What to Expect When You are Expecting an Investor?

A lot of company owners are looking for investors to grow their business, but do they know what they are getting into?

A majority of small- and medium-sized enterprises (SMEs) in Turkey is family-owned. And, again most of these family owned Turkish SMEs are managed by the family members. There are many family-owned Turkish companies that have a reasonable level of corporate structure but the ones that lack such an advantage may have the following characteristics:

• Low level of corporate governance,
• Quick decision-making process based on experience rather than data,
• Management style based on individuals rather than functional organization charts,
• Lack of internal control mechanisms, and
• Lack of accurate and timely financial and non-financial data.

As it is in many other emerging markets, Turkish family-owned businesses have become an attractive target for foreign investors. Likewise, many of the second generation family members of such companies are also interested in getting into negotiations with strategic/financial investors in order to grow their business or cash out within a certain time span. Even if this is the case and there is interest on both sides of the table, do the parties know what they are getting into?

A foreign investor that carries out an acquisition in a Turkish SME is usually a multinational corporate entity that has structured requirements from its subsidiaries. A target company tends to down play the importance of this fact during the pre-acquisition negotiations. They are naturally more focused on the potential financial and economic contributions of new investor/partner. However, this mistake in some cases may prove to be a major reason for an unsuccessful partnership.

The shareholders (family members) and the management of the target company should at least have an idea of what is to come once the closing signature photographs are taken and the hangover from the celebration dinner is finally over: a major management culture clash.

As it is in most instances, the local shareholders of the target company at the end of the M&A transaction is left with a minority stake in their own company and their previous management functions. However, there is one more additional unspoken layer of responsibility that they will have to face, which is to adapt to the corporate governance dynamics of their new majority shareholders.

Corporate governance is easier said than done especially in organizations that have decades of family way of doing business in their DNA. The transition from the old habits to new corporate dynamics and discipline at times may be much harder than hitting the aggressive revenue and profitability targets, but it is as equally important in the eyes of a foreign shareholder trying to manage a company from a land far away.

We believe that any target company looking for a potential foreign investor should always be reminded that these soft responsibilities that are to come may be as important as the economic aspects of the deal and partnership. Such soft issues if not addressed with reasonable care may result in:

• An environment of mistrust between partners,
• Concrete dispute and deadlock between partners,
• Low level of accountability of the management, and
• Shareholders' time and resources spent on such issues whereas they can be used in growing the business.

The issues listed above are just few examples of what might happen. The common denominator of these issues is that they would all have a negative effect for both partners and the management team alike. They will lead to an incoherent board, unmanageable company and diminishing equity value.

In order to avoid future major conflicts between partners, we also believe that the foreign investor should try to assess the management style and corporate culture of the target during the pre-acquisition period. An action plan for the transition of the target company's management dynamics after a potential acquisition should be a standard item to discuss before any acquisition is made in a small- and medium-sized company in Turkey.

Ömer Tunabas