Using an Advisory Board to Help Manage an Exit Transition
Who Needs an Advisory Board?
Small businesses – say with less than 100 employees and $20 million in sales – often have trouble managing complex transactions. Large companies have an active Board of Directors from which to receive advice, approve major decisions, and exercise a fiduciary responsibility toward the shareholders. When the CEO of such companies is making an important decision, the Board plays an active role in assisting with the decision-making process. Most small businesses are owned by a single individual or small group of family members. Key employees and family members who see themselves as likely successors as well as professional advisors often express frustration that they cannot persuade the business owner to seriously plan for succession. In lieu of a formal Board structure, an informal Advisory Board can facilitate major decisions including succession planning.
Let’s consider the case of Sam, the sole owner of a medical equipment manufacturer with $10 million + in revenue and significant export sales. Sam has maintained an informal advisory board for 15 years. It started initially when he wanted to implement a more sophisticated computer system to assist with internal budgeting and costing for new projects. Sam was able to recruit several financial people to provide guidance on this project. He found that local people were willing to serve on such an advisory board for much the same reason that nationally prominent executives and academics seek out opportunities to sit on the boards of Fortune 500 companies – to make connections and gain experience with a new company. Over the years, Sam’s needs changed. About 8 years ago he decided to make a major effort to grow the business in new markets. He brought a marketing person onto his advisory board. Partly as a result of the advice he received, Sam’s business doubled over five years.
Sam describes the compensation that he has paid his advisory board as “nominal”. Total compensation has never exceeded $25,000 per year. Advisory board members don’t do it for the money-rather for the experience of being involved with a growing, challenging, business enterprise.
Sam is now facing a new challenge-exiting from his business. Sam’s current board of advisors includes an entrepreneur who built a business and sold it to a private equity group for over $10 million. Sam sees the principal benefit of his board now as providing objectivity. Like many small business owners, Sam has trouble taking a “detached” view of his company. Unlike most, Sam admits to his “problem” and is actively seeking outside advice.
Sam does not have any children in the business and his key employees are not financially capable of purchasing the business. Therefore, he will try to sell to a third-party. Sam is looking to his advisory board to assist with choosing a broker/investment banker to manage the sales process and to help him evaluate offers that he receives.
Here are some general rules for setting up an advisory board:
- Recruit members with diverse business experience. Perhaps one or two can come from your industry, but diverse industry backgrounds are an advantage.
- Keep the size manageable. Five to eight people is a good range. For family businesses, it is critical that most of the advisory board members are not family members.
- Pick people with experience in the areas that you need help. If succession planning is a key concern, pick advisors who have been through the process themselves.
- Pay for the advice you get. Although advisory board members are not doing this for the money, they appreciate being compensated for their services.
- Use the meeting time wisely. These are not social events. The meetings must be well planned with a precise agenda. Make sure everyone knows what is expected and receives all necessary information before the meeting.
- Understand that an advisory board does not have the legal authority to make corporate decisions. Rather, its purpose is to provide advice; the final decision is yours.
In a succession planning context, an advisory board can provide an excellent supplement to professional advisors. Most business owners only leave a business once, so it is a process that they are not familiar with. Using an advisory board can help bring this process to a successful conclusion.