When Jeff Dyson first purchased M&D Supply, he knew he needed some outside help if he was going to make his business a success.
That’s when he began to research the idea of an advisory board. He reached out to four local business owners, all of whom accepted his invitation to join. Later, he invited his stepson Scott Hatcher to participate, in the hopes that he would take a leadership position with the company someday.
Through his involvement in the board meetings, Hatcher watched as Dyson consulted with outside advisers, who ultimately advised that the company expand into a second location.
So when it was time for Hatcher to take on an ownership role with the company, the advisory board was something he knew he wanted to keep. Today, M&D Supply has three locations in Texas (and is considering a fourth)—a fact Hatcher attributes to the guidance he received from his business’s group of outside directors.
“Jeff’s philosophy was, he didn’t know everything, and getting feedback from others—both inside and outside the business—would be beneficial,” Hatcher says. “My philosophy is the same.”
Whether it’s succession, expansion, executive bonuses, sales forecasts, health insurance or any other strategic consideration for your company, experts say consulting with an outside group of advisers can offer valuable insight in guiding your business decisions.
Outside help doesn’t always have to come in the form of an advisory board or group of outside directors; many retailers turn to a single third-party consultant for guidance, while others participate in industry roundtables through NRHA, other membership organizations or their buying groups.
Like the idea of getting some outside counsel, but not sure where to begin? Start by filling out this printable worksheet to assess your goals and how consulting an outside group of advisers will fit with those objectives.
To get the thought process started, read about what three retailers who turn to outside advisers considered when it came to asking for help, developing goals and more.
Case Study No. 1: Advisory Board Guides M&D Supply Toward Expansion
Former owner Jeff Dyson started M&D Supply’s board in 1997 by reaching out to four local business owners, all of whom accepted his invitation to join. Stepson Scott Hatcher joined the board in 1998, so it would be in place when he took on a management role with the company.
Currently, the company’s advisory board has seven members, including Dyson, who is the chairman of the board and a business professor at the local university, and it meets five times a year. The remaining members include the company’s current comptroller, a retired business owner and CPA, local business owners and a hardware store owner in a non-competing market.
As a C Corp, M&D Supply is required to have a board of directors and keep minutes for its meetings. “We just take it to another level by having outside board members with no financial stake in our business, and each member has significant involvement in our difficult decisions,” Hatcher says.
A Start on Solid Footing
Advisory board formation was a key element of M&D Supply’s succession plan and is what Hatcher says made him feel more confident in taking over the helm for his stepfather. Hatcher started off attending his company’s advisory board meetings just to get a feel for how they operate, and under Dyson’s guidance, joined other local boards to see how different companies run their meetings. Those experiences gave Hatcher the crucial problem-solving and decision-making skills necessary for navigating the key issues of his family’s business.
Hatcher points to one example: when the company was considering an additional location. “We brought in our co-op to present our first expansion opportunity,” he says. “After the presentation, we debated the pros and cons, and the board charged me with gathering more information. After further discussions, we moved forward with the new store. This has been a very good move for our company.
“Similarly, our co-op brought us another expansion opportunity about seven years later. After listening to the presentation and reviewing all the data, the board recommended we not pursue this location. It just wasn’t the right fit for us, and the board helped me realize this.”
Top Reasons for Management Guidance
Once he moved up in management, Hatcher says his decision to maintain the board was five-fold:
Group decisions are better decisions. “We have a ton of business experience on our board, so I am able to present my plan or our options and get their insight,” he says. We also use our board to approve top-level management raises.”
Unbiased opinions. “We involve our advisory board in bank and our co-op’s pitches. The board can play devil’s advocate and ask difficult questions easier than I could, since I have a personal relationship with my co-op reps,” he says.
Preparedness. “In the five meetings we have each year, I present our financials to a group of current and former business owners and CPAs, which makes me dig deeper than I think I would otherwise,” Hatcher says.
Budget. “The business didn’t have a formal budget before we had an advisory board. With the help of one of the advisory board’s original and current members, we created our first budget in 2001 and haven’t looked back,” he says.
Networking. “I’ve met lots of great people because of my relationship with our board members,” he says.
A Retailer’s Advice
Make productive appointments: When looking for potential outside advisers, don’t look for someone you can just hire (like your accountant or lawyer). Instead, look for entrepreneurs who have to deal with similar obstacles in their businesses. If possible, look for someone in the same business or field as you.
