Electronics Production | October 05, 2010

Family businesses better at safeguarding liquidity

Family Businesses are better at safeguarding liquidity in the crisis than listed companies. However, family businesses often shy away from corporate actions.
The large unlisted family businesses in Germany often have diversified business models, but they still took a massive hit on revenues in the crisis year of 2009. These companies responded with restructuring, cost cutting and steps to safeguard liquidity. Compared to equivalent listed corporations, businesses owned by a family or trust took stronger action to secure their futures.

They sharply drove down their net financial liabilities and achieved an equity ratio averaging 40%, which is 10% higher than in a reference group of stock corporations. At the same time, they proved more innovative in the economic crisis. Despite having a reduced investment budget, the family firms spent a significantly higher proportion of their operational cashflow on plant expansion and modernizing, finds an analysis from Roland Berger Strategy Consultants and ergo Kommunikation.

"In the crisis we again saw owner families pursuing strategies aimed at securing their companies' long-term survival," says Klaus van Marwyk, Principal of Roland Berger Strategy Consultants and a co-author of the study. The study analysed the financial statements of thirty large-scale industrial companies in family or trust ownership. Their combined sales total EUR 170 billion and together they employ more than 870'000 people. The reference group for the study consisted of 30 MDAX-listed companies of comparable size and from similar industries.

"Family businesses have a very precise understanding of the key elements of their business. And they think extraordinarily long-term," Mr van Marwyk concludes from the findings. "This is why they were so flexible and quick to respond to the crisis and were able to safeguard their critical resources – technology, HR and financing."

Revenues of the family businesses were hit hard. Sales typically dropped by around 12%. On the other hand, they achieved a disproportionately large reduction in material costs, partly due to favorable raw material prices and price negotiations with suppliers. They did shed around 3% of the workforce, but this was often not enough to bring down labor costs.

Unlike the MDAX-listed reference group, the personnel cost ratio rose through the crisis, averaging 22.6% after one year (2008: 20.1%). Yet the family businesses generally refrained from scaling back their research and development projects, despite the difficult business climate. In total, they spent 7.5% (previous year: 6.9%) of revenues on R&D, compared with an R&D ratio of just 3.1% for the MDAX-listed companies in that period.

Clear differences also emerged on the financing side. In contrast to the MDAX members, the family businesses extended their financial liabilities. In the case of the larger groups (with sales exceeding EUR 3 billion), the preferred tools were bonds and promissory notes. Smaller family businesses opted for traditional bank loans. Some of the additional funds were parked as liquidity on company balance sheets, resulting in reduced net debts and lower gearing (net financial liabilities to equity ratio).

Family businesses also shored up their liquidity by continuing to run down inventories and reduce liabilities, which together amounted to just 30.5% of the balance sheet total (MDAX reference group: 33.8%). They also delayed their more expensive investment projects. Nevertheless, these companies still used 68.7% of their operating cashflow for investment, whereas their listed counterparts only committed 47.1%. Finally, the comparatively moderate dividends demanded by the families also helped to ease the financial pressures.

Quelle: Roland Berger Consultancy


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