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Establishing an Advisory Board for the Family Business
By: Patrick J Horan, CFP, CHFC
Journal of Financial Service Professionals, November 2003
There can be many reasons why a business owner client fails to implement a suggested financial plan or strategy. Often, the business owner faces such an overwhelming number of issues that he or she finds it difficult to organize and prioritize any of the issues involved in an action plan. The owner’s energy and focus fail to go beyond putting out fires to solve day to day problems.
But even more often, the concept falls victim to the client’s lack of investment or ownership in any proposed plan or solution. The key, therefore, to acceptance and implementation lies in participation. A client who formulates a plan within the framework of an advisory board is much more willing to accept and implement the plan precisely because he or she has participated in its creation. From the financial services point of view, an advisory board becomes and important vehicle through which an advisor can gain acceptance and implementation of proposals based on conclusions from highly skilled individuals.
WHY THE SINGLE ADVISOR APPRAOCH FAILS AND THE ADVISORY BOARD SUCCEDS
Most business owners have more than one advisor which may include a trusted accountant, an attorney, a financial advisor, an insurance agent, and possibly other business owner colleagues. Each has specific knowledge and experience to contribute, but no single individual can possess the professional designations, practical knowledge, or industry related experience to serve as the sole advisor to a client. An advisor who believes that his or hers is the only voice of reason or that he or she alone controls the client’s planning and decision making is naïve and soon to be replaced. Most business owners garner information from a variety of sources. A team effort, using both reasoning and an intuitive approach, is most successful for problem solving and business development. The same notion of a variety of advisors in the form of an advisory board is what expands the business owner’s understanding of his or her business opportunities as well as obstacles. This understanding supports the formation of a strategic plan that addresses all of his or her financial, personal, and business issues. Consequently, the advisory board is a powerful and critical vehicle through which the business owner gains the benefits of the combined energies and synergistic thinking of the group, resulting in comprehensive, superior solutions based on the invaluable resources and wisdom of the group.
HOW A SUCCESSFUL ADVISORY BOARD WORKS
Many challenges can obstruct efforts to establish a working advisory board. The egos, power positions, and perceived threats of existing entrusted advisors can be difficult to overcome. Advisors who have nurtured their client relationships for a long time maybe short sighted and may try to control the client in order to protect what they consider their “turf”. A new advisor can unwittingly disturb existing relationships with fresh ideas and strong beliefs. As a group, advisors must stay focused on their goal without confrontation or controversy – a task that requires skill and finesse. The challenge becomes: Exactly how do you assemble and manage a team that will engage in a noncompetitive and cooperative exchange of the information and ideas for the benefit of your client?
Perhaps the most efficient and effective way to establish an advisory board is to locate and engage a neutral third party who is trained an experienced in the requirements and procedures of this specialized task force. This should be someone who can promote an environment where a free exchange of ideas is encouraged but controlled. The neutral third party can be an individual or a company that specializes in the assembly and maintenance of a working advisory board.
Chose a firm that specializes in guiding family business through the cycles of change typical to most businesses, as well as those that are unique to family enterprises. This includes experience with clients who are owners and managers from many business sectors, both public and private, as well as educational, governmental, and nonprofit organizations from around the country. Such a specialist will focus on the composition of the board, first conferring with the business owner and typically assembling an advisory board utilizing incumbent advisors. Next, the advisory board expands to fill any obvious gaps in expertise. New board members with skills, knowledge, and experience complimentary to the incumbent members are added. The end result is a customized advisory board tailored to encompass the specific needs and goals of the individual business owner.
The format (focus and scope) of the advisory board is the key to its success. For best results, the focus of the advisory board must be both strategic (a very specific plan detailing what needs to be done) and tactical (very specific action steps for achieving the plan). Therefore, the board reviews the overall performance of the client’s business and also addresses key organizational and management issues. In addition, the board takes a lead role in the development of vision, mission, and values (VMV), which become the key performance metrics for the business. A company’s VMV represents that firm’s purpose, goals, and core ideas that perceived intrinsically important. The VMV provides a frame of reference for organizational decision making. Companies with a strong VMV have an advantage in achieving key business goals because employees who understand the end goals of the company are enabled and empowered to make better decisions to help reach those goals.
Vision represent the strategic direction of the business now and in the future and spells out where the business owner sees the business going, including transfer to successors. Mission is usually articulated in a written mission statement that includes guiding principals to direct how the business should be conducted. Values are the external expression of vision and mission that supports image and marketing for the company.
The scope of the advisory board must be wide ranging and all inclusive. The agenda for each meeting is jointly determined by input from the client and through careful consideration of the client’s needs by the facilitators in advance of the meetings. The initial meetings of the advisory board focus on fact finding and identifying issues in order to determine specific concerns, which are then prioritized for the purpose of planning and problem solving. In this early stage, advisory boards usually convene monthly for three to four hours.
Agendas typically touch on, but are not limited to, analysis of the following topics:
Finance
Operations
Organizational structure
Administration and accounting
Human resources
Business development
Marketing and advertising
Information technology
The strategic plan
Funding requirements
Finally, the third party facilitator:
Plans and utilizes the agendas that guide the next advisory board meeting
Facilitates and manages the board meetings
Records and distributes the meeting results
Outlines assignments of responsibility for the advisory board action items
Tracks action plans
The advisory board should continue as long as there is a business that requires governance. Governance includes follow up and support during implementation of changes recommended by the board. The board can continue to verify what has happened and monitor activity to make certain that the planned change has had the intended impact on the company. Flexibility helps the client obtain maximum benefit for the time spent with the board. Consequently, the advisory boards meetings may be quarterly as the client’s needs and objectives are met and strategies are implemented.
