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Bonding the Ties - Chartered Accountants and Family Firms

When a family firm starts growing, Chartered Accountants (CAs) are the first professionals whose services are sought. Normally, they remain with the firm all through the journey. They develop intimate understanding of the client's business and family. Given the desire of the family owners towards maintaining confidentiality, they don't like to talk about such matters with new acquaintances. However, they are comfortable to share their thoughts with their CAs. The job of the auditors is such that owners are in any case required to share the ins and outs of the business with them.

In the past, accounts and taxation always grabbed the major share of owners' attention due to high rates of taxation and the resulting necessity for tax planning, tax management and at times, for tax avoidance.

Management consultants rarely came into picture, as it made no sense to consult with someone with whom all facts could not be shared.

Moreover, management graduates were more inclined to join MNCs as employers and neglected family firms. On the other hand, CAs served family firms both from inside and outside and they served them well given the needs of the hour. Their knack for numbers and their sense of belonging made them preferred employees for many houses like A V Birla group.

In terms of loyalty, the track record of Chartered Accountants has been absolutely impeccable. They have rarely caused any breach of trust nor have CAs in service changed jobs as fast as other professionals. Family firms, in turn, have also maintained their faith in CAs.

Roles finance professionals can play in family firms

CAs have deep access to the working of a company. They prepare accounts, conduct the audits, plan the taxes and supervise the assessment procedures. They also manage finance, perform the internal control function and prepare important reports for the management.

CAs have historically provided services in the following areas to the family firms:
  • Auditing & Internal Auditing
  • Project Finance
  • Individual tax planning
  • Cash-flow management
  • Corporate tax planning
  • International business and tax planning
  • Assessment and dispute resolution with tax authorities
  • Search & Seizure proceedings

Occasionally, they have also provided services in the following areas:
  • Business ownership structuring
  • Charitable and personal trusts
  • Estate planning
  • Initial public offerings
  • Mergers, acquisitions and divestitures
  • Debt structuring
  • Valuations and appraisals

However, CAs in profession who are responsible for the audit of accounts of a firm have tended to ignore strategic role and focused more on historical analysis. They stopped at fault finding and correcting the mistakes and failed to provide suggestions for improvements for future. They acted more as trouble-shooters. They used to appear out of the blue once a year and produced the annual accounts. They rarely participated in the planning process. However, this gap was well filled by their brothers in the industry working as employees. But the firms failed in getting the advantage of an external perspective.

Despite providing many services, CAs haven't applied their mind consciously to the family character of the firm, didn't recognize family firms as a separate category and as such have very often failed to develop strategic solutions for the typical needs of family firms. Family firms often have relied upon the same outside CAs for many years or even decades. On many occasions, the long-standing nature of these relationships gives these professionals an extraordinary level of influence. But due to their disinclination to perform strategic roles, CAs in India have not been able to capture in full the potential and possibilities that their association with family firms provided. To gain confidence and perspective, one is just needed to observe the roles their fraternity is playing in countries like US.

If CAs wish to cater to family firms as a category, they need to develop skills in areas such as sociology, psychology, team building, communications and strategic planning etc. They need to be strategist, accountants, financial planners, lawyers and psychologists - all of them.

They already understand the mindset of business owners. They have reasonable exposure to many internal matters including family matters. They, as it is, are the most trusted advisors and feel obliged to attend to all problems that come their way. Sometimes they may feel reluctant to get involved in a situation that requires earning unpopularity with somebody or which may hurt somebody's feelings. But this is part of the game. By becoming conscious of the situation, they may at least handle the situation tactfully.

CAs need to develop skills in the following areas which already fall in their core area:

Ownership structuring

Indian family businesses have been using conduits or investment companies to have ownership control. Ownership ratios are not properly articulated in the family businesses. As such, over the years, entire ownership structure becomes highly complex. Family firms are required to bring clarity on these aspects given the focus on organizational restructuring for many strategic reasons. They also need to follow various legal provisions dealing with conflict of interest situations which necessitate alignment of ownership in a structured manner.

Cleaning the mess created by cross holding patterns, ownership succession in a structured manner, creation of wealth in the hands of future generation, creation of holding companies (as being implemented by RPG group and Thapar group) etc. are some areas of interest and concern to family business owners in which CAs play important roles. Rationalization of wealth tax rates has reduced the need for parking shareholding elsewhere with the intention of saving wealth tax. Moreover, reduced rate of capital gain tax and abolition of gift tax has also opened up many possibilities for restructuring of ownership.