Scott Hatcher, owner of M&D Supply with three stores in Texas, says it’s also important to get people on your board who are plugged into the business community. “At the start of 2008, our board member’s banking information and further board discussion prompted our management team to lean our staff through attrition—we didn’t lay anyone off, but we evaluated each job that became open,” he says. “This process prevented us from having to cut employees’ pay or additional benefits. Our top line decreased, but our expenses also decreased, which enabled us to remain profitable.”
Be willing to share: “We share our complete balance sheet and income statement with our board,” Hatcher says. “We do this with our management staff as well. The more information you share, the more educated input your board can give you.”
Pay members for their time: While your advisers are likely not in it for the money, it is still a good idea to compensate them. Hatcher pays his advisory board members $500 per meeting and pays travel expenses for the company’s out-of-market board member. “Compensating advisers is a measure of respect for their time contribution and advice,” he says.
Many experts advise going beyond that, suggesting you pay each member a retainer that might range from a few hundred to a few thousand dollars, depending on your company’s size and budget.
Case Study No. 2: Third-Party Adviser Helps Hawaii Retailer with Succession Planning
CEO Wayne Kamitaki and the principals of HouseMart, a family business comprising Ben Franklin Crafts stores in Hawaii and Ace Hardware stores in Hawaii, Las Vegas and the Pacific Northwest, made the decision to bring on an outside adviser for their business about 10 years ago. Back then, the company was a complex family organization: Many family members were shareholders, and some, but not all, of the family shareholders worked in the business. Today, with the help of a business consultant, four principals remain.
Since then, the family board of directors makes it a priority to meet four times a year with its paid business consultant plus another non-paid third-party board member (the company’s former lawyer) to discuss family issues as they relate to the business at an off-site location.
Family directors tried to invite a second member, who declined for business reasons. They are not actively pursuing any potential candidates, but are open to adding a new third-party board member if the right person felt like a good fit. “Ideally we would like to have around three advisory board members, but we would like to maintain members who know the family well and are willing to share as well as keep the discussions in confidence,” Kamitaki says.
Goals Moving Forward
Kamitaki owns and operates his business with his brother, sister and cousin. Their original goal in bringing in a third-party consultant was primarily to receive advice from outside the family without creating any obligation for the consultant to become a board member. “In this way, the meetings and conversations are casual and personal,” Kamitaki says. “We do not prepare any set agenda for the advisory board meeting, unless we have an invited guest speaker. Our meetings are very loosely structured and held in a very open style.”
Over the years, the third-party board member’s role has transitioned into helping bring an outsider’s perspective to the sensitive intra-familial topic of succession planning for the incoming fourth generation of family shareholders.
After consulting with the third-party board member, Kamitaki and the fellow principals also decided to create a junior board of directors for the company’s next generation of leaders to discuss business issues. The idea is for the family to work together to develop strategies that allow the transition between generations and educate the younger people about the business and their future roles.
“We bring in guest speakers from time to time to our meetings to share their family business setup as well as share their insights into the business climate in Hawaii,” Kamitaki says.
A Positive Spin on Business
While many small business owners, especially in the home improvement industry, feel an advisory board comprised of outside consultants would hinder their independence, Kamitaki says going through the process of seeking out a savvy third-party board member has only propelled his business forward.
“As independent owners, we always have this sense of privacy, when all of us are doing the same thing in different markets,” he says. “It would be really helpful for us all to find ways to get outside advice. A third-party board member has given me a spin on my business I would have never considered otherwise.”
A Retailer’s Advice
Ask around for advisers: A board search firm can help match you to the right individuals, but these services can be expensive. Instead, try doing the research yourself. You might look to a trusted mentor, fellow retailer in a non-competing market, local community or business leaders or former business colleagues.
Don’t feel obligated to act on advice: Keep in mind that unlike a formal board of directors, advisory board members have no authority over your business. Rather, they are there to offer advice that you can either take or disregard. They do not have the legally imposed fiduciary duties of directors.
However, if you structure your business as an S Corporation or a Corporation, you are required by law to have a board of directors. Likewise, if you receive venture capital funding, you will need to form a board on which your investors will sit.*
“With our third-party adviser, there are no obligations on either side to either share or be held accountable,” says Wayne Kamitaki, CEO of HouseMart. “At the end of the day, the intent is to give the family business or independent business owner advice and outside perspective from people he or she can trust.”
Meet off-site, and keep it informal: HouseMart’s board meets off-site with
its third-party board member quarterly, and the agenda is kept simple. “Meet quarterly at a quiet—and separate-room—luncheon where you can openly share your thoughts, your problems and any upcoming business decisions for open advice from the member(s).”
