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The second meeting was set up a week after all the requests for pricing had been submitted. Each response had its pluses and minuses. While most of the nonunion bids were slightly lower, they had certain negative components. For example, the plumbing contractor could not provide the number of skilled plumbers needed just when the project would most require their skill. The heating and cooling contractor cost pennies less than its union counterpart but had fewer licensed specialists on its payroll. The union contractors came in with bids that met all the special requirements and certifications needed, but they were slightly higher in labor cost. After reviewing the bids, John told Peter he’d like to go with the union contractors if the union would lower its cost by two cents per labor hour. That would make the union contractors’ bids economically competitive with nonunion labor. Peter thought the job would hire enough skilled labor to make the project worthwhile, so he’d ask the locals to tap funds from their Market Recovery Program—a fund union members pay into just for this sort of situation—to apply toward labor costs. But labor could offer things—such as certified skilled workers and the resources to commit to completing the job—the nonunion contractors couldn’t, and John knew this.

The first step in any family succession plan is to choose the appropriate heir for the business. Where there is only one heir, it is necessary to decide whether he or she wishes to, and is capable of, taking over the business. If there is more than one suitable candidate, it is necessary to decide which one will be chosen. The factors to consider include business aptitude and management potential. Potential is more important than experience, because you can groom your heir for the role as owner/manager over an extended period.

In theory, the steps involved and the logic employed in choosing the appropriate heir should be similar to those involved in choosing the best CEO for the business, or the lead manager in a management buy-out: that is, the heir you choose should be the one most capable of running the business successfully when you leave. In practice, however, the choice may be made for various personal and family related reasons, rather than on solid business-based grounds.

Where there is only one heir (or only one heir who is interested in taking over the business), obviously it might still be a mistake, on purely business grounds, to hand over the business to that heir. But, if this is to be the case, your task is to make the best of a dubious decision and to prepare this person as best you can for the role of running the business.

The bear market for credit between 1997 and mid-2002 has put a new focus on valuing corporate credit. The debt-financed equity bull market of the second half of the 1990s was accompanied by historically high default rates and investigations of the management and reporting of corporate balance sheets.

Obviously the standard approach of using rating agency credit ratings to gauge credit risk is no longer sufficient. As a consequence, quantitative approaches have recently gained popularity, particularly structural models based on equity-market inputs. Quantitative models can be used as a tool to provide warning signals or to determine whether the spread on a corporate bond adequately compensates the investor for the risk. Due to the current low-yield/low-return environment the number of investors interested in credit products has grown worldwide. Credit models like KMV or CreditGrades have been developed to meet the growing investor demand.

These enhancements of the Merton model are able to incorporate companyspecific details and can include subjective credit analyst views. With respect to the rapidly expanding credit derivatives market, quantitative models provide critical inputs for valuation and hedging. Default correlation, a major driver for the valuation of credit portfolio products, can be modeled in both structural and reduced form models. Finally, quantitative credit models have become indispensable tools for the risk management of financial institutions.

Although various quantitative models are used by credit investors, two approaches for modeling default have gained widespread acceptance: structural models and reduced-form models. Both of these methods provide estimates of default probabilities or fair market spreads.