Getting The Right Advisors - II
By: Andrew J. Sherman, Esq.
Dickstein Shapiro LLC
Advisors, Accountants and Consultants
One key critical success factor for early-stage companies is the need to hire the right team of advisors, accountants, consultants and other external professional advisors in a wide variety of business disciplines (such as marketing, sales, finance, administrative management, strategic planning, computer systems, manufacturing, production, advertising, operations and personnel) as and when needed as a source of valuable advice.
As a general rule, professional service providers and business consultants are hired to fill a particular need of the early-stage company, such as: expert advice in a particular field of knowledge; readily available pool of human resources when you can't hire full-time employees; dentification and solution of specific problems or barriers to growth; timulation or implementation of new ideas, technology or programs; a sounding board (or even shoulder to cry on); access to contacts and resources (the opening of the rolodex); and insights on the successes and failures of other companies similarly situated.
Once the exact reason or specific project or problem has been identified, there are certain key questions which must be addressed during the selection process, such as:
How does the background, education and experience of the particular advisor relate to the task or problem at hand?
How does the professional advisor charge for its services? What billing options, if any, are available? Does the firm offer any creative billing options, such as equity for services (see below), deferred fees, reduced rates or project-specific discounts or contingencies? How do rates vary among various members of the firm? How much will it cost to accomplish this specific project to resolve the problem?
Which staff members will actually be assigned to this project? What is the expertise of these particular members of the firm? Will you be able to get access to other members of the firm with specialized expertise on an as needed basis?
What is the firm's anticipated timetable for completing the work? What progress reports will be provided? What input will the management team have to give to the service provider?
What is the service provider's representative client base? What references can be provided? Does the firm have any actual or potential conflicts of interest? How does the company compare to the firm's existing client base?
The Selection Process
The process of selecting, retaining, and knowing how and when to use a professional advisor is among the more important business decisions that an entrepreneur must make, both initially at the outset of the business and throughout the growth of the company. Yet, most entrepreneurs express frustration, dissatisfaction and confusion when asked about the professional advisor selection and retention process. Many owners point to high fees, failure to meet deadlines, lack of business savvy, inaccessibility, inability to cut through red tape and mountains of paperwork, inexperienced junior staff, and a general inability to understand the business ramifications of legal and strategic decisions as the sources of their ongoing problems with advisors. As a result, these advisors are viewed as a necessary evil who do not understand the business considerations of proposed transactions. Therefore, the entrepreneur may take matters into its own hands, only to have the proposed agreement or strategy backfire creating even larger problems than ever anticipated. Experienced professional advisors can and should be key members of the external management team of early-stage companies, but this does not mean that they need to be involved in every step of every transaction. The key to a prosperous and harmonious advisor entrepreneur relationship is knowing how to select and when to seek advice from an advisor.
For example, in selecting a legal advisor, if your idea of an advisor with strong corporate legal skills and business acumen begins with an ability to keep your spouse away from key assets in a hotly-contested marital dispute, then think again. The days when your divorce advisor could also handle a complicated corporate transaction are long gone. Due to the increasing complexity of the law and the ever-growing specialization of the legal profession, the division of assets in your family in a divorce or in estate planning, and the division of assets in your corporation in a merger, acquisition or shareholders agreement must be handled by two very different types of advisors. Although it is more than likely that the adviser who prepared your will could also assist in the performance of routine corporate tasks during the formation of the company, many general practitioners are quickly outgrown as the business expands and legal needs become more complex. As a result, you must periodically assess whether your current advisor and/or law firm best meets their legal interests and requirements.
You are likely to have varying personal preferences with respect to the age, experience and interests of the advisor you hire. Priority may be placed on experience and clout (which would tend to favor an older, more seasoned advisor) or on aggressiveness and cost (which would tend to favor a younger advisor). However, it is dangerous to place too great a priority either on experience or billing rates. For example, an older advisor with time constraints is likely to assign the project to a younger, less experienced advisor, and a younger advisor who offers lower billable rates may take twice as long to complete the assigned project. Similarly, age and reputation should be viewed with a grain of salt. An advisor practicing for three years who has devoted all of his or her attention to a given industry will probably know more about that industry than would a general consultant with 30 years experience. Nonetheless, there are certain common denominators that a company should identify when selecting its professional advisor:
Responsiveness - An advisor must be able to meet a client's timetable for accomplishing a particular transaction or implementing a particular strategy. An advisor with all the expertise in the world on a given legal topic is of no use to a company if the knowledge can't be communicated to the client in a clear and timely fashion. Make sure that deadlines are discussed and that the advisor has adequate resources set aside to meet those requirements in accordance with the schedule established.
Business Acumen - Many advisors are criticized by their clients as being unable to comprehend the business ramifications of legal decisions. Small companies need independent and objective advisors with broad-based experiences, but may also need a consultant with business acumen, management and marketing skills, and a genuine understanding of the specific industry in which the company operates. Advisors with tunnel vision who lack the ability to understand the impact of the law on the client’s business goals and objectives should not make legal decisions and strategies.
