You Need These Guys.
By John M. Collard
You need these guys… to increase cash flow, and provide valuable guidance, contacts, growth, and credibility.
Companies committed to going through significant business change (turnaround, transition into new markets, generational ownership transfer), or anticipating a major liquidity event, need guidance.
Why add outsiders to your board of directors or advisors?
Outside directors bring an independent perspective, develop strategic thinking and planning, utilize their experience and objectivity, provide their contacts rolodex, find capital to finance the company, and guide transaction activity. Many of these benefits are absent in companies, so the outside influence should be used to your benefit. Remember, the key is for the CEO and management team to listen to the advice given and factor these inputs into their thinking, then make decisions.
Benefits of Outside Directors
|Independent Perspective, Unbiased Advice||Challenge Management, Sounding Board for CEO, Objective, Mediate Conflicts|
|Strategic Thinking & Planning||New Directions, Transitions, Incentive-Based Compensation|
|Experience & Objectivity, New Knowledge||Been There, Done That, Accountability, Credibility|
|Contacts, Networks||Investors, Lenders, Resources, Partners, Customers, Suppliers|
|Capital Infusion||Raise Money, Restructure, Guide Offering Process, Finders of Capital|
|Transactions||Prepare Company For Sale, Locate Interested Parties, Negotiate a Deal|
Create a culture and structure that will withstand third party accountability to add value to your business. Start thinking as a serious growing company and prepare for a potential future life as a public company or increased scrutiny of investors.
The day-to-day events in a business often distract the CEO. It is easy to get wrapped up in the ways and means of running the operation, while losing track of the bigger picture. An outside advisor provides a sounding board to ground the CEO in real leadership duties. Typically, a board will focus on protecting the unique value of the company, but they often add much more.
The CEO needs unbiased advice and diversity of opinions from outside directors who can view things from a distance and a different perspective. The CEO will be well served by adding board members who can challenge him or her and the decisions that they are about to make. This advice can often keep you from making mistakes that add significant costs. When the CEO only listens to “yes” people they are essentially on their own, and new ideas don’t enter the decision process. You want strong board members who are not afraid to offer advice, guidance, feedback, and argument on issues. Employee board members may be in fear of losing their job if they speak up.
Strategic Thinking & Planning
Outside directors should challenge and contribute to strategy development and implementation. Outside directors can be particularly adept at guiding the company into new markets, or changing directions when trouble occurs. Because these outsiders have experienced these situations and guided other companies through the pitfalls, they can certainly guide you to success with less trepidation.
Once strategy is set you have defined where you want to go. Now communicate that message for all stakeholders to see and clearly understand. Provide guidance. What do you do or provide? Which generic customer needs will, and will not, be satisfied? Why will they buy? Why will they buy from you? Differentiate yourself from your competition. Define and focus on those innovations and capabilities that give you an edge over your competitors.
There is nothing quite so effective as designing compensation and incentive plans that are paid out when goals are met, but, don’t pay for non-performance. Incentive-based management is extremely effective, but be cautious that you have set the right goals, because if not, employees will take you in unplanned directions.
Experience & Objectivity
The very nature of growth implies that a company is going where it has not been before. It is refreshing to make that journey to new opportunities with the help of an objective advisor who has been there, and done that before.
When independent observers scrutinize the performance of management in meeting goals and objectives, and monitoring results compared to long term valuation goals there is real value in their participation. Outside directors should satisfy themselves that financial information is accurate, that financial controls are in place, that internal reporting is at the right levels and prepared often, and that risk management systems are in place. Make sure that the company complies with laws and regulations. This protects you.
When transitioning into new markets it helps to have someone on your team that has both gone through transitions before and understands the idiosyncrasies of the new market. For instance, doing business in the US can be quite different than doing business in international markets. If you want to enter into new markets have team members with diverse experiences to help guide the way. Sell products and services to customers in the way that they want to be sold to.
Your contact book doesn’t include everyone. Every company needs help when it wants to grow, prosper, or turn around. Outside directors can extend the company’s reach by using their own contact network, colleagues that can get involved to provide guidance and resources. Some outside directors have more quality contacts than others.
Rely on these introductions to bring in new capital, customers, and suppliers. Strive for strategic teaming relationships to promote growth. Contacts can be influential in bringing resources not previously available. They can attract new talent into the company at all levels, and provide a new set of eyes and ears during the interview process. Grow the sales force and distribution channels. Introduce and improve marketing, penetration, and Internet presence strategies. Entice operational experts to produce product and services. Lure innovative people who can embellish research and development.
Outside directors often have a database of contacts who can supply capital, in the form of equity and/or debt. Some have more extensive and higher quality databases than others. This means that you can get in front of many financing resources quickly once an expression of interest or offering package is ready. The key is to document the plan describing where you want to go and why you will succeed, put that in summary and detail form, describe assumptions and risks, and present rate of return projections. In other words, present your opportunity in terms the investor or lender wants to see —your company is the product. Investors are in this for returns on their investment.
You will need financial history of operations and projections of future plans to satisfy the stringent criteria of financing sources. Begin this process early so that you are prepared when the time comes. Consider a 2 page (executive introduction), 10 page (present the deal opportunity), list of due diligence (details) available, and operating plan approach, to step potential interested parties through the process. Send the introduction to 100s or 1,000s of potential investors. Finders often have such rolodex
An outside director, as part of the company, can be a Finder to introduce you to investors and /or lenders – you then negotiate a deal that you can live with. When an outside director has a large database to utilize during this introduction process, measured in thousands of contacts, you can be in front of many investors. The key is to prioritize the flow of introductions and manage the diligence process. There is money available, just be the ‘good deal.’
Like with raising capital, outside directors often have a database of investor contacts who both have deals for acquisition and who are looking for opportunities to buy. This means that you can get in front of M&A dealmakers quickly once an offering package is ready. Use a similar approach as described in Capital Infusion section above.
Prepare for that future liquidity event. The best time to sell a company is when a buyer wants to buy and has cash, which could come when you least expect it. Be prepared and work toward ultimate valuation throughout the process of growth. Privately-held and family-owned companies should demonstrate that they can be run independently, without the owner, to maximize their valuation. Buyers don’t pay for past sins and they don’t pay much for companies who are heavily reliant on the owner. There is much more value in the company when the management team (without owner), processes and procedures control the company to produce results.
Outside directors are often adept at introductions or negotiating deals. They then elevate you (management and the board) to the decision-making role.
Hire that outside director. They bring about change.
About the Author
John M. Collard is Chairman of Annapolis, Maryland-based Strategic Management Partners, Inc., a turnaround management, asset and investment recovery firm. He is inducted into the Turnaround Management, Restructuring, and Distressed Investing Industry Hall of Fame. John is a Founder of TMA.
You can reach John at 410-263-9100 or visit http://www.StrategicMgtPartners.com