Why should a buy side firm prefer to have vendor assistance performed in the target company?

Most Turkish family owned companies have the necessary data but they do not have the means and resources to compile it for a due diligence in a short period of time

Imagine a family company that has been managed by the founding family for decades. In Turkey this is a more than common sight as the 95% of all Turkish Companies are founded and run by the families. Currently most of these companies due to their life span are being managed by the founder or the second-generation family members. During the life span of these companies the Turkish Accounting Standards did evolve to close the gap with IAS, however even today there is still some work to be done in that department. Even with the introduction of the new Turkish Commercial Code, we are still able to see that the long waited improvements of the Turkish Accounting and Reporting Standards is a passenger on a slow steam train.

Within such an accounting and reporting environment, the priorities of the Turkish family owned companies were never to implement infrastructure for an independent or internal audit, leave aside a buy side due diligence. The sole objective of the founder of such companies would have been to make sales, create cash and at the same time be in good terms with the tax office. So the management of the company always had a built in instinctive cash flow follow up system as a helm from which they can steer the whole company. Such management or shareholders did not care too much for the tidiness of the financial statements, as they did not use them for any worthwhile analysis.

Now imagine yourself and your consultants when you are to embark on the mission of acquiring a Turkish family owned business. As we all know a financial and tax due diligence process could be long and painful for both parties and at the same time may require substantial amount of financial resources. As many of the foreign investors prefer not to take the slightest risk during the due diligence process, they want to hire well-known and established consultant firms to carry out this exercise. These firms are highly capable in terms of know-how and experience, however this background can only be put to use if there is meaningful data to work on. In general if the target firm's accounting function lack the capabilities of producing the data (which actually exists in the company but was never prioritized thus never checked or reported) for the due diligence exercise, failure of the process becomes likely.

We are very often called in for duty in situations where a sell side is contacted by a potential foreign buyer and it is time for the buy side financial and tax due diligence to begin. The potential buyers are happy with the term sheet and they have their consultants lined up to perform work but the target firm is dragging their feet not because the data is not available but because it can not be compiled in such a short notice and by the existing accounting personnel of the company. In such instances we, as Cerebra, go in with a team to prepare the items on the information request list within the perspective of internationally accepted best practices.

Ironically in situations like these we see that the buy side management is usually happier to have people like us on the other side of the table. In some instances the buy side management is encouraging the target company to hire such assistance so that;

- The M&A process is not interrupted due to lack of resources

- The buy side hired consultants carry out their work with a smaller team and less spent hours (as our team acts in fact as their team, spending the effort to prepare their detailed requests).