CASE STUDY: THE STOLTZES
Mr. and Mrs. Stoltz own a manufacturing business located in the Midwest.
Considerations
The Stoltz’s business is very successful
The Stoltzes spend all their time and energy running this business
The Stoltzes are frustrated that the business could not operate or be profitable without their physical presence
They need a different business infrastructure
They need business continuity and training for their son and daughter
They need a retirement strategy
They need expertise that the financial advisor did not possess
Solution
The Stoltz’s financial advisor proposed an advisory board to help the Stoltz’s crystallize their business and personal goals and to develop a plan for their dreams to become reality.
The Stoltzes agreed to a preliminary meeting with the board facilitator, a business attorney, and their financial advisory to talk about an advisory board for their business to address the following:
Improving management infrastructure
Creating an exit strategy for the Stoltzes without destroying the business
Instituting succession planning
Beginning retirement planning
Initiating a strategy for building wealth outside their business (an investment portfolio)
Minimizing the effects of income and state taxation
The Stoltzes agreed to the advisory board concept, and once a month for twelve months, they went to their financial advisor’s office for a six hour session.
Results
Through business planning, the board helped the Stoltzes identify their strengths and weaknesses in terms of management infrastructure. Systems were implemented and recruiters were employed to locate and attract the desired talent necessary to fill vacancies in the organization. More comprehensive accounting software was suggested, and better, more thorough account practices were implemented to assist in determining profit margins on each job taken by the company. Incentive based compensation was instituted as well as nonqualified deferred compensation for key employees. Succession planning in a career track were established to assure that the son and daughter would take over the business as they achieved certain goals set forth by the Stoltzes. The board also helped the Stoltzes set up a manufacturing plant in a foreign country where many of their customers were doing business. As a result of establishing this plant, opportunities arose to mitigate income tax through the use of foreign sales corporations and by utilizing some rather complex, relatively unknown international tax strategies. The company’s profit sharing plan was abandoned since it was costly, did not directly benefit the owners, and did not motivate the average employees due to the seasonality of their employment.
Estate Tax Planning
The new business entity – a family limited partnership (FLP) – was formed to allow full control by Mr. and Mrs. Stoltz and allow future appreciation of cash flow and business value to occur in this new structure. This was accomplished by establishing a FLP in which the Stoltzes each owned a general partnership interest. Then, the 98% limited partnership (LP) interests were split evenly between their son and daughter. A new manufacturing line was constructed in a new plant. The total value of the building and manufacturing equipment was valued at $1,000,000. Because of minority interest and the illiquidity associated with these interests, the Stoltzes discounted the value of the LP interests by 40% to arrive at a valuation of $580,000 on the 98% LP interests. The Stoltzes then used a portion of each of their unified credits and filed applicable gift tax returns reflecting the value of the gifts made to their children. The FLP allowed the Stoltzes to maintain control over the manufacturing plant while removing the value of the asset from their estate.
Asset Protection Planning
The advisory board discovered that the Stoltzes had some exposure to potential contamination issues. The buildings they owned personally that were rented back to their business had some potential EPA land issues from previous land owners. The Stoltzes set up asset protection trusts to mitigate the risk of judgments levied against them personally. The board recommended that certain assets be owned in an asset protection trust (which is income tax neutral) to protect wealth and assets from potential wayward, but damaging judgments. These trusts also contained the professional managed investments, which would provide growth and future retirement income.
The advisory board met for 18 months. Over this period of time, the board invited numerous out of town experts to add greater depth and expertise to the group. These experts, from the Mid-Atlantic region, were invited to participate on the board as needed to implement the ideas developed by the board. At the end of the 18 months, the client’s felt the advisory board was the best money and time that they had ever invested because it eventually provided the necessary prescription for goal achievement.
COST CONSIDERATIONS
The obvious benefits of such a timely, effective advisory board for business clients come at a cost. The actual construction of the board and how often the board meets determines its cost. Sometimes the cost of not having systematic, external advise is very expensive – such as losing virtually all of one’s assets to litigation in a personal liability judgment or lawsuit. It basically comes down to a cost/benefit analysis of solving a number of intricate planning issues for a client in a logical way that is accepted and implemented by the client. The total cost of the board will vary depending on which professionals are involved at any given moment. A financial advisor who is also a money manager may or may not charge for his or her time if he or she ends up managing personal or business assets for the client. Or the financial advisor initially charges hourly for his or her time but may credit a portion or all of the fees paid back to the client if they enter into a money management agreement. Therefore, the cost can vary depending on how each of the professionals charge. If the client becomes an ongoing client in the practice of any of the professionals on the board, there maybe the opportunity for fees to be credited.
Hourly rates will vary depending on the expertise provided by the individual board members. Typically, accountants and attorneys charge from $250 to $400 per hour for their involvement on these boards, depending on the level of expertise. Total cost for each advisory board session can range from $3000 to $10,000 per meeting, or even more depending on the number of hours, days, and/or professionals involved.
After analyzing the scope, complexity, and seriousness of the issues resolved and all the benefits received by the client, one can determine whether the costs were justified.
DETERMEING WHETHER THIS PROCESS WILL BENEFIT A CLIENT
The best way to determine if the advisory board approach will work for a particular client is to assume for a moment that because of the introduction to an advisory board concept, a client perceives the advisory to be the key catalyst for solving complex, life, personal, and business issues for him or her. Let’s further assume that when the advisor offers the ultimate value proposition, the status achieved by the advisor will separate him or her from all the competitors in the client’s mind. Albert Einstein said, “Try not to become a man of success, but rather a man of value.” Again, the ultimate value you can give a client with complex issues is to help the client identify and implement a plan to solve his or her problems. Walk through the process of the advisory board with a client. This approach promotes success. Both advisor and client will appreciate the process and take away great wealth from their participation.
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