3 questions to smart minds


For this 3 questions to U. W. Fricke

Photo: H. Zelger | MAZARS
15. March 2011

In the finan­cial world, the evalua­tion of a company or a rating serves as the basis for decis­i­ons on finan­cing condi­ti­ons, the basic willing­ness to lend and the provi­sion of loan colla­te­ral. The rating of compa­nies makes strengths and weak­ne­s­ses trans­pa­rent and shows poten­tial for improvement:

For this 3 ques­ti­ons to Part­ner at MAZARS Audi­tors, Munich,

1. When does a company need a rating?

“An obli­ga­tory exter­nal rating is typi­cally done when finan­cial markets are acces­sed (e.g. when bonds are issued) or when there is a concrete agree­ment among the firm’s credi­tors. This is prima­rily the case with big compa­nies, less so with German small and medium-size firms. The latter must prima­rily deal with the rating by the finan­cing banks.

Banks regu­larly do inter­nal valua­tions of their borro­wing commer­cial clients. This inter­nal rating is a struc­tu­red proce­dure, based mostly on quan­ti­ta­tive sources (such as annual accounts, recent monthly finan­cial state­ments, and plan­ning calcu­la­ti­ons). Some quali­ta­tive aspects, which are important for the assess­ment of a firm’s credit­wort­hi­ness, such as the apprai­sal of markets/competition, orga­niza­tio­nal effi­ci­ency or the management’s compe­tence, often remain uncon­side­red. An exter­nal company valua­tion or an exter­nal rating can ther­e­fore be helpful; it permits the entre­pre­neur to present a complete picture of his company and to discuss or improve the assess­ment by the bank in a profes­sio­nal way.”

2. What can a company do itself to improve its “rating”?

“Because of its busi­ness and finan­cial rela­ti­onships, e.g. with suppli­ers, inves­tors or leasing/factoring finan­ciers, a company will also be asses­sed from their point of view. Whether an exter­nal rating is to be done for these purpo­ses is to be deci­ded on the basis of a cost-bene­fit analy­sis. — Equity inves­tors will do the valua­tion of a firm on the basis of their own due dili­gence and set the other condi­ti­ons of their invest­ment on the basis of the insights gained. An exter­nal rating plays no role or only a secon­dary role in this.”

3. What can a company do itself to improve its “rating”?

“A lot! Espe­ci­ally owner-mana­ged medium-size and family firms often fail to utilize the possi­bi­li­ties to “sell” their firm in a clear and convin­cing way. They present past finan­cial data like annual accounts or monthly finan­cial state­ments; but there is no coher­ent presen­ta­tion of their busi­ness model and any corre­la­ting relia­ble busi­ness planning.

Here the compa­nies are chal­len­ged to relin­quish their often passive atti­tude and to deal actively with current and future inves­tors, lenders or suppli­ers. The entre­pre­neur ought to be so well prepared that he is able at all times to “sell” his company. The cost of preparing/revising the busi­ness plans or the orga­niza­tion of docu­ments is well inves­ted. — Such an “inter­nal” company rating crea­tes trans­pa­rency and permits a profes­sio­nal discus­sion on a par with stake­hol­ders. The trans­pa­rency so crea­ted reve­als, as a rule, exis­ting problem areas that can now be analy­zed and correc­ted in time. The expan­ded scope for action allows winning addi­tio­nal finan­cing part­ners and redu­cing the frequently exis­ting depen­dence on the house bank. Last, but not least: Should a company still decide on an exter­nal rating, the measu­res mentio­ned above will help to reduce the cost of the rating and to improve its findings.”

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