A view of the Banwol-Sihwa National Industrial Complex in Ansan, Gyeonggi. Developed in the 1980s to relocate and accommodate small- and medium-sized factories scattered across the Seoul metropolitan area, the complex was designed to decentralize population and industrial facilities. It is one of Korea’s major clusters of small and medium-sized enterprises.KOREA INDUSTRIAL COMPLEX CORP.
Lee Chul-min
The author is the managing partner of VIG Partners.
The aging of Korea’s small- and medium-sized enterprise (SME) CEOs is increasingly clear in the data. According to the Ministry of SMEs and Startups, about 2.36 million SMEs were headed by CEOs aged 60 or older last year, and roughly 30 percent said they had no successor. In manufacturing alone, the share of CEOs aged 60 or older rose from 14.1 percent in 2012 to 44.8 percent in 2024.
To address this structural challenge, the government included a meaningful change in the tax reform plan announced this month. Founders who sell their companies to third parties will receive a 20 percent reduction in capital gains tax. The measure applies to founders aged 60 or older who have operated their businesses for at least 20 years and will be introduced temporarily for three years beginning in 2028.
Buyers will also benefit. For five years after an acquisition, they will receive a 10 percent reduction in income or corporate tax on income generated by the acquired company, capped at 500 million won ($361,400) annually.
While the existing family business inheritance deduction has focused on succession by children, the new system broadens the options from “family succession” to a “sale for business continuity.” Buyers, however, must meet eligibility requirements. They must be individuals or companies that have operated in the same industry for at least 10 years, or executives and employees who have worked at the target company for at least five years.
The disappointing part is that private equity funds, or PEFs, are excluded entirely from eligible buyers. PwC Korea analyzed about 1,000 mergers and acquisitions (M&A) transactions worth at least 25 billion won between 2021 and 2023 and found that PEFs accounted for 64 percent of SME acquisitions by number of deals. PEFs were also the preferred counterparties for about 48 percent of sellers. Their appeal stems partly from fast decision-making and greater certainty that transactions will close. Yet the policy excludes them from the tax incentive.
There is, of course, a reasonable argument that PEF buyers do not need tax benefits. The problem is that sellers also lose the benefit when selling to a PEF.
The policy fails to account for the difficulties competitors in the same industry may face in becoming buyers. Many have succession problems of their own and lack sufficient financial capacity. Employees, even if they agree to an acquisition without resistance, generally lack the capital needed to buy the company.
That is precisely why sellers often prefer PEFs, which have both the financial resources and execution capabilities to complete acquisitions. By excluding them, the policy overlooks how the market actually operates.
The issue is especially important because succession is not simply a question of ownership. When an aging founder cannot find a buyer, a company may face closure, the loss of accumulated expertise or disruption to employees and suppliers. A qualified acquirer can provide capital, professional management and a path for continued growth. In many SME transactions, PEFs perform that role. A tax regime intended to facilitate orderly succession should therefore distinguish between granting tax breaks to financial investors and denying relief to founders merely because a financial investor is the most viable buyer.
A temporary tax incentive will not, of course, fundamentally alter the direction of Korea’s SME M&A market. Even so, a mismatch between the direction encouraged by government policy and the way the market functions in practice could create considerable confusion for aging SME owners trying to resolve succession issues.
The government’s effort to expand succession options beyond transfers to family members is welcome. But if the ultimate objective is to preserve viable companies, jobs and productive assets after founders retire, policy should reflect the buyers that are realistically available in the market.
PEFs have become a major practical alternative for owners who lack family successors or credible strategic buyers. Failing to make greater use of that option in addressing the fundamental challenge of SME succession deserves reconsideration.
This article was originally written in Korean and translated by a bilingual reporter with the help of generative AI tools. It was then edited by a native English-speaking editor. All AI-assisted translations are reviewed and refined by our newsroom.
