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Marty and Jean knew they needed to work together to make their vision a reality. There was no question of working with outside partners. This was an internal partnership. But they needed to explore their compatibility. So, I asked them to complete a Partner Compatibility Analysis as a team-building exercise to help them begin thinking about how their relationship might develop. Marty balked. “Look, I know that I have to work with Jean, and I think we’ve identified the scheduling as one area we can work on. But I don’t want to waste my time with that compatibility thing. Can’t we just move on?” Jean replied: “Let’s just look at it, Marty. It might help.” So look at it we did. After a few minutes they started answering the questions out loud, so I suggested we just informally put down on paper what they were saying. Neither objected, and their compatibility analysis is what we came up with. Marty and Jean noticed they both answered no in areas that concerned their relationships. They vowed this was one area they were going to work on.

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.