Succession Planning

Unlike US, in India, Estate taxes are not an issue as the same has been abolished long back. Hence owners in India do not pay much attention to succession planning forgetting the benefits succession planning provides in ensuring continuity of their businesses.

Despite the absence of estate tax liability, the following issues still remain relevant to India:
  • Providing security for the retiring family owner
  • Deciding the ownership succession in a manner that business continuity is ensured
  • Mentoring of successors
  • Selecting the right person for management succession capable of carrying the business forward and family together
  • Communicating the succession plan to all family members
  • Deciding the right time
  • Managing the transition

Family owners tend to avoid the issue of succession. They understand the need for such planning. However, they find it difficult to select one amongst many contenders whom they love equally. They are confused about the fate of business after they withdraw from day-to-day management. They have heard the saying that few family firms survive the transition to second generation and even fewer survive in the hands of third generation. Nobody has communicated to them properly that the prime reasons of such failures are:

  • Absence of proper succession plan which left the successors to decide all issues on their own in the absence of a common binding factor like their father
  • Business reasons which can disrupt any firm's growth if it doesn't have a strategic focus.

Both these problems can be tackled largely by developing the succession plan, by putting appropriate governance mechanism in place and by professionalizing the management. CAs can do a world of good to family firms by bringing the issue of succession in limelight and motivate the business owners to put their desire in action by appointing the CA or some other person as responsible for carrying out the entire succession exercise in an independent manner. They can thus allow the business owner to detach himself from the job of selecting the right candidate and relieve him from much discomfort, pain and agony.

CAs need to understand that with rising concern of family owners about the succession issue, they are seeking solutions. If CAs will be slow to react, the emerging breed of consultants who specialize in the study of family firms will grab the opportunity and keep them to sidelines. Even if they lack the experience of dealing with family issues like the one discussed here, they will do no harm to themselves by initiating the issue and later on working with other consultants in the field, once the owners open up for the exercise. If they take interest right from beginning, they can maintain control and remain involved. A succession plan initiated by a consultant, an insurance agent, an investment advisor or a banker may leave the CA out as the owner may not know that the CA was familiar with these matters. However, if the CA has been raising the issue time and again, when other professionals also persuade the owner, he will be definitely brought into the picture.

By remaining involved in the exercise, they become party to the transition process and get an opportunity to work with the future successors too. This way their relationship extends to the next generation.

Succession process is immensely important for the firm, but it is time consuming. A CA should be available to the firm all through the process. Their intimate knowledge of the client's business and family make them the perfect "partner". CAs should not underestimate their importance in succession planning. They are in the best position to know when it is needed. If ever a tragedy strikes midway through the process, the impact will not be much due to presence of the plan. The family shall ever be thankful that somebody prompted the process.

The time to bring the succession issue to surface should not be later than when the owner reaches his 55th birthday or when the children first enter the business, whichever is earlier.

However, the owner might show some reluctance in the beginning. Persistent hammering may force him to think positively about the issue sub-consciously. Thereafter he will be more receptive of the idea and allow the CA to discuss in detail the options. These achievements will earn the CA respect from both the generations and deepen their relationship with the family as they start sharing many of their personal problems with the CA. I have often come across people who were thinking about the issues but lacked the guidance to proceed further.

One method to bring the issue to the front is to enquire first about the security the business owner has provided for his old age. The owner should quantify his financial needs for taking care of his future security including maintenance needs, health needs and social needs. Accordingly, the CA may recommend that a fixed sum should be periodically diverted to non-business investments. He may also recommend concepts like having a separate family investment office if the volumes and size of savings permit. He can involve along with him investment advisors and insurance agents who can propose options and provide examples of people who are opting for various schemes. A word of caution is required in disclosing the names of others. It is better to disguise the name and narrate the substance.

Raising cash

Family firms tend to be over-capitalized. Hence, taking the money out may not be much of a problem. Their low debt-equity ratio also allows them to borrow from the market and allow the promoters to withdraw some money from the business. Be cautious in negotiating the terms of loans from banks as they generally put restrictions on withdrawal of promoters' investments from business. Don't agree to an open condition. Rather make it proportionate to bank limits. Hence, as the earnings are added or as loans are repaid, owners can also withdraw proportionately. Bankers may ask the owners to pledge the money withdrawn as collateral for some time.

Some firms can opt for placement of equity or going public as a strategy to generate cash. However, if it is not done by off-loading the holdings of the promoters and instead fresh equity is raised; though the firm will receive cash, owners may get limited benefits only. If promoters' holding is off-loaded, capital gains may be attracted. Prospective investors don't like to see the promoters exiting from the business and hence pricing may be at a substantial discount. Moreover, the firm is now required to comply with enormous disclosure and filing needs. In my opinion, bringing in external investors is not always the right strategy to fund the exit option.

