When An Outside Board of Advisors Can Benefit Your Family Business

By: Amy Wirtz

I have been a business owner on and off since I was thirteen years old. It is not polite to ask how old I am. Being a single owner can be very challenging.

Who do you discuss, brainstorm, commiserate, plan or argue with? The person in the mirror? How do you hold yourself accountable? Unfortunately, it can’t be done with the face staring back at you in the mirror.

Granted there are, as the business grows, a number of people interested in the business. But their position necessarily shapes their vision. Employees will often refrain from telling you their true opinion for a variety of reason: due to fear of losing their standing in the company, laziness, personal relationship issues within the workplace, etc. Lawyers, accountants and advisors all form specialty areas and have their own interest in your decisions too. Your family members will have their interest in the decisions that are being made as well.

When you get to the point where you decide you need extra help what should you do? The tool you can create to meet these issues and strengthen your business is the outside board. This is how you get advice that is confidential, credible and reliable from other experienced business people. It is a proven tool.

Very few companies make it beyond the second generation. It is very significant that a study of 88 family businesses in their 3rd generation or later indicated that the single most important commonality of their success was that they all had active outside boards. Page 30 of “Creating Effective Boards for Private Enterprises” by John L. Ward.

When you create an outside board you should do so with specific expectations. Here are some typical expectations of such a board:

  • Boards help the owner design and implement management succession plans.
  • The board can be an insurance policy for a resource to the family members after one of the unexpected succession crises occur like Death or Disability.
  • The board can be an impetus for the owner to proceed in a timely manner with the ownership succession plan and help with the predictable “bumps” in the road.
  • The board can help with creating the life after plan for the owner too. (insert stat about dissatisfied business owners).
  • Confidentiality of the board creates as safe place for the owner to problem solve and be creative.
  • Boards help identify needed organizational changes to help make the company successful before, during and after the succession of ownership and leadership occur.
  • The board can also help prepare the next owner/CEO of the company and monitor the business issues that develop with transitions. The board can help plan for and identify the next leaders of the business and leverage the human capital in the business.
  • The board can help support the family council by helping the owner categorize issues as business issues or family issues.
  • The outside advisors help with compensation issues and structure to lessen the tension that is created owners who work in the business and those that are passive owners. The passive owners are looking at dividend returns and active owners in the business want compensation for the sweat equity in the company. This can create tension that can be lessened by objective outside advisors.

Having a board can model a new way to constructively discuss issues and resolve them in a more formal and manageable manner. It also shows the family that you have a commitment to run the business in a manner that is above board in compliance with state laws and in a manner that is in the best interest of the business and you are willing to be accountable to a board of outside influence. This shows the business is not all about your individual best interest.

There are two different kinds of Boards. The first kind of outside help is known as Board of Advisors. The second is known as a board of Directors. Both allow for the owner to hand select members who have navigated small and large changes in business. An outside board can be assembled strategically to bring a new intellectual experience and technical expertise to your company.