
Despite differences in size, location and industry, family owned companies have a number of revealing similarities. For many, their longer-term outlook on business strategy tends to result in greater stability.
In fact, our recent study into the creditworthiness of family-owned businesses demonstrates that credit ratings for family enterprises were more stable over the last five years than ratings for businesses with other ownership structures. As bank lending becomes increasingly constrained due to new regulations, and as family run companies seek growth-enabling funding outside of these long-term relationships, this may prove an important strength.A diverse but small group
In our study, the definition of family ownership requires most decision-making rights to belong to the firm’s founder(s) or immediate family and heirs, and one member of the family to be officially occupied in the firm’s running. Of 784 rated companies in EMEA, – barring utilities, project finance entities and financial services companies – only 92 fall within this definition. But this small group contains a variety of different sized businesses, in a number of locations and in a range of industries. That said, there are several characteristics that members of the group have in common, despite their diversity. For example, they often plan to pass on the business to their family’s next generation – giving management longer horizons than is common elsewhere. Various studies have tried to understand the effect this behaviour has on performance. For our analysis, we examined the stability of ratings for family owned businesses by cataloguing rating transitions over the past five years and comparing the results to our total rated non-financial corporate portfolio. The results demonstrate that – over this period – family owned companies were more stable in all rating categories apart from BBB.Management and governance is an asset
An assortment of financial policies
Our financial risk assessment is derived from analysis of prospective cash flows and a company’s evolving capital structure. More sophisticated business managers balance the degree of financial risk that they are prepared to accept against the fundamental dynamics of the business, and the financial policy of the owners and their investment horizon is taken into consideration in our overall credit assessment. The family enterprises in our study cover a wide range of different financial policy strategies. But even with these substantial variations, 64 per cent of the family enterprises in our study have financial policies we would categorize as moderate, conservative or very conservative.Share this story