Some owners may consider a total exit and sell the firm or the business to an outside party or sell their own stake to a co-promoter. This must be done with due understanding of the impact the void will create in their life. They must have planned for their future activities. The price must be worth the detachment. Future of their heirs must also be considered.

A proper risk-benefit analysis must be carried out and that should go beyond numbers and intangibles like emotions and family pride must also be factored in. The CA should remember that he is dealing with the lifelong achievements of people and should look beyond his self-interest. When strategies like total sale are opted for, he also runs the risk of losing a client permanently as the future buyer will in all probability have a separate set of advisors. But that again should not be a prime consideration, as the existing client will more than compensate if the deal fetches him handsome money. Caution is needed in structuring the fee as ICAI puts restrictions on percentage-based rewards.

Preparation of will

Most patriarchs don't want to transfer ownership in the hands of successors as long as they are around. In such cases, 'wills' are the tools for appropriate distribution of ownership. In the absence of wills, law will take its own course and the ownership may get transferred in the hands of legal heirs in equal ratio which may not be in conformity with the desires of the deceased owner.

Family owners tend to avoid preparing their wills. This lands the successors in much confusion, particularly in case of assets which cannot be divided. It is the obligation of any permanent advisor of family firms, including the CA, to motivate owners to prepare their wills. This also allows the CA an opportunity to understand relationship dynamics in the family. He should never use this knowledge to exploit a personal benefit, but it definitely provides him a perspective of the wishes of the person concerned. He can also help the client by suggesting innovative means to handle complex problems related with distribution in the manner desired by the client. CAs, who are closely attached with the family, may provide rationality to the process if the owner is biased or prejudiced. But the CA must be cautious in not going beyond advising as wills need to be prepared without the elements of pressure or undue influence.

This exercise requires involvement of lawyers and the CA must be cautious that they are brought into the picture at the appropriate moment. This is more so when the will has the feature of unequal distribution. Such wills may give rise to future litigations and the CA may unwillingly become a party to such disputes.

Preparing for going public

Most family firms jump into a public issue without much preparation as the advisors lure them into it. Pros and cons and the preconditions to going public must be properly understood and weighed. CAs must influence their clients in conducting appropriate analysis. If the decision is made about going public, CAs can play key role in preparing the clients strengthen the organization and its systems. They should get actively involved and look beyond providing certificates. They must also visualize enormous accountability that comes with auditing the books of a publicly held company.

Governance structure and processes

The key to success in advising a family firm depends on the CA's ability to motivate, guide and help implement critical governance structures and processes.

CAs should first ensure that:
  • A family council or a family assembly is organized
  • Independent directors are brought on the board of directors
  • Family constitution and policies are drafted and implemented
  • A business plan is put in place

CAs can play important role in drafting various policies given their knack for cross-questioning which can help in examining any clause recommended by various family members.

All listed companies and all privately held companies having paid-up capital beyond prescribed limit are required to comply with various provisions related with corporate governance. This includes constitution of an audit committee.

CAs may tend to treat audit committees as an intrusion and abhor their questioning. But if they change their outlook, they will find how much of support they can get from audit committees in streamlining systems and processes. Due to their long association, clients start taking their auditors for granted. Pursuing any change becomes difficult. Information is at a premium. Putting qualifications may disqualify you for appointment next year. Audit committee members may carry the load on behalf of the auditor as they themselves become accountable for any discrepancy. Auditors thus feel relieved that their advices and suggestions are being taken seriously.

Acting as Independent Director

With the increasing liability on directors, boards are becoming professional. Companies are willing to pay good sum of money to people who can add value to their governance process. Professionals are required to head various committees like the Audit committee and the Remuneration committee.

CAs who are inclined towards governance and who possess strategic vision, can help their clients steer through confusion to credibility by acting as independent directors, but in such cases, they must not act in any other manner that may compromise their independence.

Tax planning

This already happens to be a core area for all CAs. Ownership restructuring can be done through buying and selling and also through gifting where individuals are involved, as gifts don't attract any tax in India. A sale-purchase transaction may attract capital gains. Proper valuations are required to be done in case of closely held companies. An alternative can be transfer through wills as estate taxes are not there in India.

