“To accept good advice is but to increase one’s own ability.”
— Johann Wolfgang van Goethe
In my last blog post, I discussed:
– the high cost of a marketplace education
– that while entrepreneurs and business owners want others to see the value that they add, they rarely accept the value that others add
– with that, it is still important for the entrepreneur/business owner to seek out advisors. The following is a list of the advisors an entrepreneur needs:
- Someone who knows what you do not.
- Financial Person
- Board of Advisors or Directors
Let’s discuss these advisors and the roles of each one.
Someone who knows what you do not
Yes, this is a very vague suggestion. However, the recommendation is purposefully vague because the specific needs of every business are different. This person might be a co-founder or a parter. This person has either general or technical skills that are different than yours.
Preferably, this person would be more experienced than you, in general, or at least in their specific skill set. (Just because your 13 year old nephew knows more than you about using computers or social media, doesn’t mean that he’ll make a good partner. On the other hand, don’t automatically discount him because he’s only 13.)
It is possible that this person could be an investor or a donor, but be careful. Just because someone has money – and potentially a good investor – does not automatically mean that that person knows more than you.
Ultimately, this person needs to have a vested interest in you and/or your success. If this person does NOT have a vested interest, it will be difficult to keep them engaged. Finding a way to fairly compensate them will be critical.
If you are going to have “an accountant,” please make sure of a couple of things:
- the person is qualified to do accounting work; just because the person is “good with numbers” doesn’t mean that they are a good accountant
- the person desires to do accounting work; desire is a key word
Bean Counter is not a pejorative term. Counting beans is important and there are a great many ways to do it. According to wisegeek.com, “only a bean counter would literally count the number of beans contained in the company kitchen’s pantry.” A bean counter would also “scrutinize each department’s budget to find any form of potential waste, no matter how insignificant or nominal it appears to be.” This person is going to be able to help you accurately keep your “books” (financial statements) and manage cost controls, to name just a couple. It is very important to maintain accurate Profit and Loss statements and Balance sheets as these documents are critical to the long-term success and viability of the company.
This person does not have to be a CPA, and many times, is not.
The Tax Advisor can also be the Bean Counter, but it doesn’t have to be. It is probable that your Tax Advisor will be a Certified Public Accountant (CPA) or an Enrolled Agent (EA).
Your Tax Advisor needs to not only understand the IRS’ tax code but should also understand the benefits and implications of the structure(s) of your business. That is, should you choose, LLC, Inc, LP, or Ltd? And if you do, what are the ramifications of each and why would one be better for you more than others?
If your business is profitable and making money, it is crucial to have a Tax Advisor that truly understands how to advise you regarding minimizing taxes and maximizing the value of the business for you, investors, donors, etc.
I’ve seen tax advisors help business owners make a lot of money for a lot of people and I’ve seen bean counters screw up so badly that a 2nd generation family business went out of business in a matter of 48 hours. As with all of these advisors, choose wisely.
There are two different kinds of attorneys: “order takers” and “counselors.” While the value created by attorneys varies greatly, it is important to not be intimidated; you should interview different attorneys to figure out which type you need.
While interviewing attorneys, make sure that there is an initial free consultation and do not start working with an attorney and exchanging ideas until you have a clearly defined agreement in place. You may walk away thinking, “Wow, this person is going to be a big help…I’m excited to begin working with them” only the find receive an invoice the following week for “services rendered.”
Order Takers vs Counselors
The vast majority of attorneys are order takers. You tell them you want a Will, a Trust, an Operating Agreement, or some other kind of document. The order taker listens to you and develops the document. It may be a great document in and of itself, but you may be missing the “forest for the trees” when it comes to your overall strategy and plan.
A Counselor is going to help you make sure that your personal planning and documents and in accord with your business planning and documents.
While I could give “oh that will never happen” examples that actually happen, here is a very basic example of working with order takers vs. counselors:
Business Partner 1 (Tim) and Business Partner 2 (Gary) have been partners in a shipping business for almost 7 years. Tim owns 60% of the business and Gary 40%. They have contracts with shipping partners and for their employees. They even had an agreement with how they would handle the splitting of profits every year.
Early one morning, Gary walked into the office to find Tim laying on the floor because Tim had a massive heart attack. After several weeks of bereavement and physicals for Gary, everyone tried to get the business on track until one day when Tim’s wife, Sally, and her lawyer walked in to the office and informed Gary that Sally was now 60% owner of the shipping business and that she was not going to be involved in the day to day operations of the business, but that she expects to still receive 60% of the profits
Tim had what is known as an “I love you Will.” This basically says, “everything that I own, I give to my spouse upon my death.” And since Tim’s personal planning and documents were not aligned with his business planning and documents, Gary was now partners with Sally and she had every right that Tim did.
A counselor would have helped put a plan in place that would have been able to address these issues before something like this happens.
This person should be an attorney, but there are very few counselors. It is possible for the “counselor” or consultant to not be an attorney and work directly with an order taker to make sure the documents are put together as part of a cohesive plan.
This could be an account, an investor, or a partner that has a strong understanding of financial matters, in general. However, they need to know the specifics of your business.
This is more than likely not a “financial advisor,” an “investment manager,” or “insurance agent,” unless they have extensive experience working with and/or investing in privately-held entrepreneurial ventures (which is not likely). While the insurance agent is more important, at least initially, the typical financial advisor does not have the experience or the acumen to be the “financial person” for a privately-held business.
This position could be maintained by your accountant or CPA, but likely not. This role does include the oversight of the simple day to day management of the bills and the company bank account. But it also extends to helping manage relationships with investors, bankers, or institutions, as well as helping to keep money in coming into the business, whether from investors, banks, or revenues.
Board of Advisors/Directors
A Board of Advisors and a Board of Directors are different and typically serve different purposes. While both possess knowledge and/or experience that are beneficial, the Board of Advisors is more informal than the Board of Directors.
Board of Advisors
A Board of Advisors (BoA) is typically established because the business does not have the resources to pay for or compensate other consultants, employees, or directors. The BoA typically does not have ownership, and therefore, typically does not have legal responsibilities or liabilities.
The BoA provides advice to the entrepreneur based on their own experience and expertise, especially as it relates to one’s “deep smarts.”
Board of Directors
A Board of Directors (BoD) is a highly formal group within a business. A BoD bears the legal responsibility of operating a company and is directed by the business’ operating documents, such as the Operating Agreement, By-Laws, or Partnership Agreement, to name a few. The operating documents determine the roles and responsibilities of the members of the BoD and typically outlines how the BoD should elect its own officers.
While the BoD is typically selected formally by the shareholders according to most operating documents, practically, it’s usually the owner, founder, and/or primary shareholder that asks someone to be a part of “the Board.”
There is a lot of responsibility for a member of a BoD and, as such, the members of the BoD are typically compensated.
It is important to remember the old adage:
You get what you pay for.
People do things for their own reasons. And, while there are many people that want to “help” and “give back,” unless they have a vested interest in you personally, most people will lose interest in you and your project unless they are being compensated.
How entrepreneurs compensate the different advisors for the value that they add will be discussed in the next blog post, the final of three posts in this series about entrepreneurs seeking value.