Every small-business owner needs an advisor – an impartial third-party who has great business expertise. Sure, you can hire a consultant for the job; but there’s another solution, one that gives you access to multiple experts at one fell swoop: forming an advisory board.
Like a formal board of directors, these entities are made up of independent experts who can do everything from providing insights about marketing plans and access to bankers, to reviewing compensation levels. But, unlike a more traditional board, these advisors aren’t legally bound by the decisions they make. "It’s a way to get advice from a range of experts you might not be able to tap otherwise," says Joe Schmieder, senior associate at the Family Business Consulting Group in Marietta, Ga.
At the same time, less than 30 percent of small businesses have any kind of board, according to Schmieder. That’s partly because some entrepreneurs don’t relish the prospect of having a bunch of outsiders telling them what to do. But, also, some small-business owners don’t know how to go about putting an advisory board in place.
Here’s how to do it:
Decide what you want to get out of it. The first step is pinpointing your goals. What do you want the board to do? Answering that question involves considering the issues your business is facing, as well as your own needs. In some cases, for example, you might decide you want a group that serves as a sounding board. In others, you might prefer people who act more as mentors.
Pinpoint appropriate areas of expertise and qualifications, Generally, that means looking for people with strengths in areas where you’re weak – anything from finance to marketing. You’ll also probably want someone with experience in your particular industry. It’s helpful to look for an advisor who has run a business before. In addition, if you’re embarking on a new strategy – say, expanding globally – you'll want an individual knowledgeable about that area.
Decide how big you want the board to be. Typically, according to Schmieder, a business with fewer than 100 employees should have two to three advisors. "More than that gets cumbersome," he says.
Recruit advisory board members the same way you would any top-level executive. You could start by making a list of people you know who might be willing to serve on a board or who would be able to refer you to candidates. But, in general, it’s best not to create what Schmieder calls a "crony board." In fact, getting the impartial advice you need means finding independent third parties. To that end, you might even use a recruiting firm. In any case, put together a one-page description of your company, including goals and financial history, so everyone you approach has a clear idea of what your company is about.
Figure out compensation. Some people, especially retired entrepreneurs and businesspeople interested in sharing their experience, may be willing to serve for free. Usually, however, you’ll need to give equity in the company, or pay a per-meeting fee. While Schmieder has seen that fee range from $500 to $25,000, the typical fee is $1,000 to $5,000. That also takes into account pre-meeting preparation and post-meeting follow up.
Provide a written document with the ground rules. That should include such matters as length of tenure and specific duties, roles and responsibilities. While you don’t need it to be a legal document, it’s best to show it to an attorney before handing it out.
Be prepared to be challenged. To get the most out of your advisory board, you need people who aren’t just 'yes' men. Schmieder points to a 100-employee maker of automotive parts as a typical example. At one recent meeting, several advisors criticized the company’s bonus program as too generous. The firm gave 30 percent of profits to employees, while the industry norm was more on the order of 25 percent. Their suggestion: lower the percentage, but also explain to eligible employees the reason for doing so.
The CEO followed that recommendation, explaining to his staff that, with more money at his disposal, he would be able to invest more in new-product development and build a stronger company. "The employees understood, and he’s now working on better diversifying his services and products," says Schmieder.
Change the board’s composition every so often. As your business needs evolve, you may want to find advisors with different expertise. Schmieder recommends a tenure of not less than three and no more than eight or so years.
But there’s no hard and fast rule. Plenty of advisory board members stick around for much longer. "They become a trusted confidant able to add value for a long time," says Schmieder. "You hate to lose that by bringing in someone new and starting from scratch."