Paul Collins is the Chairman of the Board of Directors at Equiteq and has held a number of non-executive directorships.
Non-executive directors (NEDs) can play an important role in helping a business navigate its way through often-choppy waters and grow. They can provide valuable advice, but only if they have the right skills and experience. So how should a consultancy aiming for growth and eventual sale choose an NED?
First off, unless your business is well past the $50m mark in revenue, you don’t really need an NED and can instead have a board advisor. Until a firm is well over this size, it won’t have the governance issues to consider that mean an NED is needed.
Becoming an NED brings with it all the legal liabilities of being a formal director, but arguably without much of the additional information that directors have. In my experience, it works best for an NED to attend board meetings quarterly, with informal communications in between these times. If the NED attends the monthly board meeting then they can quickly become bogged down in the operational issues, rather than provide the strategic insight that they should be concentrating on. But if they don’t attend these monthly meetings, yet have the same legal liability for the company as the executive directors, then this can put many people off the role.
A solution for companies under the $50m mark is to have a board advisor rather than an NED, as they don’t have the same governance issues to consider as larger companies. Board advisors can provide the same strategic advice as NEDs but they don’t have the same legal liability. This way you could access people with the right skills who may otherwise be put off by the liabilities of becoming an NED.
When looking for an NED or board advisor, you want to choose someone who has had the experience of being involved with a business of your size, has grown it to a couple of stages past where you are now and been through a sale. This way they understand the glass ceilings at each level. So for example, if you were an $8m company, you’d want to find an NED who had been in a company your size and broken through the $10m barrier and also the $20m barrier.
The challenges of each glass ceiling are different depending on the size of the consultancy, but they are entirely predictable. So the challenges evolve from things such as creating service offerings, to scaling the business, to delegating authority and operating from a standard set of repeatable processes, to introducing a CEO and so on as the business grows. By having an NED or advisor who is familiar with these challenges, they can see where the business is in the growth trajectory, predict the likely problems and head off the next bottleneck which would stymie growth.
I have often seen boards choose one of two types of NEDs who can be of limited usefulness for the consultancy. The first is someone who has had an illustrious career in large corporates with a wonderful little – or actually large – black book. The consultancy hopes that they can draw on the NED’s contacts to drive new business. However, while many meetings may get set up out of courtesy to the NED, these meetings are frequently not with the right kinds of people who would actually become clients of the consultancy. So it can end up wasting a lot of time. Also, someone from a large corporate will not know the issues that a consultancy of $20-30m in revenue is dealing with.
The second kind of NED is drawn from one of the Big 4 consultancies and while they can relate to the world of corporate consulting, they don’t know what it’s like to be a consultancy of $20m. The usual challenge for consultancies not in the Big 4 is getting over someone’s doorstep in the first place. So while someone from the Big 4 would be excellent for governance issues, their business development approach would be completely different because they would be used to doing it with the recognition of a huge brand behind them.
For a board looking for an NED or board advisor, there are many NED networks and services around. However one of the best approaches is to look for consultancies a couple of stages larger than yours that have been through transactions in the past few years. Several years after sale, the former owners are likely to have finished their earn outs and many take a more portfolio approach to their careers. They could be in an excellent position to join your team and add valuable advice.
Finding the right NED or board advisor can make all the difference for the growth of your consultancy, so make sure you give it the attention it deserves. If you’d like more information about NEDs, the Institute of Directors provides a variety of resources.
If you are thinking of selling your consulting firm and would like to discuss your plans, please get in touch.
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