Column: Why Hire Outside Directors When Private Companies Don’t Have To?
They Bring Change!
By John M. Collard, chairman, Strategic Management Partners Inc.
You need outsiders….to increase cash flow and to provide valuable guidance, contacts and credibility.
Companies committed to going through significant business change--turnaround, transition, generational ownership transfer or a major liquidity event--need guidance.
Why add outsiders to your board of directors or advisors?
- According to Forbes; 97% of firms increased revenues and EBITDA since adding a board with outside directors;
- Outsiders bring a new set of skills and ideas to produce benefits, while you maintain control;
- Outsiders provide an external source of accountability;
- Outsiders are on your side, and answer only to you; and
- Outsiders add credibility. At a liquidity seeking event, they show the organization has leadership and guidance.
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 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.
Create a culture and structure that will withstand third party accountability to add value to your business. Start thinking as a serious company and prepare for a potential future life as a public company or increased scrutiny of investors.
Independent Perspective
An outside advisor provides a sounding board to ground CEO in real leadership duties. The CEO needs unbiased advice and a diversity of opinions from advisors who can view things from a different perspective. The CEO is well served by adding board members who can challenge decisions that you are about to make. You want members who are not afraid to offer advice, guidance, feedback and argument on issues, while employee board members may be in fear of speaking up.
Strategic Thinking & Planning
Directors should challenge and contribute to strategy development and implementation. They can be particularly adept at guiding the company into new markets, or changing directions when trouble occurs. Because these outsiders have experienced these situations before, they can certainly guide you to success with less trepidation.
Experience & Objectivity
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. Understand the idiosyncrasies of new markets. Sell products and services to customers in the way that they want to be sold to.
Contacts
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.
Capital Infusion
Outside directors often have contacts who can supply capital, in the form of equity and/or debt. Some have more extensive and higher quality databases than others. 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. 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.
A director, as part of the company, can be a Finder to introduce you to investors and /or lenders and guide the process – you then negotiate a deal that you can live with. There is money available, just be the ‘good deal.’
Transactions
Directors also often have investor contacts who have deals for acquisition and who are looking for opportunities to buy. You can get in front of M&A dealmakers quickly once an offering package is ready.
Prepare for that future liquidity event. The best time to sell a company is when a buyer wants to buy for cash, which could come when you least expect it. Be prepared and work toward ultimate valuation. Privately-held and family-owned companies should demonstrate that they can be run independently, without the owner, to maximize valuation. Buyers don’t pay for past sins and they don’t pay much for companies heavily reliant on the owner. There is more company value 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 to the decision-making role.
Hire that outside director.
John M. Collard is Chairman of Strategic Management Partners, Inc. in Annapolis, Maryland, a turnaround management and outside director leadership firm: http://www.StrategicMgtPartners.com or call 410-263-9100.
