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The vast majority -- 84% -- of family-owned businesses intend to pass control of that business to the next generation of family members. Many are unprepared, because succession happens only once in a generation. CPAs typically become involved with family business succession issues as a result of the tax planning or management services they offer. But tax planning and management issues regarding succession cannot be optimally resolved without knowing the succession objectives of clients and their families, making it important for all CPAs to have some knowledge about what needs to be done. The need for succession planning may be raised by the incumbent or another family member. If raised by another family member, then a CPA should ascertain whether the incumbent agrees. The criteria for selecting a successor should be derived from the family's goals. To be committed, potential successors must first be interested. An incumbent must feel secure about the business and the family before letting go.

The vast majority - 84% - of family-owned businesses intend to pass control of that business to the next generation of family members ("Making a Difference: The PricewaterhouseCoopers Family Business Survey 2007/08," November 2007). Many are unprepared, because succession happens only once in a generation. Researchers have estimated that only about one-third of all family businesses make it into the second generation (Richard Beckhard and W. Gibb Dyer, Jr., "Managing Continuity in the Family-Owned Business," Organizational Dynamics, vol. 12, no. 1, 1983; John L. Ward, Keeping the Family Business Healthy: How to Plan for Continuing Growth, Profitability, and Family Leadership, Jossey-Bass, 1987), so families are very likely to seek help from their most misted advisors: their accountants (2007 American Family Business Survey, Massachusetts Mutual Life Insurance Company).

CPAs typically become involved with family business succession issues as a result of the tax planning or management services they offer. But tax planning and management issues regarding succession cannot be optimally resolved without knowing the succession objectives of clients and their families, making it important for all CPAs to have some knowledge about what needs to be done.

Consultants and researchers agree the best thing a CPA can do to help a family business client through the succession process is to help the family plan for the future (John L. Ward, Perpetuating the Family Business: 50 Lessons Learned from Long-Lasting Successfid Families in Business, Palgrave Macmillan, 2004). The benefits are many. By planning ahead, issues can be discussed and policies established in abstraction of the people who will be affected. If the family waits until succession is imminent, then policy deliberations cannot avoid being "about" specific family members, exacerbating an already delicate discussion. Succession issues are very emotional because they affect family members' essential psy- chological needs for acceptance. If family harmony is to be preserved, the family must be given time to deal with these emo- tions. The authors' research has found that the satisfaction of incumbents, successors, and other family members with the succes- sion process increases with the extent of suc- cession planning. In addition, having a plan in place will allow the transition to occur with much less disruption of the business if the incumbent family business leader is unable to continue because of illness or death.

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Through exhaustive review of the family business literature and a series of studies con- ducted with family firms over the past 15 years, the authors can recommend the fol- lowing eight-step planning process for helping clients with family succession (Pramodita Sharma, Jess H. Chua, and James J. Chrisman, "Succession Planning," The Blackwell Encyclopedia of Management: Volume IH, Entrepreneur ship, 2005). These steps do not need to occur in sequence; some can take place concurrently. They do, however, compose a comprehensive process that allows the involvement of stakeholders and facilitates communication.

The CPAs Role

What is the CPA' s role in the succession planning process? CPAs can be the primary consultant managing a multidisciplinary team of experts; they can help the family find a primary consultant and assemble the multidisciplinary team; they can be a member of that team; or they can be an advisor outside the process. CPAs must assess where they add the most value to the process for a particular client.

As already mentioned, the process is very emotional for family members. Emotional outbursts at meetings are to be expected and must be managed. Family members will be sharing their innermost feelings and family skeletons will be dragged out. Family members are easily convinced that a consultant is biased in favor of one family member or another. Sensitivity to these highly probable developments is crucial.

Prepare the Family

The need for succession planning may be raised by the incumbent or another family member. If raised by another family member, then a CPA should ascertain whether the incumbent agrees. In either case, the incumbent must understand the necessary time, effort, and resources and be committed to the process. Without the incumbent's commitment, research indicates that the succession planning process is unlikely to succeed, especially if initiated by another family member.

