M&A activity in the Middle East is growing for good reasons and this signals a potential opportunity for acquirers.
A generation of Middle East family- and owner-managed businesses have matured and represent potential targets for acquirers. Andrew Robinson looks at what buyers and sellers should do to ensure a satisfying outcome.
Owner-managed businesses (OMBs) in the Middle East constitute 80% of businesses, and a significant number started as early as the 1960s. More recently, governments in the region have encouraged OMBs to support the trend towards diversification away from oil and gas.
Whether they have been in business for 50 years or five, many of these businesses need to manage a generational change. This can often mean the owner selling the business in cases where there is no obvious succession plan in place.
Family businesses are both strong and unique, but they face similar challenges to other entities. As they expand they are often not able to cope with the combined pressures of increasing market demands, the need for greater investment, geographical expansion, complex regulatory requirement, increasing family involvement and so on.
Acquisitions are driven by a multitude of factors, including multinationals with a desire to have a more direct presence in the region, cash-rich local businesses pursuing growth strategies, private equity (PE) firm expansion, etc.
According to Thomson Reuters, the value of M&A with Middle East involvement reached $56.2bn in 2015, up 13% from the year before. Equity and equity release-related issuance in the region, meanwhile, totalled only $5.7bn, a 50% decline on the previous year. Debt and Islamic debt issuance also showed declines during 2015.
With the market for equity and debt issuance unlikely to show any improvement in the year ahead, it would seem that for those wishing to exit their business, identifying a suitable acquirer should be a top priority. We see a continuation of the trend for local family trading groups, local corporates, PE fund managers and multinationals targeting high growth and profitable OMBs in the Middle East for potential acquisitions.
When contemplating a Middle East acquisition, the following factors should be considered:
The first piece of advice about buying an OMB is to have patience. Running a business is hard graft and the option of selling for a multiple of earnings may initially sound like a smart choice. In fact, globally, almost half of business owners say they would like to sell if they were given the right price. The reality is that only about one in five businesses that are put up for sale actually sell within 12 months.
Before negotiating, it is wise to consider the role of existing managers – their relationships with suppliers and customers, and their influence over other managers. An earn-out period or continued role might be a wise decision. In all cases, a succession plan should be devised very early to ensure these relationships are carried forward positively.
Prepare an annual business plan, including a three-year projection. The more a seller can document expected revenue, the better. The business plan should include a ‘strengths, weaknesses, opportunities and threats’ analysis. Buyers need to understand the industry, its key success factors and future growth prospects. Understand the competition as well as your target business’s competitive advantage. As a former auditor, I can also recommend the benefit of auditing an acquisition target’s annual financial statement.
Specific considerations in the Middle East market include:
Funding the purchase price and the working capital required post-acquisition will be your core activity, and most acquirers will be confident about reducing the funding costs compared to the present owner and therefore provide an immediate value enhancement to your advantage.
M&A activity in the Middle East is growing for good reasons and this signals a potential opportunity for acquirers.
Andrew Robinson is a qualified accountant and treasurer and, after 30 years with KPMG, runs his own business consultancy in the United Arab Emirates.