In case of transfer of holdings to and from corporate entities, capital gain taxes are always attracted. Timing of transfer becomes crucial given the method of valuation. Huge costs need to be incurred in maintaining corporate entities. Dividends also attract taxes. Sometimes it may be advisable to run the business in partnership form as withdrawals of profits are not taxable. Moreover, share of profits from such firms are also free of tax in the hands of partners.

Capital gains can be saved from taxes if amount of sale proceeds or profits as may be prescribed for the relevant situation are re-invested in prescribed mode.

All planning should be done after understanding future cash needs and the need for control. Sometimes, clients are willing to pay the taxes and be free to use the money in any manner they want. The key is helping the client identify these tradeoffs and come to an educated understanding of the benefits and costs.

Remuneration of the owners has also to be planned in an appropriate manner. Family firms tend to account for personal expenses in the books and fail to treat them as taxable income in the hands of the beneficiary. Auditors need to guide the owners of the grave consequences of such practices and are legally bound to make proper disclosure of such incidences.

Corporate tax planning is also an integral part of the job and CAs need to guide their clients in exploiting all legal shelters available. Knowing the client's business logic, personality and risk tolerance levels can help a CA anticipate what makes the most overall economic sense for the client. For example, a client may be planning to install a unit in a location which doesn't enjoy any tax benefits. There may be another location just 50 kilometers away which offers attractive tax benefits. But this place has significant infrastructural disadvantages which may result in regular disruptions. The client may perceive favorably the trade off of putting the unit in a place where there are no tax benefits. A CA may fail to grasp the logic that incidence of tax arises only if there is a profit first. He may continue to argue how much the client is losing, every time tax is paid, without appreciating the fact that that had the client opted for the location with tax benefits, he might even have lost his capital.


Till recently, insurance offered tax benefits in addition to taking care of security concerns. With the withdrawals of tax benefits for higher income group, CAs may tend to overlook their role in advising the owners in the matter of insurance. As they are barred from receiving commission, they may feel that they are rendering thankless services to owners by advising on insurance matters. They make two mistakes by acting on such assumptions.

First, security is a highly emotional subject for most business owners. They take personal interest in such matters. By avoiding attending to this area, a CA loses big opportunity to develop intimate relations with a client. Jumping of many private insurance companies in the fray has widened the options and has made selection of the right policy a complex task. A CA can perform the task of selecting the right policy for the client and charge for his professional advice if he is so inclined.

Second, CAs, when they are appointed as advisors for family businesses, cannot look at issues in isolation. It is a total package and ignorance of any area may allow other competitors to creep in.

CAs can introduce an insurance agent to the client and coordinate the insurance purchase with the overall estate and succession plans. Clients also need services in non-life insurance areas including business insurances. Medical insurance, accidental insurance and key-man insurance are some of the areas where value-added services can be provided. CAs have exposure to many clients and can learn from them various methods they use to insure themselves and their businesses. Insurance companies now charge variable rates in many areas like transit insurance and ignorance causes many clients to pay hefty premiums. CAs can save substantial sums for their clients by taking active interest in such areas and thus earn goodwill of their clients.

Buy/Sell Agreements

Family firms wish to maintain ownership control of the firm in their hands. They also want to provide clarity for the modus operandi and for the method of valuation in case a family member wishes to exit from the firm. Events like death, disability, termination of employment and divorce necessitate clarity of consequences. Owners may wish to prescribe for the eventuality of sale - who will be authorized, what percentage of owners must agree and about the compulsion of all to follow the decision. These issues are tackled by the buy/sell agreement.

A buy/sell agreement is essential for a smooth transition and to avoid disputes, conflicts and deadlocks. CAs can play an important role in drafting the specifics of the agreement and also at a later date when the agreement is invoked by playing active role in valuation etc.

Investment options

CAs are masters of numbers. They are aware of various investment options. Families need advice in the matter of investment. They can coordinate with investment consultants and help the owners in parking the money in a proper manner.


Family firms are ridden with conflicts and they need somebody close to resolve them. I have seen many CAs performing this job - the obvious reasons being their proximity with the family and their unbiased and professional approach. By recognizing these possibilities well in advance they can prepare themselves better in tackling conflicts.

Risk Management

Family firms are generally conservative in their approach to business. They treat their business as stewardship obligation to future generations. They want to assure continuity. The world of business is full of disruptions - predictable and unpredictable. Business volatility necessitates enforcement of measures which can help provide stability. Businesses need to put in place systems which can act as shock absorbers through the bumpy rides. Consider the following:
  • Risk needs to be transferred to agencies like insurers.
  • Risk needs to be distributed by widening portfolios - business or otherwise.
  • Risk needs to be distributed over a long time horizon.
  • Contingency plans need to be developed.
  • Alternatives and options need to be created.
  • Monitoring systems are required to track even the below-the-radar flying problems.
  • Future needs to be foreseen.
  • Mistakes cannot be eliminated totally, but the impact of mistakes has to be brought down.
  • Faults need to be detected early. Moreover,
  • Employees commit frauds.
  • Computers catch viruses.
  • Machines break down.
  • Currencies fluctuate.
  • Factories catch fire.
  • Debtors default.
  • People die.

