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Are family businesses underleveraged?

By CreditMan Tuesday, April 7, 2015

With the position paper “Family Businesses and Debt: Shifting Towards a New Paradigm”, the EDHEC Family Business Centre and the EDHEC Financial Analysis and Accounting Research Centre invite family firms to revisit their assumptions about their debt

For both companies and for the academic world, determining the optimal level of debt can be likened to the quest for the Holy Grail. The financial and the economic crises which have been ongoing since 2008 have brought this subject back into the spotlight, given the increasing scarcity of financial resources and the reduced profitability levels of companies, which consequently reduce self-financing.

Within this context, many family businesses, in the quest for growth, have found themselves facing a structural problem and asking the following question: Do the intrinsic characteristics of family businesses justify debt levels that are structurally lower than those of their non-family peers?

Within the current context of historically low interest rates, are family businesses taking on sufficient debt? Are the classic paradigms on funding structure not more fragile within this new interest rate environment?

To address this problem, it is necessary to revisit modern financial theory by considering two additional dimensions: the desire to perpetuate the family business and to maintain its control.

Thenceforth, the traditional criterion used when choosing financial structure, based on the risk-reward ratio, is thus relegated as the two-fold condition of perpetuity and control takes priority in all

To this end, the authors examine the criteria that take precedence when companies decide what type of financial structure to adopt, thereby revealing the key elements of this financial structure.

In the new economic context of historically low interest rates, where some family businesses finance themselves (by issuing bonds or private placements) at costs of lower than 1% per annum over a 5-7 year period, the paradigm of financial distress is likely to be less restrictive. This research answers the question about whether family firms are sufficiently leveraged.

This latest research will be presented at EDHEC Campus in Paris, on 15 April 2015.