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Qualities Lenders Should Seek in Borrower Advisory Boards

October 15, 2018, 07:00 AM
Related: Due Diligence

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, sisters and other relatives who share the same experiences, knowledge and culture. While often this can be beneficial to the growth of a company, the downside is that if you always do what you have always done, you will get what you always got.

It is estimated that less than 5% 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 savvy enough not to need a board, think it would be too expensive or would constrain their decision-making.

With the demands on CEOs — including 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 borrowers to get new expertise and insight by adding one or more outside directors to their board.

Not convinced?

In a recent survey conducted by Statistics Canada, private companies with advisory boards with 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.

Asset Based Lenders may prefer clients with active boards:

  • A board driven company is less apt to get into legal & HR trouble, saving legal expense and reducing employee turnover.
  • A board driven company may pay less for D& O insurance due to reduced risk.
  • ABL lenders normally lack adequate cash flow thus depending more on collateral values and the abilities of management. Management risk is generally lower in companies with boards.

5 Qualities Lenders Should Look for in a Borrower’s Advisory Board

Are members experienced senior executives with diverse backgrounds across multiple markets

An Advisory Board provides counsel, advice, contacts, professional skills and experiences that typically go beyond that of the company management team in areas like industry practices, 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. They are 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.

Could a Advisory Board member fill an existing gap in the management team?

Senior executives with diverse backgrounds can bring an enlightened, unbiased perspective. Borrowers should avoid a “vanity board” full of luminaries – they typically end up being purely window dressing and neither productive nor useful. A Board needs to be populated by those with contacts helpful to the business, the will to exercise their skill and knowledge to grow the 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 be able to add real value. 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 growth. They can also introduce greater corporate accountability and discipline. If the strategy needs attention, advisors can provide fresh thinking and counsel on planning the development of the business. They’ll also tend to create a sense of accountability for the senior team’s execution.

Is functional expertise missing in Sales, Marketing, Operations, Finance or Human Capital Management? The right Board member(s) can provide the lift to cover that ground while a search for the right professional is conducted.

Could the Advisory Board Member help expand business development opportunities?

Often, a Board can enhance credibility with industry, vendors, customers or investors. Simply featuring Advisors prominently on a website and letterhead can give a leg up on the competition. The firm will enjoy an enhanced image among a broad range of constituencies.

Could the Advisory Board member help 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 the company’s strength into accelerated growth. Advisors may also introduce untapped communities of interest to expand 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 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.

Could the Advisory Board member help position the company for exit and help to increase the ultimate value of the company?

A Board can also help improve the ROI of the senior team. A new or inexperienced CEO can look to the Board to help expand 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 a liquidity event can be complex and daunting. The right Board can help prepare for and execute the transaction, achieving the best possible return. After all, isn’t that why the business was created in the first place?

If the business is to be passed on to the next generation, 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.

Owners should think through the type of knowledge, experience and relationships that would add value to the firm. Then craft a profile of the ideal board member to be circulated to executives who are excellent prospects and asked for feedback. For best results, work with an advisor who has built successful boards for other firms. That will accelerate the process and attract great candidates.

Art Medici
Partner | Newport Board Group
Art Medici has a diverse background as an executive leader in e-commerce, high tech, telecom and information companies. His experience spans startups, high growth small/mid cap firms and global leaders like Thomson Reuters.

Consistently, he has assembled top management teams, then mentored and motivated them to significant accomplishments. He has served on boards of directors, including ICC and Logilent.

Medici advises government contractors on taking advantage of that industry's rapid transition and consolidation trend.

Earlier in his career, as SVP of Marketing at $12B Cable & Wireless PLC, Art was responsible for growth by building alliances with Cisco and IBM among others.
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