Family businesses are foundational to the development and growth of economies the world over. According to the U.S. Census Bureau, about 90 percent of businesses in the U.S. are family-owned or family-controlled, and family businesses account for half of U.S. gross national product.

They are therefore also instrumental in creating personal wealth for the families who own and operate them. Very often, successful family businesses create large personal fortunes for family members.

That said, this occurs only when family businesses are well managed and grow.

To help ensure effective management and strong but disciplined growth, many family businesses establish advisory teams. These are organized groups of leading professionals who contribute their expertise to help both the family and the company excel.

Families put advisory teams in place typically to achieve two key goals for themselves and their businesses (see Exhibit 3):

1. Substantially greater business success. Some of the experts on these teams are able to help guide the business forward by enabling the company to avoid obstacles. They often do this by sharing industry best practices and dealing with specific problems the firm faces. The advisory teams are often critical to ensuring the family business continues as a family owned and operated enterprise over several generations.

2. Substantially greater personal success. There are a few ways advisory teams tend to contribute to the individual success of the family members. One way involves helping family members develop the competencies and business know-how so they can effectively take control of the company down the road. Another way deals with helping individual family members attain greater personal wealth and protect themselves from unfounded lawsuits or marital complications.

We see that formal advisory teams are more common among larger family businesses. When companies have, say, tens of millions of dollars in revenues, they are more likely to systematize their use of top outside professionals by establishing an advisory team— and, in many cases, compensating these experts for their insights and assistance.

That said, many smaller family businesses do rely on various experts for guidance and to act as sounding boards. In effect, these family businesses have an informal advisory team. We tend to find that regardless of the company’s size, as family businesses grow, the need for advice from others becomes greater. When the family business reaches some sort of critical mass, the advisory team often becomes formal and official. 

What’s more, the family business advisory teams tend to evolve over time along with the business. As different needs and opportunities arise—brought on by business growth, business challenges and other developments both within the business and in the outside world—family businesses look for insights, direction and solutions from different professionals. At first, that might occur only on an as-needed basis. Over time, some of these professionals may be tapped frequently. When a cohort of specialists is relied on regularly, they’re often formalized into an advisory team.

What a business advisory team looks like

There are two types of professionals that almost always end up on family business advisory teams whether those teams are formal or informal:

• Accountants. The No. 1 most valuable professionals to most family businesses—and non-family businesses as well—are accountants. They understand the numbers of the business, and they often understand what can be accomplished to address tax-related issues. Their services are consistently required.
• Corporate lawyers. By and large, the most common type of lawyer on family business advisory teams is the corporate lawyer. From making sure problems are avoided to helping deal with financing, these lawyers are often crucial.

Most likely, the next addition to a family businesses advisory team is their company’s commercial bankers. Because of the (usually ongoing) need for credit, the family business’s commercial bankers are often in the loop. Moreover, their perspective can be very important in directing how to ensure the family business is able to get money when necessary.

Because of their own particular needs and wants, some family businesses add still other types of professionals to their advisory teams. Examples include:

• Family business consultants. Family dynamics have the potential to be disruptive to a family business. Of course, they also can be beneficial. It all depends on the health of those relationships. To enhance the benefits (or to mitigate the problems) of a family working together, family business consultants are commonly brought in.
• Executive coaches. Upgrading the knowledge and skills of executives—particularly those who are family members—can often result in a better running and more successful family business.
• Human resource and compensation specialists. For a family business that wants to bring in non-family talent, sourcing skilled executives and getting them to commit to the company can be a challenging task. Developing effective and motivational compensation arrangements for non-family senior executives, for instance, can be very important.
• Wealth managers. As family businesses become more successful, wealth managers can prove helpful in assisting family members in making smart decisions about their money. Moreover, wealth managers can be very useful in helping family businesses mitigate certain taxes and build loyalty among key non-family employees.

The more any expert is needed, the more likely it is that specialist will become part of the advisory team. Meanwhile, there are likely to be quite a few other specialists who are engaged only for a specific project—their expertise is not needed regularly. These professionals will likely not be invited onto the advisory team.

Criteria for joining the advisory team

We find that the best family business advisory teams meet a number of criteria:

• Each professional is exceptionally technically capable. The advice and direction of each expert has to be excellent—after all, the reason you want them involved is because they are very good at what they do, right? Having a track record of success with family businesses proves to be a good indicator.
• Each professional must understand the family business. All the advisory team members must be very familiar with your specific business and industry. Along the same lines, each professional needs to understand your family members beyond a cursory level.
• Each professional has to understand that the advisory team is indeed a team. Some leading professionals are highly convinced of the value they bring to situations but are unwilling to recognize the value that other professionals may also deliver. Put another way, they tend to focus entirely on solutions that are tied to their expertise. But for the advisory team to be effective, there has to be a lot of cooperation among the different experts and a willingness to admit when another expert’s idea is the right one in a given business situation.

Sourcing advisory team members

Generally speaking, there are three main ways family businesses find prospective advisory team members (see Exhibit 4):

1. Introductions from other professionals. The most pervasive way family businesses find experts is via referrals from current professionals they are engaging and whom they see as highly competent. When issues come up that are beyond an existing professional’s expertise, the family often asks that expert whether he or she knows anyone who can help. This is a very effective way for the family business to mitigate the risk of working with someone unsuitable, because the professional making the referral will only introduce other leading professionals who are exceptional. Otherwise, it could hurt the current professional’s relationship with the family business.
2. Introductions from peers. Family businesses also find experts by getting referrals from other family businesses. Very often the family business owners connect because they are in the same industry. When one family business owner asks for recommendations to leading professionals, another family business owner who has dealt with similar issues may introduce the fellow business owner to the experts who made a difference for him or her.
3. Connecting with thought leaders. Everyone wants to work with the best of the best. Thought leaders readily and unrestrictedly share their insights, processes and best practices with others. Doing so can help a professional become a recognized and heralded expert in his or her field. Family business owners tend to gravitate to thought leaders because they are usually the best in their fields.

Conclusion

Advisory teams can be a powerful way for family businesses to both maintain their success and, more important, continue to become even stronger. Getting the right advisors in place and making sure they work well together may just be one of the key ingredients your company needs in order to move to the next level—and beyond.

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This report was prepared by, and is reprinted with permission from, VFO Inner Circle.  AES Nation, LLC is the creator and publisher of VFO Inner Circle reports.

Disclosure: The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra IS or Kestra AS. The material is for informational purposes only. It represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. It is not guaranteed by Kestra IS or Kestra AS for accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS.

Fusion Wealth Management is not affiliated with Kestra IS or Kestra AS. https://www.kestrafinancial.com/disclosures

VFO Inner Circle Special Report
By Russ Alan Prince and John J. Bowen Jr.
© Copyright 2021 by AES Nation, LLC. All rights reserved.

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