How to best leverage advisors for your business: Part I
Wednesday, February 26, 2014
Most people realize that success creates complexity. What top business owners and managers have realized is that the management of complexity and leverage is not the job of a traffic cop. As a business grows, the number of complicated, technical risks that the business faces also grows exponentially.
To illustrate how complexity grows exponentially, let's consider the following two situations. Figure 1 shows the relationship between two people. Figure 2 shows the different relationships that exist when you have four people in a group.
In Figure 1, you can see that Dick and Jane have one relationship. There is only one relationship when you have two people. This seems relatively easy to manage as you have two people and only one relationship. Let us see what happens to the complexity of the interactions when we have four people in a group.
That means that it is at least 500 percent more work to manage four businesses or elements of a business plan than it is to manage two businesses or elements of a plan. If you have eight elements, then you have 56 different interactions to monitor. You can see how the complexity of the situation increases quickly.
As a simple practical example, consider the beginning of a business, when you go from running a sole proprietorship to having one employee. You may not see a major difference, but that couldn't be further from the truth. The addition of just one employee creates a need for:
- Payroll creation, funding and payments.
- Regular payroll tax payments (or you can go to jail).
- Withholding tax filings and payments.
- Workers compensation insurance or fund payments.
- Occupation Safety Hazard Association compliance.
- Separate retirement plan (ERISA) regulations and contribution requirements.
- A host of other state and federal reporting requirements.
In addition to all of the aforementioned specific issues, the expansion of such a business increases the need for more general categories of planning, like asset protection, banking (private and commercial), business planning, financial and cash management, income tax management, property and casualty insurance analysis, and a host of other areas — regardless of the type of business or industry-specific expertise (i.e., health care law advice for a medical practice) that may also be required.
Each category of planning has its own technical areas that can be competently handled by an advisor who has expertise in that area. Although it is common to find an advisor who has expertise in a few areas, there is also some overlap where two advisors are needed for one of the categories above.
For example, tax issues are typically handled by a both a tax attorney and a CPA. As a result, there is no way that a small team of two or three advisors could possibly handle the needs of a large or growing business.
While a large number of advisors may seem overwhelming, consider your personal health. As an adult, you certainly do not see the same obstetrician who delivered you or the pediatrician who treated you as a child for all of your ailments.
If you have an injury, you may need to see an orthopedist. If you have a skin problem, you may see a dermatologist. If you develop digestive issues, you may see a gastroenterologist. Most adults receive help from at least 10 to 15 different physicians from a variety of specialties over their lifetime.
Nonetheless, if you are like most people, you would love to be able to keep the same general physician (i.e., internist or family doctor) for as long as possible. Having someone you know and trust as your primary contact is comforting. This primary care physician can help explain situations to you, find the right specialists if a need for one arises and help communicate with you as complicated procedures take place.
From a business perspective, this "generalist" could be in-house — like a practice manager, CFO or general counsel. It could also be the practice's general business attorney or accountant. They work with you on a more regular basis and then you bring in other specialists when needed.
As with any collaborative endeavor, the collection of people is not enough to ensure success. Every conference call and meeting must have an agenda and someone to manage the meeting to make sure all important items are handled in the allotted time.
It is common to put one of the advisors in charge of organizing and facilitating information flow among the other advisors. Within the group, you need to identify roles and responsibilities and make one person accountable for the completion of each task.
When considering different options, it is wonderful when there is a unanimous decision on whether or not to go in a particular direction. However, many decisions will not be unanimous.
You need to set the rules (51 percent, 66 percent, 80 percent) concerning how decisions are to be made within the group and share them with the group. If they know how you are going to make decisions, it will make it easier for them to participate in the group and allow them to continue to participate even when the rest of the group disagrees with a particular decision.
In this article, I have explored the important topic of the need for an advisor team and how increasing complexity calls for a larger advisor team. In Part II of the article, I will discuss in detail what types of advisors a successful business should have.
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