Advisory Boards can Accelerate Growth and Profitability in Middle Market Companies
Growth in private middle market companies often is constrained by the lack of “diversity of experience” in the company. Often, the company is a family company with management comprised of brothers and sisters who share the same experiences, knowledge and culture. While often this can be beneficial to the growth of a company, often it is not due to the concept of “if you always do what you have always done, you will get what you always got.”
It is estimated that less than 5 percent of middle-market companies have an established Board or Advisory Board, the primary reason for such a low percentage is that small and middle-market businesses believe they are smart enough not to need a board, think it is too expensive, or believe it would constrain their decision-making abilities.
With the demands on CEOs — including ongoing regulatory changes, pressure from family and other founders, the rise of new competitors and business models, and the need to transform businesses at an ever-quickening pace — it may be time for you to get some help and add an outside director to your Board.
In a recent survey conducted by Statistics Canada, private companies with Advisory Boards where outside members produced the following results:
- Sales growth was stronger after instituting an Advisory Board. In the first three years after an Advisory Board was set up, sales grew 66.8% compared with a growth of 22.9% in the three previous years.
- Productivity growth also strengthened after the Advisory Board was introduced. In the three years after the Advisory Board was set up, productivity rose an average of 5.9% compared with 3.2% in the previous three-year period.
5 Key Points When Interviewing Advisory Board Members
1. Look for Advisory Board members with the experience of a senior executive and with various and diverse backgrounds.
An Advisory Board provides counsel, advice, contacts, professional skills and experiences that typically go beyond that of the company management team and may include individuals with industry, sales, operations, strategy, financial, marketing, technology, investment, intellectual property, or human resource expertise. Advisory Boards are informal brain trusts and have no governance or fiduciary responsibility but is solely focused on helping the company achieve its goals.
Many private companies prefer an Advisory Board so that no control is ceded to non-owners. Advisory Board members can offer perspective on everything from making introductions to sources of financing to targeting niche markets and forming partnerships with market leaders.
2. Consider whether the Advisory Board member could fill an existing gap in your management team.
Independent third parties – frequently an outside advisor, build the best Boards. Senior executives with diverse backgrounds can bring an enlightened, unbiased perspective. Avoid building a “vanity board” full of great names – they typically end up being purely window dressing and neither productive nor useful. Your Board needs to be populated by those with contacts helpful to your business, the will to exercise their skill and knowledge to grow your business and a firm commitment to see it through. Bringing on golf partners, book club members, neighbors or family members may be easy to do but they must add real value to take such a risk. Experience suggests it’s best to avoid this scenario altogether. Advisors should serve as a sounding board for assessing new offerings, markets and opportunities. Properly selected, their knowledge base can help accelerate your growth. They can also introduce greater corporate accountability and discipline. If your strategy needs attention, Advisors can provide fresh thinking and counsel on planning the development of your business. They’ll also tend to create a sense of accountability for you and your team for execution.
Are you missing functional expertise in Sales, Marketing, Operations, Finance or Human Capital Management? The right Board member(s) can give you the lift you need to cover that ground while you search for the right professional to bring onto your team. Ask your business colleagues for referrals to others they know who are skilled in the areas your business lacks.
3. Could the Advisory Board Member help expand your business development opportunities?
Often, your Board can enhance credibility with industry, vendors, customers or investors. Simply featuring your Advisors prominently on your website and letterhead can give you a leg up on the competition. Your firm will enjoy an enhanced image among a broad range of constituencies.
4. Could the Advisory Board member help you address new market segments?
A Board consisting of thought leaders who have done it before, will be able to ask the right questions to determine how to leverage your company’s strength into accelerated growth. Advisors may also introduce untapped communities of interest to expand your business development opportunities. When considering a new market or new territory, Board members with expertise in those areas can be of great assistance in helping to crystallize your thinking and providing skilled guidance. They can also offer knowledgeable input on market changes and industry trends. Further, their input on marketing performance and ROI can be invaluable.
5. Preparing for a liquidity event? Could the Advisory Board member help position the company for exit and help to increase the ultimate value of the company?
Your Board can also help improve the ROI in yourself. Perhaps you are new to, or inexperienced in the CEO role? Look to your Board to help you expand your leadership and managerial skills. A properly selected group of advisors who have “been there, done that” can help anticipate and avoid costly mistakes.
Most small business owners expect to eventually sell their firm or merge it with another company. Planning your liquidity event can be complex and daunting. The right Board can help you prepare and execute the transaction, helping you achieve the best possible return. After all, isn’t that why you created the business in the first place?
If you are not planning to sell but want to transition your business to your family, an Advisory Board can help address sensitive issues like sibling rivalry and individual agendas. Board members can also help evaluate the capabilities of family members for succession planning and facilitate cross-generation communications. Boards can remove emotion from the decision-making process and smooth leadership transitions from family to professional executives.
Think through the type of knowledge, experience and relationships that would add value to your firm. Then, craft a profile of your ideal board member. Circulate that to executives who are excellent prospects and ask for their feedback. For best results, work with an advisor who has built successful boards for other firms. You’ll accelerate the process and attract great candidates.