Family businesses with succession plans in place are more likely to achieve a better credit rating and as such able to borrow easier than those with no plan

SUCCESSION PLANS KEY TO RATINGS FOR FAMBIZ

ARTICLE | 8 AUGUST, 2013 12:11 PM | BY JESSICA TASMAN-JONES

Family businesses with succession plans in place are more likely to achieve a better credit rating and as such able to borrow easier than those with no plan, according to report from the ratings agency Standard & Poor’s. The report said that family businesses were susceptible to so-called “key man” syndrome, whereby a dominant family figure is associated with the success of the business. But Trevor Pritchard, managing director of corporate ratings at S&P said that this risk can be mitigated by a family business having a clear succession plan in place and this would give help to reassure the ratings agency that the business wasn’t too reliant on one individual.The report, entitled Family Ownership is no Bar to Creditworthiness in Europe, also found that European family businesses are more creditworthy than non-family firms, and have more stable credit ratings. The median credit rating for family firms was BB+, the highest speculative grade, compared with the median non-family business, which ranked BB.

Pritchard said they were not surprised by the results and thought it might correct misperceptions in the market that family ownership negatively affects a company’s rating.

Bank lending, he said, was becoming increasingly scarce due to capital constraints and regulation, and family firms were now considering their funding options more widely as a result. An independent credit rating can speed up lender decisions and widen a business’s potential pool of lenders outside their home country or region.

Pritchard said the difference in ratings between family and non-family firms outlined in the report was subtle, but that the family-owned business median was just one notch below the threshold for an investment grade company, which is BBB-.

The report found 18% of family businesses rated “strong” for management and governance compared to 13.1% of other European businesses.

Pritchard said one reason for this was that family business owners generally pay very close attention to how the business is run, often because it’s their largest asset. In contrast, shareholders in public companies are usually dispersed and have to rely on a management team to run the company productively.

The report also found that family businesses had more stable credit ratings as they generally had a longer-term investment horizon and more conservative business strategies than their public counterparts. So while they are less likely to pursue aggressive expansion in good times, they are equally less likely to conduct layoffs and cuts when times got tough.

Pritchard said lenders looking at a company from the outset also want to see stable ratings. “Most companies do aim broadly for stable ratings. When they have people that have lent them money, they feel an obligation to live up to what they’ve promised to repay.”

The report found some family businesses were concentrated in countries considered risky by S&P, such as Russia and the Ukraine, and this will affect their credit rating score.

Pritchard said factors such as unpredictable legal and taxation systems, inadequate infrastructure and strained labour relations contributed to some business environments being more difficult than others, and could affect ratings as a result.

Of the 784 companies S&P assigns ratings to in the region, 92 are family owned, as defined by the European Central Bank.

Almost half of family businesses rated were multinational companies with revenues greater than €5 billion, and 36% had debt greater than €3 billion.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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