Of course, there must be family members in the next generation who are willing and potentially able to take over. At this stage, an indication of interest is usually sufficient because developing a successor is a long and demanding process.

There are no universal solutions to family succession issues. Therefore, the most important thing a consultant can do is help the family devise its own solutions. This requires honest and constructive communication. Unfortunately, family members learn to communicate with each other at the dinner table - multiple family members speaking at the same time and not listening to each otiier is a frequently observed problem. Therefore, the family may first have to learn how to communicate in a more formal setting. Research indicates that a family's satisfaction with thie process is linked to the level of communication (Pramodita Sharma, Jess H. Chua, and James J. Chrisman, "Succession Planning as Planned Behavior: Some Empirical Results," Family Business Review, vol 16, no. 1, 2003).

Consultants should learn about each stakeholder's values, commitments, willingness to accommodate each otiier, and ability to separate family and business issues before making a judgment about the family's readiness to engage in succession planning. If the family is not yet ready, or if family members have few shared values or willingness to accommodate, then the process is likely to break down, and engaging the family in me process could do more harm than good.

Finally, family members should be asked about their comfort level with engaging an outsider. Some of them may view succession as a purely family matter. It is wise to tread lightly until the family has a consensus on outsider involvement.

Define Broad Ownership, Governance, and Management Goals

The next step is to get the family to agree upon its goals and the goals of the family business. Does everyone agree that the business should remain in the family, or should the business be sold to outsiders? What direction do they see the business taking? What level of family involvement and business performance do they expect? In one case, the authors interviewed some family members who wanted to grow the business while others wanted to cash out. This had critical implications for the future of the family business. The family members spoke on a daily basis, but never actually talked about long-term goals. It took several meetings before family members understood each other's objectives. A trusted CPA with experience in strategic planning can help the family tremendously in this exercise.

Ownership and governance are often closely related because the family dominates both. It is very important to make sure that these are compatible with the long-term goals. The authors observed a family business in the third generation fail because of this incompatibility. More than two dozen cousins had inherited shares in the business, but only five were involved in running the business. The family did not come up with a plan that accounted for this discrepancy. As a result the family members managing the business were out-voted by those who were not The managers recognized that the business had to upgrade technology and grow to stay competitive, but other family members only saw the risks and refused to approve the proposed investments. Over a 10-year period, the business steadily lost market share, causing the more able family managers to leave the business. In the end, the business was shut down.

In terms of management, a family must develop policies regarding the participation of family members, including in-laws. From a purely economic point of view, participation should be determined by commitment and ability. But families may have noneconomic goals, such as making sure that even the least able family member has a minimum standard of living. Although this is more advisedly accomplished using the family's resources outside the business, individuals may still prefer to do it within the business.

A second key policy to be addressed is professionalization and the involvement of nonfamily managers. Professionalization is governance and management of the business according to an agreed-upon and clearly communicated decision-making and reporting structure. This approach is frequently different from how the family business was run by the founder.

Organize the Succession Task Group

The next step is to decide who will select the successor. Choices range from an objective group of outsiders to the incumbent alone. Some family businesses hire recruiting agencies and require family members interested in the position to apply, while other family businesses consider it a private family matter. With the objectivity of an outsider and an understanding of family relationships, the family's CPA may be a valuable member of this task group. Regardless of the group's makeup, the incumbent must be involved in its creation and deliberations.

One small retail crafts store the authors worked with learned these lessons the hard way. The daughter and son-in-law of the owners were asked to take over the business but were not given the power to implement the succession plan they developed. As a result the succession process floundered until the son-in-law forced the issue with a buyout offer. Although this led to an agreement regarding management succession, the particulars of ownership succession were left in limbo. Eventually, the daughter and son-in-law quit and the parents liquidated the business.

