German small and medium-sized enterprises (SMEs) were not always considered banks’ ideal clients. That has now changed, however, because equity ratios rose with the onset of the financial and economic crisis a good ten years ago. Interest rates, which remain at a historic low, were also a contributing factor.
A recently published study by the management consulting firm Roland Berger and the credit insurer Euler Hermes—which the Handelsblatt has obtained exclusively—examined the balance sheets of 700 companies. The findings show that the equity ratio for family-run companies is, on average, seven percentage points higher than for other companies. Furthermore, family-owned businesses are less likely to have debt and fewer bank liabilities if the company’s management remains family-controlled. The study also shows that they are more willing to pay higher interest rates on loans than to be more transparent to the outside world.
Digitalization Eats Into Equity—Family-Owned Businesses Face Major Challenges
In addition to the findings from the survey, the management consultants conducted approximately 70 interviews with owners of medium-sized family businesses. These interviews revealed that while the equity ratio of the majority of family-run businesses is good, it is not sufficient to successfully implement the necessary steps for corporate digitalization. In fact, the digital infrastructure is significantly more expensive than predicted and, of course, also incurs ongoing costs to keep it up to date.
To cover these and other costs, companies must therefore seek out other sources of funding and are increasingly turning to private equity or private investment capital. In addition to family offices, private equity firms—which were once viewed negatively—are now an attractive option for medium-sized family-owned businesses in such cases.
Family Businesses – The Problem with Succession
Additional costs may arise if there is no successor—or no suitable successor—within the family or the company itself, making it necessary to bring in an external manager. According to the study, external managers spend more money than family members, and costs may arise for the company even before they are hired, as they must be poached from larger corporations.
Added to this is the need for digital experts, which can only be met at a high cost due to the limited supply relative to high and steadily growing demand. The shortage of skilled workers and a global labor market with well-positioned competitors exacerbate this effect. As a result, a large majority of those interviewed stated that they were already in talks with investors.
Nevertheless, negotiations with family offices remain the most popular option among family-run companies. This is not particularly surprising, as private-equity firms typically seek a majority stake, which does not really align with the logic of a family business. In conclusion, the following trend emerges from the study: Lending has been rising steadily for eight consecutive quarters. A further acceleration in new corporate lending is expected for the fourth quarter of 2018, with growth projected to rise from 8.3 percent to as high as 10 percent.