The list goes on and on.

All these situations warrant attention. Many situations can be insured against. In other situations you need to plan for the eventuality. This is the job of risk management.

CAs need to focus in this area to ensure continuity and growth of the family firms if they wish to ensure continuity and growth of their own revenue stream. In future, preparation of the risk profile of a client and devising the risk management strategy are going to be a high potential area.

Preparing for due-diligence

More and more family firms will be seeking to exit, will form alliances or will go in for Mergers & Acquisitions. Such deals are preceded by a due-diligence exercise. Many deals fall through during this phase if family firms do not have appropriate systems and structures in place or if transparency is not assured. Any such failure attracts huge anti-publicity and firms need to wait for years to recreate further interest in a party.

All firms now need to maintain their marketability and need to remain open to exit options. CAs can play an active role in preparing family firms for all such eventualities.

Process Audit

Cost control, risk management and speed of business activity are the key focus areas of all firms. All these require proper and efficient management of processes. Family firms have bad reputations with process management. They are known to be more output oriented and fail to provide proper inputs that are necessary to get them the desired output. Informal style of management reduces predictability of behavior and consistency is lost. In their hurry to get results, they allow too much flexibility to decision makers. The sources of most of their problems lie in bad processes.

More and more firms are now going for business process reengineering exercises. A large chunk of this business is captured by management consultants. CAs need to develop their capabilities in this area.

A Note of Caution

A word of caution is needed. You might be required to ally with other professionals. Follow the rules prescribed by the ICAI and don't share fees. Divide the roles and charge independently. In the areas requiring expert knowledge, be suggestive and always warn the client to seek appropriate expert advice.

Moreover, in the light of the Enron-Andersen controversy, there is an increasing discomfort in the minds of general public towards auditors who also provide consulting and other services to their clients thereby being prone to compromise their independence. CAs who wish to develop expertise in the field of family firm consulting, must not compromise their independence. This issue is more relevant in the case of family firms with external funding - public or otherwise.

Changing Scenario

Change does not occur in simple cause and effect patterns. Change is nonlinear and complex. The CA profession is accustomed to a linear, numbers-driven, standards-focused framework. Approaching change in a linear fashion will preclude the profession from participating in the ever-growing market of family business consulting. Moving to a strategic, results-driven profession implies that CAs must not remain stuck in current rules of the game, but rather leapfrog to meet new demands and realities of future paradigms. In the light of rising competition from MBAs, software experts, CFAs and other consultants, CAs need to keep themselves grounded in present reality while stretching towards future. The field of family business consulting is one such area which suits well to their core strengths and profile. But opportunities are like flowing waters; if you don't capture them by building a dam, they flow away.

CAs tend to be glued to the past. They put limits on their vision and thus limit their own growth. This neither helps them nor their clients.

CAs need to observe the rising concern of the family firms about their inherent strengths and weaknesses arising out of their character as a family firm. Organizations like CII and educational institutions like S. P. Jain Institute of Management & Research and Narsee Monjee Institute of Management Studies - all are focusing on family firms as a category. It is high time the long trusted profession of accountants also woke up to the challenge and responded to the needs of their own clients with vigor and interest.

Total dependence on statute for creation of business opportunities is not the right approach. In the service industry, service is the key factor. Service begins with identification of the needs of the client.

Awareness of the needs arising out of the changing environment is necessary. Maintaining the present skill level may not be sufficient. You may continue keeping your swords in shining and battle-fit condition, but the outside world might have started using guns and what not.

Adaptation and providing value-added services have become critical for the long-term growth of the profession and its members. The impact of recession will be felt much longer. Globalization has created new challenges for the family firms. Many firms are seeing decline in their fortunes. Economy is undergoing consolidation. In such times, small and medium-sized family firms need professional advice to deal with the challenges and opportunities emanating from their family character.

The necessity is there. Means and tools are available. You will not be taking a plunge in the dark. In all probability, by default, you are already acting as a family business consultant. The objective of this discussion is to help you in being aware of the opportunities and challenges in the field and to provide a platform for structured thinking.

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