Set Criteria for Selecting the Successor

The criteria for selecting a successor should be derived from the family's goals. Trade-offs are common, however, because potential successors frequently cannot satisfy all of the family's goals. For example, selecting the eldest son may preserve family harmony, but selecting the youngest daughter may maximize growth and profitability. Cultural issues inevitably intervene. In one Asian family the authors worked with, the elder daughter helped the father quintuple sales but was asked to step aside for her younger brother when he graduated from university. After building a separate and very successful business, she was asked to sell that business and return to save the core business, which the brother had mismanaged. She loyally did as the family wished and revived the core business, but the brother retained the presidency.

The issues are going to be unique to each situation, but research has uncovered a number of general criteria for selecting a successor. Managers of family businesses in North America, Asia, Australia, and Africa all agree that integrity and commitment to the business are the two most important attributes of a potential successor, followed by the respect of employees. Decision-making ability, experience in the business, intelligence, self-confidence, and interpersonal skills fall further down the list. (See James J. Chrisman, Jess H. Chua, and Pramodita Sharma, "Important Attributes of Successors in Family Businesses: An Exploratory Study," Family Business Review, vol. 1 1, no. 1, 1998; L. Dana, K. Smyrnios, and C. Romano, "Succession Matters: A Comparison of Views of Owners, Spouses, and Their Adult Children - Attributes of Successors and Succession Issues Considered Important by Families in Business," paper presented at the Family Business Australia conference, 2000; and Pramodita Sharma, and S.A. Rao, "Successor Attributes in Indian and Canadian Firms: A Comparative Study," Family Business Review, vol. 13, no. 4, 2000.)

Quite simply, family leaders agree that the best successor is someone who wants the job and has the trust and the respect of family members and employees. Furthermore, the successor must want the job for the right reasons, such as believing they can improve the business, versus feeling an obligation to take the job or lacking other viable career choices (Pramodita Sharma and Gregory Irving, "Four Bases of Family Business Successor Commitment: Antecedents and Consequences," Entrepreneurship Theory and Practice, vol. 29, no. 1, 2005). Without commitment and trust, it is doubtful that a successor will have the support needed to implement a longterm strategy. A family patriarch once asked the authors why interpersonal skill is not ranked higher, because maintaining relationships with family members is so critical. The answer is that a family member with highly developed interpersonal skills but no integrity and commitment will be seen as slick and untrustworthy. Of course, a successor must also have management skills because families must not only trust the future leaders' intentions, they must also trust their abilities to execute.

A lack of trust plagued the succession plans of an auto parts dealer the authors worked with. The father and principal owner wanted to cede majority ownership and leadership to his eldest son, but the siblings did not trust their brother. Because each held ownership in the parent company and controlled individual retail outlets, they were able to frustrate their father's plans. The end result was a transfer of leadership to the "second best" choice, a partial breakup of the family, and general dissatisfaction and ongoing dissension among all.

Develop Potential Successors

To be committed, potential successors must first be interested. There are various ways to get children interested in the family business, such as involving them at an early age, hiring them immediately after they finish their formal education, and designing positions within the business to match their interests. There are many possible routes to success, but coercion is not one.

One family the authors interviewed gave their children summer jobs in the business once they entered junior high school. The children were happy to earn extra money while learning about the business. The jobs were simple and designed to make them have contact with customers, suppliers, nonfamily workers, and business procedures. They tagged along with sales staff on customer visits, rode on delivery bucks, went on collection rounds, made deposits in banks, and filed documents with the government. From this, they moved into part-time sales work with customers that the full-time staff deemed too small. By the time they graduated from university, they already had an intimate knowledge about the business and were eager to prove themselves. They had also earned the respect of the nonfamily managers and workers.

If trustworthiness and dedication are the most important attributes, then, once potential successors formally join the business, they should be given responsibilities and training that allows them to demonstrate or develop these characteristics. Research shows that providing these kinds of opportunities for potential successors not only prepares them for leadership positions but also develops the incumbents' trust and confidence, making it easier for them to let go of leadership later. One experience with a seafood retailer illustrates this perfectly. When the owner's son finished college he was sent to a different town to open another outlet. Three years later, he had established a successful operation and earned the respect and confidence of his father. The eventual succession of ownership and management followed as a matter of course.

