Many successful entrepreneurs attribute their achievements to personal determination, sound decision-making skills and even reliance on gut instinct. Unfortunately, the very qualities that brought about their success can later become key weaknesses. Too many businesses become rigid over time, handcuffed by their owners' assumptions and unwillingness to challenge the status quo. Simply put, these businesses end up suffering from a severe case of tunnel vision.
It is unwise to be too sure of one's own wisdom.
It is healthy to be reminded that the strongest might weaken and the wisest might err.
- Mahatma Gandhi
The best cure for tunnel vision is a hefty dose of objectivity. In larger organizations and public companies, independent directors provide this much-needed perspective and insight.
Family businesses can also suffer from a lack of objectivity which can subsequently limit their potential. Within a family business, new ideas and individual opinions tend not to be viewed as impartially by siblings, parents, in-laws or cousins. Often there is no formal discussion or decision-making process, but rather an instinctive need to hold all cards close to the chest. This overall resistance to change means limited opportunity for the next generation to develop critical-thinking and leadership skills.
A Family Business Advisory Board can limit such tunnel vision. It ensures a fresh viewpoint from the outside and provides protection for both the goose and the golden eggs. It serves as a forum to groom next generation leadership and helps to create the choice for either an internal or external sale of the business. As a component of your Communication Vehicle™, it is the closest thing to a silver bullet.
What is an Advisory Board?
An Advisory Board is primarily a think-tank that stimulates communication and promotes a "we-focus" among current and future owners and the management of a business. Its ultimate objective is to enhance the creation and preservation of wealth while managing the risk that is inherent in all business entities. It not only acts as a sounding board for the senior generation, but also serves as a training ground and source of guidance for their successors.
Similar to a Board of Directors, the mission of an Advisory Board is to garner the insight of people from outside the business – people who have specific knowledge or expertise in privately-owned businesses and can bring a different perspective to discussions.
However, unlike a Board of Directors, this board does not have the power to make decisions – it operates solely in an advisory capacity. While a Board of Directors can decree what actions must be taken to fulfil the needs of the shareholders, the role of the Advisory Board is to explore new opportunities, challenge the status quo and make recommendations to the owners, Board of Directors, CEO and/or management team.
While both entities play an important role in the growth, professionalization and ongoing sustainability of the business, many family businesses have yet to recognize the value of having an outside perspective. Consequently, the majority of privately-owned businesses do not have a structured Advisory Board and fewer still have professionalized to the point where a legal Board is responsible for major decisions. And yet, we know every business owner has a mentor or outside advisors whom they trust and consult on an ad hoc basis. Taking this one step further and having regular meetings with these mentors and advisors creates an opportunity for great ideas to develop from good ones.
Key benefits of an Advisory Board
Our top reason for using an advisory board in enabling a successful business transition is to help manage the fears of current and future decision-makers, while at the same time grooming and mentoring the next generation.
Statistics show that although more than 80% of business owners would prefer to pass the torch to family members, only 50% think that goal is realistic. Currently, only 30% transition successfully and a lack of adequate preparation, planning, and communication are the causes cited.
Consider the three key factors that handcuff business owners and prevent them from putting the same time and effort into planning for the continuity of their business as they did growing it over so many years:
- The unknown – they don't have a clear picture of how to integrate all the components of a business transition
- Uncertainty – they aren't sure that the time is right for a change of leadership or ownership
- Lack of urgency – there is too much to do today and no time to focus on tomorrow
The end result is a total lack of confidence – either in themselves or in their potential successors. Yet transitioning a business isn't something that happens every day, so why should anyone - young or old - be expected to know the ropes?
Few business owners realize the impact their inaction has on the succeeding generation. Whether verbalized or not, the next generation is attune to the underlying concerns. If these doubts are not addressed, the prospective successors can become intimidated, lose confidence in themselves, rely on others to shoulder many of the responsibilities that are rightfully theirs, or generally become hesitant in their roles.
When it comes to preparing for the inevitable sale or transition of the business, an established board, either legal or advisory, can greatly enhance the saleable value. Consider these additional benefits to establishing an Advisory Board as part of your Communication Vehicle™:
- As a key component of a contingency plan, an Advisory Board can push for the business to be highly functional without relying on any one individual for its success.
- It encourages the senior generation to make the transition via a gradual delegation of decision-making while holding them accountable to their responsibility and commitment to the transition process.
- It can promote putting the right people in the right roles within the organization or ownership group and ensure that authority is not linked to membership in the family.
- It provides security for the non-family managers and employees who see the organization focused on professionalism rather than nepotism.
- It also adds stability and promotes confidence in other stakeholders such as customers, suppliers and lenders.
Our next article will explore the setup of an effective Advisory Board but in the meantime, feel free to contact The BDO SuccessCare Program™ team at 1 800 598 6400 or your personal BDO advisor for further insights on equipping a roadworthy Communication Vehicle™.