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Written by: Rick Gendemann, CPA, CA
You have been running your family business now for several years. You’ve enjoyed wonderful success to date – success driven by your entrepreneurial spirit and leadership. But you now find yourself facing a new stage in the life cycle of your family business.
I am referring to that period of transition from an entrepreneurial venture to a longer-term sustainable and strategically directed business. This period of transition is critical to the continued success of the business – but often it’s one that family businesses are never quite able to make.
As their business begins to mature and plateau into a steady state, family business owners struggle to identify the next big idea or strategy. They may find themselves too focused on the operational issues of the business, rather than looking at the vital longer-term direction; and at driving the initiatives needed to get the business to that direction.
Many family managers are superb business operators, marketers or manufacturers in the present. Yet they are relatively unversed in planning for the future. No question their business is operating well. But does it run the risk of stagnation setting in? That’s where a family business advisory board (FBAB) can play a major role in moving a family business to the next level. An FBAB can plan and create strategies for future success – and introduce sound, strategic advice to continually move the business forward.
The success you have enjoyed to date has likely been supported not by only your guidance and leadership, but also that of your management team. The key is how to continue increasing the range of management know-how so that the business will support its future success.
Family business advisory board members are typically selected based on:
When seeking potential advisors for your business, focus on finding individuals who are well-versed, experienced, and able to assist in evaluating business ideas and opportunities.
You should also consider their ability to assist you in developing the future succession and ownership transition program of the business. Their experience and skills should provide a depth and range that greatly extend the current managerial capacity of the business.
Studies have shown that family businesses use their FBABs to fulfill multiple mandates. Most commonly, FBABs are used to assist:
It is important to understand that a Family Business Advisory Board does not act like a board of directors. Nor does it have the legal responsibilities and authority of a board of directors. Rather, the FBAB is an informal group of (primarily external) advisors chosen by the business owner to provide guidance and advice.
When a business establishes an advisory board for the first time, it often populates the board with:
As the business continues to evolve, the range of expertise needed on a Family Business Advisory Board may encompass changes to its specific make-up. This may include bringing on experienced business leaders who understand the specific business and industry, and who can help guide business strategies.
An FBAB offers a flexible platform to access advice from advisors. Owners may choose to act on this advice as they feel appropriate. Further, as the owners appoint advisors, they can also lay them off or replace them without a consenting vote of any sort being required, as would be the case with a formal board of directors.
Compensation for advisory board members can be variable in nature, ranging from meeting only their actual expenses for the time and work they put in, to a reasonable retainer. It will be important to monitor any compensation arrangement put in place to make sure it is commensurate with the value the members of the FBAB bring to the business’s success.
Granted, there is limited data demonstrating a direct link between advisory board activity and business growth indicators. However, plenty of anecdotal evidence from surveys and business articles show that growth-oriented family businesses find FBABs a key asset in enhancing their future success.
Based on my experience, and that of business owners I work with who have an FBAB, the following factors will contribute to ensuring an advisory board does add value to your business.
In selecting the individuals to appoint to the board, you as owner should either:
Also, be sure to exercise caution, as favouritism can all too easily come into play. It may be tempting to appoint a well-regarded friend or colleague who knows the industry to a position in your FBAB. But carefully consider: Do they have sufficient personality to give you a totally independent view that may be in contrast to your own?
It is also important to recognize that business needs will change over time. You will need to adapt the board’s composition as circumstances change and necessitate different types of knowledge. Appointment to an FBAB should be for a predetermined period of time, with the option of renewing the appointment.
Having a group of independently-minded experts can bring a significant advantage to your business. The challenge will be to seize the opportunity, utilize their talent and ensure you don’t ignore their advice when given. An effective FBAB can be an invaluable resource to your business.
As your family business continues to grow and strengthen its position, it may neither need nor require a formal board, including outside directors. However, there may come a time, a critical period, where the family may need more than informal business advice to keep it growing and remain competitive.
Establishing an active, effective outside advisory board that openly offers advice and mentoring can be the single greatest resource for a family business. Creating an FBAB for your business will allow you to retain control over the business – and create a platform to continually enhance your business’s performance going forward.
Rick Gendemann, CPA, CA, focuses mainly on Estate Planning and Business Succession services for Canadian owner-managed businesses in a wide range of Industries. Rick can be reached at 604-557-5760 or by email at firstname.lastname@example.org.
The above content is believed to be accurate as of the date of posting. Tax laws are complex and are subject to frequent changes. Professional advice should be sought before implementing any tax planning. Manning Elliott LLP cannot accept any liability for the tax consequences that may result from acting based on the information contained therein.