Initial Valuation of a Turkish Company and the Importance of a Preliminary Financial Due Diligence
The critical success factor of the valuation
process of a Turkish company may not be in the valuation methodology you choose
Imagine you are in the process of acquiring a Turkish Company which;
- is not listed on the stock exchange,
- is a family company;
- has no proper a system of internal controls and internal audit;
- has never been through independent audit.
The initial bid you are expected to make for the term sheet will have to depend on the data provided by the sell side company and it will most probably be based on the historic financials of the company which have been prepared in accordance with the Turkish GAAP. Due to past dynamics of the Turkish accounting and reporting standards, these financial statements may need to be normalized before they can be used for any kind of valuation procedure. No matter which valuation methodology will be used, the historic financials of the company should at least reflect realistic data such as absolute value profits, profit margins, shareholders equity, total balance sheet size etc.
As we all know any M&A procedure based on an unrealistic term sheet in most cases will result in;
- waste of resources;
- loss of focus;
- unnecessary stereotyping for future similar exercises;
- loss of reputation.
As Cerebra we are coming across projects in which we are hired to do a brief preliminary financial due diligence on the disclosed financials before a term sheet is finalized. Once a realistic term sheet is in place, more resources are being allocated for a full scope financial, tax, legal, commercial and technical due diligence work. With such an approach certain issues which may be hard for the seller side to explain and quantify can be determined at the very beginning without spending too much time and capital.
A preliminary financial due diligence may take much less time than a full scope financial due diligence and the main objective is to define the issues and getting an idea of their impact rather than quantifying them in detail. The general findings in a preliminary financial due diligence may include;
- one off revenues and or expenses;
- sales or expense cut off;
- inventory and cost accounting issues;
- off-the-books accounting transactions;
- inappropriate expenses capitalization;
- expenses having no valid business purpose.
