Business Strategy

Creating a Small Business Advisory Board

Published by Debra Murphy

Creating a Small Business Advisory Board

A business owner/entrepreneur learns quickly how lonely their job can be. Most businesses are started with a great idea put into action by the person who had the idea. Despite the business growing – slowly or quickly – the business owner remains the key cog in the business wheel. All decisions flow through the business owner. Accountability for success or failure falls squarely on the shoulders of the business owner.

What if the business owner is a great engineer, but lacks the following skills:

  • Marketing and sales
  • Small business financials
  • Managing staff

The skills necessary to create a product or market are not necessarily the right skills for adapting the product to changing customer requirements, expanding the market, managing the operations of the company, increasing the financial viability of the company or a variety of other essential activities.

What can a business owner do to fill the gaps in expertise without increasing headcount, payroll or the amount of money spent monthly on legal or accounting services?

An outside advisory board provides a range of services from acting as a sounding board or a second set of eyes, to providing expertise, guidance and insight to the business owner.

It’s Lonely at the Top

“The company cafeteria,” replied a business owner when asked what he missed most about the corporate world. He missed the environment where he could:

  • Easily discuss issues and opportunities facing him.
  • Bounce ideas off someone who had already, “been there, done that.”
  • Float ideas that were way outside the box to see what kind of reactions they created.

Owner isolation is a real issue for business owners. Understanding ways to effectively deal with it can help your business go from good to better to best.

Advisory boards are fairly common for a start-up. They are typically there to help form the company, supplement the skill set of the company founders, assist in identifying and obtaining investors and launching the business.

An advisory board for a growth company operates differently than with a start-up but is just as valuable. The focus of this series is on companies that are generating revenue and are looking to grow.

What is an Advisory Board?

An advisory board is a group of individuals, typically outsiders to the business, who possess knowledge and expertise to guide, grow and manage the business. Advisory boards can:

  • Act as a sounding board for the business owner
  • Help fill gaps in management capability
  • Provide valuable insight into challenges you may be experiencing
  • Add years of experience that can accelerate growth
  • Offer assistance in all disciplines including sales and marketing, finance, human resources and operations.
  • Steer the business towards achieving their objectives and goals.

An advisory board can be as simple as one outside person who can provide the business owner with insight, perspective and guidance on growth, operations, exit planning or many other issues specific to the company.

In some cases, it is comprised of several people who represent specific business functions – typically those functions where the business owner does not have expertise. For example, the business owner is an engineer but needs assistance in planning marketing and sales to fully leverage their product or service.

An advisory board helps create a strategy and implementation plan for marketing and sales – typically at a lower cost than if individual hires were made to address the skill gaps. The key is the outside perspective provided by someone or a group of people who have weathered the storms of business ownership.

Board of Directors vs Advisory Board

So what’s the difference between a board of directors and an advisory board? They sound very similar, but there are distinct differences.

A Board of Directors:

  • Has a fiduciary responsibility to the company (and shareholders) and can be liable for mistakes that a company makes.
  • Has an obligation to the company (and shareholders) first, and the business owner second.
  • The proper size of a board of directors is debatable. The size is mostly based on the life cycle stage of the company. All companies face limitations on the size of their formal boards.

Advisory Board members:

  • Don’t have fiduciary responsibility, therefore members are not held liable.
  • Put the business owner first and help steer you in the right direction to best care for your company.
  • Are added for specific needs and removed when no longer needed.

While an advisory board is there to help guide the business owner, it does not have authority on decisions or over staffing. The advisory board also does not act as the business coach or mentor for the business owner.

Whether an individual or a group of people, two items are of utmost importance.

  1. An advisory board is not a quick fix for problems. Advisory boards work best over a period of time where you create a long term strategy / planning and achieve short term goals against the long term strategy / plan.
  2. You, the business owner, must be open to hearing opinions and advice that may be contrary to the way you have always acted.

For both of these reasons, you must choose an advisory board that you respect and who will tell you the truth.

Why do you Need an Advisory Board?

You started your business with an idea, a product or service. Eventually you realize your skill set doesn’t span the entire landscape of issues / functions / activities that are part of successfully running your business.

Even if your business is running well, you can learn from the lessons of other business owners and benefit from the different perspectives presented to you. Advisory board members from another industry can bring a new and different perspective to your business.

An advisory board can help you do some or all of the following:

  • Optimize your business – processes, people, vendors, channels
  • Find growth in areas where none was previously seen
  • Help define or refine direction – change of direction; stability of current direction
  • Create or refine a long term plan that holds the business owner accountable

Tips on Choosing Advisory Board Members

Guide to Creating an Advisory Board
  • When creating an advisory board, it is advisable to NOT include family members or friends. You really want someone who will tell you truth, has experience in business areas where you do not and won’t just agree with whatever plans or decisions you make.
  • Seriously consider recruiting doubters. Those are people who will challenge you to thoroughly think through the decisions you are making.
  • Ideally, you should fill in the board with skills that complement yours, not ones that mirror yours. Remember, you are looking to fill gaps.
  • Be sure to actively vet potential advisory board members to be sure they have the skill set you need and also to make sure you can work with them in a constructive manner.

Term Limits and Contracts

It is always best to set term limits for advisory board members. That way, the composition of the board can change as your business changes. Keeping terms to one to two years could provide the right amount of consistency while allowing you to bring in new viewpoints and skills as required.

This is your business. You wouldn’t conduct it informally, with just a handshake. The same goes for your advisory board. There should be an advisory board agreement in place between the members and the company. The agreement doesn’t have to be long and complicated. It needs to specify the scope and purpose of the advisory board, the parties involved, what is expected, the frequency of expected meetings and compensation.

There are sample advisory board agreements available online that are approved by attorneys. Look at using one of these and customizing it for your situation. An agreement helps ensure advisory board members will continue to provide their time and attention to your company.

While start-up advisory board members typically are compensated with equity in the new company, advisory boards for going concerns are compensated for their anticipated time and depth of involvement. You may want to pay a fee per meeting or a retainer for a 30, 60, 90+ day time period. The time period varies on your needs.

What is Coming Next?

The best endorsement for creating and using an advisory board is to look at the ways companies have used them and what they have achieved because of the guidance and perspective gained. We will examine several companies who have done just this. Stay tuned for future postings. In the interim, let me know your questions and of your experience with advisory boards.