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The responses on the questions have been heterogeneous regarding the existence of a financing strategy within the investigated companies, the elements of such strategy and whether it is formulated. However, several elements could be identified in the interviews as well as in the document analysis.

These elements have been grouped into categories as displayed in Table 5.5.

Table 5.5: Elements of the Financing Strategy (Q 2.1 and Q 2.2)

Fin. partners Fin. instruments Principles Financial ratios Further policies Description of process Rank 1 1 3 4 4 4

No. of responses (max. 14) 11 11 8 5 5 5

Manager types

Top level (max. 7) 5 5 5 2 1 3

Middle level (max. 7) 6 6 3 3 4 2

Owner-manager (max. 5) 4 3 3 1 1 1

External manager (max. 9) 7 8 5 4 4 4

Shareholder generation 1 (max. 6) 4 4 4 1 1 2 2 (max. 4) 4 3 1 3 3 2 3 (max. 2) 2 2 2 - - 1 4 (max. 2) 1 2 1 1 1 - Family trees 1 (max. 4) 3 3 3 1 1 1 2 (max. 2) 2 2 2 - - 1 3 (max. 6) 5 4 2 3 3 3 >3 (max. 2) 1 2 1 1 1 - Literal/theoretical replication

Literal cases (max. 10) 9 9 6 4 4 3

Theoretical cases (max. 4) 2 2 2 1 1 2

Source: Own illustration.

5.2.1.1 Financing partners/banks

Eleven out of 14 participants named that a list of relevant or acceptable financing partners should be included in a financing strategy of the firm, primarily banks that the company should work with. Only four participants explicitly included other financing providers in their response. The relation between answers from top management and middle management with five to six matches in the respective answers shows that this aspect is seen to be important in both levels.

5.2.1.2 Instruments

The inclusion of predetermined financing instruments (or at least categories) in the financing strategy was also named by eleven out of 14 participants. Financing instruments and financing partners were therefore identified to represent the most important elements to be included in a financing strategy based on the analysed cases. Table 5.6 presents the instruments used as primary source for the refinancing as well as potential additional instruments to maintain the necessary funding.

Table 5.6: Refinancing Instrument(s)

Case Is the refinancing

process completed? Primary refinancing instrument Additional refinancing instrument(s) Other aspects

1 Yes Syndicated loan Schuldschein1

State-backed loans on subsidiary level

Integrated refinancing

2 Yes Syndicated loan

Schuldschein1

Reverse factoring Integrated

refinancing

3 Yes Retained earnings Increase in syndicated loan -

4 Ongoing Extension of standard

mezzanine Bridge loan

- -

5 Yes Midcap bond Revolving credit facility Integrated

refinancing

6 Yes Retained earnings

Bilateral loans

Working capital financing -

7 Yes Syndicated loan - Integrated

refinancing

Note: 1_{Schuldschein is a particular German financing instrument and is named as Schuldschein in} most English documentation. Other translations for a Schuldschein are promissory notes or debt certificates.

Source: Own illustration.

A significant shift from a bank-dominated relationship lending towards a debt capital market financing or towards alternative financing instruments could only be identified in Case 5. Three cases used bilateral or syndicated loans as their dominant refinancing instrument. Case 3 and Case 6 were able to refinance primarily via retained earnings plus additional bank lending. Case 4 had to overcome problems in maintaining a suitable refinancing instrument at the time of this research. The management team negotiated a temporary prolongation of one mezzanine facility and a bridge loan from a bank to repay the second tranche. Together with the observations on financing

partners in section 5.2.1.1, this emphasizes the dominance of bank financing as primary source for external debt in SMEs and midcap companies, especially in Germany (Börner et al., 2010; Johannesen, 2011). Four out of the seven cases used the replacement of their standard mezzanine instrument to refinance larger parts of their capital structure in an integrated refinancing.

5.2.1.3 General financing principles

Eight participants saw ‘general financing principles’ to be an element of the financing strategy. This element groups several patterns of answers, such as key terms and conditions that should be obtained in every financing process like the composition of maturity profiles or the granting of collaterals for the financing. Furthermore, it involves answers on a target capital structure of the firm. This target capital structure could be either the mixture of debt and equity a company wants to obtain or the legal entity where external financing should be raised (e.g. local subsidiary or group holding company). As a third pattern, answers on the interaction with financing partners are grouped in this element, like information package to be presented or the organisation of annual bank meetings.

General financing principles allowed to identify differences between top management and middle management. As shown in Table 5.5, this element could be identified in five top management interview content protocols. Therefore, this element is for the top management as important as the inclusion of financing instruments or financing partners. But only three middle management interview content protocols allowed for the identification of general financing principle elements. This is of particular interest, because this category includes most of the factors that are important for the interaction with the financing partners on a day to day basis during the lifetime of the financing. The financing principles will be investigated further in section 5.3.6 as it will be revealed that these are used by the management to discipline shareholders and family trees.

5.2.1.4 Key performance/financial ratios

‘Key performance ratios’ play an integral part in the controlling of the overall performance and development of a company (Taylor & Lowe, 1995). They should therefore be an element of the overall corporate strategic discussion:

Participant 2 (external manager, middle level, literal replication): “Key financial ratios that the company / the group uses as KPIs to run the company and is willing to accept in financing contracts [are an element of the financing strategy] and that derive from the business plan that has been signed-off by the management and the shareholders of the company.”

However, ratios as a quantitative determinant to ensure a certain debt to equity ratio, a leverage ratio or a minimum equity ratio were found only in five out of the fourteen interview content protocols and only in three of the seven cases. Financial ratios are investigated in more detail in section 5.3.5, where the consistency of financial ratios and their effect on determining the refinancing instrument will be explored.

5.2.1.5 Further Policies

‘Further policies’ like an investment memorandum or hedging principles have been named as elements that should be included in a financing strategy. Interestingly, this element has been named by four middle management participants and ranks third after financing instruments and financing partners.

Participant 1 (owner-manager, top level, literal replication): “Financing strategy follows the overall company strategy (e.g. the new syndicated loan agreement includes a dedicated basket for further joint venture financing within a specific product sector).”

However, only one top management interview participant stated that further policies represent a relevant aspect of the financing strategy. This result is not surprising as it indicates the aim of the middle management that in their view a good financing policy includes very detailed and operative elements that serve as guidelines in their day to day work.

5.2.1.6 Process Description

Five interview participants included an outline on how a typical ‘financing process’ should be conducted by the company’s management in their answer on elements of a financing strategy. In contrast to further policies, this element seems to be of more importance to top management participants. Interestingly, the process description element does not concentrate on how the banks are approached and on how the negotiation process with external financing partners should be executed. The

description is primarily focussing on the internal communication between middle management, top management and supervisory bodies of the company. Consequently, the process description element has been only named by external managers. This undermines the research of Naldi, Nordqvist, Sjöberg & Wiklund (2007) and Busenitz & Barney on risk taking and corporate entrepreneurship, as they indicate that owner- managers “are likely to perceive less risk in a given decision situation than are managers” (1997, p. 24) and therefore are not aiming for a transparent documentation of the decision process. The financing process will be further investigated in section 5.3.