*Always consult with a tax professional to make sure your business is compliant with the law.
Case Study No. 3: Star Lumber’s Third-Party Directors Offer Company Valuable Insights on Industry Issues
Star Lumber & Supply, with several locations throughout Kansas and Oklahoma, utilizes a nine-member board of directors, which includes three directors from outside the company; the remaining six are family shareholder directors.
CEO Chris Goebel says the company’s 29 family shareholders see great value in bringing in outside directors to the company’s board of directors.
“I had an aunt serving on the board who was a bit overwhelmed with making big business decisions,” he says. “She approached me with her resignation, but said she would resign her post if the family would consider adding a second outside director. She had witnessed the value that outside directors bring first-hand and knew that her financial investment in the family business would be in better hands if we added more outside directors to our mix.”
So it’s no surprise Goebel is methodical and thorough when he begins the selection process for a new outside director, something he’s had in place since the mid-‘90s.
He first prepares a potential list developed from a pre-written goals statement (see list at right), then discusses his pre-selected candidates with his executive team. Many of the outside directors Goebel recruits are from industry associations and buying group roundtables, distributor forums and his local family business forum.
He then usually discusses a list of five potential outside directors, ranked in order by the company’s executive team based on their perceived best fit, to his current board members and writes a report for company stockholders.
Next, the top three outside director candidates (in recommended asking order) are presented at a stockholder meeting for discussion and official vote. Once approved, Goebel approaches the candidate, asking for a minimum three-year commitment.
Critical Outside Perspective
Once on the board, outside directors ask challenging and relevant business questions to the company’s leadership team, prompting Goebel and the other board directors to think critically about the company.
“Our outside directors are typically thinking about or dealing with many of the same issues in their businesses and bring that experience and knowledge to bear in the discussion,” Goebel says. “This allows the other stockholder directors to listen, learn, and make up their own minds when it comes to voting.”
He points to the Affordable Care Act as a timely example. “All businesses are learning and developing strategies as to how to address and/or deal with this massive legislation,” he says. “The recent discussions of the Affordable Care Act at the board level have been very interesting. It is similar for Star, as it is in our outside directors’ businesses.”
The Ideal Candidate
Goebel distributes this outline to his directors and shareholders each time he’s brought a new outside director to the board:
“The ideal (outside) director not only has experience running businesses but often has already achieved the goals the CEO is hoping to reach. He or she is a respected peer of the CEO whose position as a director is uniquely designed to foster impartiality, objectivity and clarity. The director typically does not serve to collect the fees, but to learn new things, share problems and look for solutions with a community of peers.”
Traits or experiences that are definite advantages for Star Lumber directors:
- Currently serving as a president or recently retired president
- Involved with a successful business that is as large or larger than Star
- Involved in a family business that is at least second- or third-generation
- Experienced in retail, construction, installation or manufacturing
- Experienced with/as an outside director elsewhere (for profit)
- Expert in sales/marketing
- Expertise in one or more of our specialties (contractor, building materials, flooring, etc.)
- Has a willingness to provide objective feedback, share ideas and lessons learned.
While not all of Star’s outside directors meet all experiences, the list focuses the search.
A Retailer’s Advice
It’s always the right time to seek an outsider’s professional opinion. Whether you’re starting an advisory board from scratch or looking to add outside directors to your current board, Chris Goebel, CEO of Star Lumber & Supply, says there’s never a wrong time to ask your professional peers for advice. “The sooner the better, but you don’t have to approach the process at Mach 3 right out of the gate,” he says. “I’d recommend adding one outside adviser first and then growing into it.”
Keep discussions focused on strategy. Because all of Star Lumber & Supply’s outside directors are so well vetted early in the process and they’re chosen to discuss strategy, not family politics, Goebel says he has no concern over losing control of his company.
“Our outside directors typically focus most of their attention on industry topics and allow the family directors to lead the discussions regarding family-related topics,” Goebel says. “Intelligent and experienced outside directors know instinctively when they add value to a discussion and when they don’t.”
Look into joining an industry roundtable. Goebel attends two industry roundtables each year, one moderated by NRHA and one by his buying group. He brings a list of questions and ideas on which he’d like unbiased feedback to each meeting. “The meetings are designed so you can be free to share your best ideas, tell others of some pitfalls and not be fearful of repercussions,” he says.
While all roundtables Goebel participates in are invite-only, if you’re interested in forming a group of business peers to get outside advice, ask other trusted industry sources to see if they can help you make new connections.