million yen ($3 million) or less, which accounted for more than two-thirds of his deals completed through March. More than half were in the manufacturing, construction, information technology and wholesale and retail sectors. Past deals include selling a 200 million yen IT company with no successor to a rival with 15 billion yen in sales.
The company uses data to improve productivity and is “revolutionizing the labor-intensive process of sourcing and executing M&A.”
Macquarie analyst Shinji Tanioka
One of the factors behind M&A Research Institute’s growing number of deals is another unique selling point. While most of its competitors charge initial, intermediate and other fees, the company charges fees only after the deal is completed. M&A Research Institute charges fees to both buyers and sellers. The commission rate varies depending on the deal size and other factors. For example, for deals between 200 million and 500 million yen, buyers pay 5%. For deals under 500 million yen, sellers pay a variable commission, but a minimum of 25 million yen.
According to government data, Japan’s small and medium-sized enterprises (SMEs) sector accounts for 99.7% of all businesses and roughly two-thirds of employment. These companies are vital to the manufacturing supply chain, providing key raw materials to a variety of industries, from semiconductors and electronics to automobiles. The definition of SMEs in Japan varies by industry. One definition states that a company has capital of 300 million yen or less or has 300 full-time employees or less, although the standards are usually higher for manufacturers and lower for service providers and retailers.
In a March report, JPMorgan analysts Ami Terai and Haruka Mori forecast that deals by small businesses struggling with succession issues will double to more than 500 billion yen in total by 2033. Over the same period, they predict the number of annual deals will jump from 4,000 to nearly 10,000. More than a third of Japan’s 3.4 million small businesses are at risk of closing because their owners are over 60 and have no family to take over the business, they said, adding that at least half are profitable. “This is a huge social issue,” Sagami said.
Sagami Shunsaku, founder and CEO of M&A Research Institute.
Forbes Asia Edition Shunichi Oda
Although sales and net income growth has slowed since the company’s strong founding period due to rising non-operating expenses and the loss of some tax incentives, they are expected to double to 8.6 billion yen and 2.6 billion yen, respectively, for the fiscal year ending Sept. 30, 2023, the highest growth among the top four listed companies. Sagamihara is confident that sales and net income will nearly double again this fiscal year. JP Morgan analysts predict that sales could reach nearly 43 billion yen by the end of September 2026.
The M&A boom among Japanese small and medium-sized enterprises is likely to continue, due to a low birth rate and younger generations showing little interest in taking over family businesses. According to a November survey by Teikoku Databank, a Tokyo-based credit research company, companies that have resolved succession issues through M&A will account for just over 20% of all SME successions by 2023, up from 17% in 2018.
But Sagami and its competitors now face the challenge of increased oversight of the industry. On June 9, Japanese magazine Facta reported that the government aims to lower brokerage fees. This prompted a sell-off in the top four M&A brokers for small and medium-sized companies, and M&A Research Institute’s shares fell 12% in one day, but have since recovered.
The company declined to comment directly on Factor’s report, which came just days before the government is set to confirm revisions to M&A guidelines to increase fee transparency and improve post-merger integration, as well as new national policies to make it easier to sell off companies for business succession.A Nikkei report in late May said the regulations would be finalized later this year, with fee disclosure rules set to come into effect around April 2025.
“We did not expect the sudden implementation of regulations that impose unpredictable and difficult compliance requirements,” a company spokesperson said in an email. The spokesperson wrote that while there may be changes to the operation of the brokerage business, the company does not expect a significant impact on its performance. (According to the Small and Medium Enterprise Agency, there are about 650 brokerages specializing in M&A in Japan, and about 2,000 others in the industry, but only the top six have more than 100 advisors, and the majority have fewer than 10.)
Source: Corporate Earnings Reports/Bloomberg
Meanwhile, the young disruptor is moving forward. “Aiming to be number one [by operating profit] “Of course, we should aim to improve our position in the industry, but what we really want to do is change traditional industries through technology,” Sagami explains. (M&A Research Institute’s operating profit for fiscal 2023 was 4.6 billion yen, fourth among listed companies.) Last year, he set up a division to advise companies on using technology to improve efficiency. He also launched an asset management consulting firm to help clients who have sold businesses and need help investing the proceeds. Sagami declined to disclose revenue targets for the new business.
Sagamihara is also looking overseas, helping local companies expand overseas and international companies enter Japan. About a year ago, M&A Research Institute began brokering deals for small businesses in the U.S. and Southeast Asia looking for Japanese buyers. Companies for sale listed on its website include a steakhouse in Singapore and a solar panel installation company in Hawaii. Sagamihara did not disclose how much it is targeting for cross-border business, but overseas deals accounted for 2.4% and 7.6% of total transactions for Nihon M&A Center and M&A Capital Partners, respectively, in their most recent fiscal years.
Sagami’s expansion seems well-timed. Outbound M&A from Japan is expected to rise more than 45% year-on-year to $66 billion in 2023, while inbound M&A is expected to more than triple to $30 billion, according to Dealogic. That contrasts with a 7% increase in cross-border deals in other Asian countries combined, according to the British financial data provider. The international M&A rush is likely to continue for at least the next few years, driven by strong balance sheets from Japanese companies, a need to diversify beyond a shrinking domestic market and low domestic interest rates, says Takashi Obara, a Tokyo-based partner at U.S. consulting firm Bain.
“In theory, the M&A Research Institute could replicate the success it has achieved domestically in cross-border transactions,” said Timothy Morse, founding partner at Hong Kong- and Singapore-based equity advisory firm Asymmetric Advisors. “Most Asian countries have aging populations, which will create more companies that could be acquired.”
“We have developed an overwhelmingly powerful system that will be difficult for our competitors to replicate.”
Mr. Shunsaku Sagami, Founder and CEO of M&A Research Institute
Sagami took a roundabout route into M&A. He taught himself programming while studying at Kobe University’s Faculty of Agriculture. After graduating in 2013, he joined Japanese advertising company MicroAd as a software engineer, gaining experience in marketing. Two years later, he launched fashion media Alpaca, which he sold to Tokyo-based PR company Vector in 2017 for around 950 million yen.
“I have a background in design, engineering and marketing so I understand all aspects of business,” Sagami said, adding, “When I started out as a young person, I felt it would be difficult for people to follow me if I didn’t have a grasp on all these areas.”
Sagami’s decision to jump into M&A for small and medium-sized businesses was prompted by his own experience. He witnessed his grandfather, then in his 80s, being forced to close his real estate business because his father, a police officer, was not interested in taking over the business. After selling his own startup and taking a job overseeing M&A transactions at Vector, Sagami witnessed firsthand the tedious paperwork, lengthy matching process, and opaque fees that come with M&A transactions.
Sagami remains inspired by mahjong and is working towards becoming certified at a professional level. “Reading the situation and giving and taking are skills that can be applied to running a company,” he says. “As a young entrepreneur, I feel like I can win even more in the future.”
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