Not everyone agrees that a successor's entire career should be spent in the family business. Some families require family members to work outside the company before joining. An important benefit from doing this is that the family member will develop a better understanding of her "true" market value. This will yield dividends when discussing compensation for family members.

Prepare the Incumbent

An incumbent must feel secure about the business and the family before letting go. If the first six steps are properly executed, the business and the family should not be major worries. But personal financial well-being and self-worth are also important.

A financial arrangement must be crafted to allow the transfer of ownership to successors who might not be able to afford the purchase of shares outrighL while ensuring the incumbent's future financial security. Many incumbents have most of their wealth invested in the family business and will not be willing to transfer ownership if their financial security is uncertain. CPAs are particularly well suited to help design such an arrangement.

Many people define their self-worth on the basis of their work. Some leaders have other interests and are able to redefine themselves in those terms. Others, however, may need a managed transition. This can be accomplished by designing a role for the retiring incumbent with responsibilities that diminish over time. For example, one family in the logistics business assigned the retiring founder special projects in upgrading the technologies for their ships and warehouses. After that, he was assigned to mentor the thirdgeneration members.

It is also important to define and communicate the retiring incumbent's new role to avoid leadership conflicts. The former incumbent often has tremendous loyalty and credibility with both family and nonfamily managers. Therefore, it is very important for everyone in the business (especially family members) to understand who is in charge. The new family leader could be doomed if managers and employees continue to work directly with the former incumbent.

Timing the Succession

Succession is often referred to as "passing the baton." The timing has to be just right: too early and the baton is dropped; too late and the runners bump into each other. The best time for succession is when a successor is ready and sure of his status in both the business and the family, and the incumbent is emotionally secure and ready to let go. One of the most successful processes the authors know of occurred in a well-established accounting firm that recently transferred ownership and managerial control from the second to the third generation. The successor had 15 years of experience in the company. The incumbent knew his son was eventually going to take over and had been planning for that event from day one. When the time came, both the father and son were ready. Although the incumbent continued to play an important role in the firm after the transition, the timing was right and, in the words of the successor, the process "just flowed in."

On the other hand, if the incumbent is insecure the successor will be treated as competition and everyone is likely to suffer. One extreme approach that may nonetheless work in such situations is that when the incumbent is too strong and not ready to retire (but should for the good of the business), the family should appoint the second-best choice as the successor. The first choice can come in later, after the credibility of both the successor and the incumbent have been destroyed. This outrageous suggestion illustrates that good timing may depend at least as much on the incumbent's readiness as the successor's readiness.

Guiding a Process

Family business succession is an important process that must be carefully managed. With their outside-the-family objectivity and financial expertise, CPAs can play a valuable role. But more important than expertise, they are the professionals most trusted by business families. For some small family firms, the succession process may be obvious and straightforward and the eight-step process outlined above should be painless. Many CPAs may uncover, however, that families involved in business have hidden disagreements that boil over when the time for succession draws near. This often makes the succession process not as obvious and straightforward as it might have initially appeared. In that case, following the eight-step process outlined in this article will help identify these issues earlier and increase the chances that they will be resolved constructively.

[Author Affiliation]

James J. Chrisman, PhD, is a professor of management and information systems and interim director of the Center of Family Enterprise Research at Mississippi State University, Starkville, Miss. Jess H. Chua is a professor of finance and holder of the Professorship in Family Business Governance at the Haskayne School of Business at the University of Calgary, Calgary, Alberta. Pramodita Sharma, PhD, is a professor at the John Molson School of Business, Concordia University, Montreal, Quebec. Timothy R. Yoder, PhD, CPA, is an assistant proin the Richard C. Adkerson School of Accountancy at Mississippi State University.