Reputation - It goes without saying that a company will want to hire advisors with a good reputation in the business community. However, reputation goes beyond a series of names on a door or letterhead. In considering the references of a prospective advisor, you should look closely at the foundation upon which the reputation has been built. Is the advisor's reputation primarily due to the accomplishments of named partners who have been dead for over 20 years? Or, on the other hand, maybe the advisor enjoys a fine reputation as a golfer and a philanthropist, but no one can really give you an opinion as to the quality of his legal documentation. Be careful of those who have build a reputation solely on the basis of heavy networking but where the advisor’s actual legal or strategic planning skills are uncertain.
Philosophy and Approach - You need to understand an advisor's or firm's overall philosophy and approach. Are they more inclined to be "deal makers" or "deal breakers?" Are they truly trusted advisors or more of a necessary evil? Do they understand the importance of value-added relationships (e.g. bringing more to the table than just good documents or accurate advice)? Are they an asset or a liability to your company's growth and its ability to meet or exceed its business plan?
Representative Client Base - Just because an advisor's list of clients reads like a Who's Who of the Fortune 500 does not necessarily mean that the legal needs of a growing company would be understood. As it has often been said, "A Small Business Is Not A Little Big Business", yet many consultants assume that because they have handled a $500 million acquisition, they can understand the legal needs of the parties to a $500,000 dollar transaction. Although some of the planning and strategizing may be similar, the business goals and philosophies of the parties are likely to be very different. The advisor's client base should also be evaluated to determine whether there are any actual or potential conflicts of interest, complementary resources or whether the advisor has experience in prior matters which are relevant to your company.
Billing Rates and Policies - Managing the cost of consultants is of especially great concern when your resources for professional advisory services may be scarce. The good news is that increasing competition among advisors for small business clients demonstrating growth potential has created a certain amount of flexibility in billing policies. At the same time, however, advisors at firms of all sizes expect to be paid for quality services which have been rendered within a client's deadline. There is nothing more frustrating or offensive to any professional service provider than to work nights and weekends for a client who does not pay its bills. Therefore, it is important that any mystery or confusion concerning the billing rates and policies be clarified before any work is commenced. One effective means of controlling billing rates and policies (as well as defining related rights and obligations of the advisor and the client) is the use of a retainer agreement. A retainer agreement is for the protection of both parties because it resolves any mystery about the relationship before any work commences. The components of a well-drafted engagement agreement include:
- the nature of the services to be provided;
- the compensation for services rendered;
- the use of initial retainers or contingent fees;
- the reimbursement of fees and expenses;
- the conditions for withdrawal of counsel or termination of the relationship;
- the counsel's duty to provide status reports;
- the time limitations or timetables for completion or work
- the ceilings or budgets (if any) which have been set for legal fees; and
- any special provisions needed in the agreement as a result of the nature of the project (e.g., rules governing media relations, , protocol, etc.).
Government and University Programs
Several Federal, state and local government programs have been established to support economic development and owners of small businesses. For state or local programs, you should check with the relevant economic development department within your state, your state chamber of commerce or your local government. Many universities have established entrepreneurship centers which offer a wide variety of resources to foster and support both regional entrepreneurship as well as student entrepreneurship. For some examples, take a look at the Dingman Center For Entrepreneurship at the University of Maryland www.rhsmith.umd.edu/dingman or the Rothman Institute at Fairleigh Dickinson University www.fdu.edu in New Jersey
Two Federal programs that come to mind, each with their roots as outgrowths of Small Business Administration (www.sba.gov) (whose District offices can also be an effective resource) are the SBDC program and the SCORE program.
Small Business Development Center (SBDC) (www.asbdc-us.org)
Provides management and technical assistance to more than 1.3 million small business owners and aspiring entrepreneurs each year. Small business owners and aspiring entrepreneurs can go to their local SBDCs for free, face-to-face business consulting and at-cost training on writing business plans, accessing capital, marketing, regulatory compliance, international trade and more. The SBDCs are a partnership that includes Congress, the U.S. Small Business Association (SBA), the private sector, and the colleges, universities and state governments that manage SBDCs across the nation. The SBDCs raised nearly $109 million in non-Federal resources (to match $88 million in Federal funding) to serve small businesses and aspiring entrepreneurs in FY 2004.
Service Corp of Retired Executives (SCORE) Program (www.score.org)
The SCORE Association, headquartered in Washington, D.C., is a nonprofit association dedicated to entrepreneurial education and the formation, growth and success of small businesses nationwide. SCORE is a 501 (c) (3) nonprofit organization. We provide a public service to America by offering small business advice and training. Formed in 1964 to help small businesses flourish. SCORE’s 10,500 volunteers have more than 600 business skills. Volunteers share their wisdom and lessons learned in business. Our volunteers are working/retired business owners, executives and corporate leaders.
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ABOUT THE AUTHOR
ANDREW J. SHERMAN is a Partner in the Washington, D.C. office of Dickstein Shapiro LLP, with over 350 attorneys nationwide. Mr. Sherman is a recognized international authority on the legal and strategic issues affecting small and growing companies. Mr. Sherman is an Adjunct Professor in the Masters of Business Administration (MBA) program at the University of Maryland and Georgetown University where he teaches courses on business growth, capital formation and entrepreneurship. Mr. Sherman is the author of eighteen (18) books on the legal and strategic aspects of business growth and capital formation including his latest book Road Rules: Be The Truck. Not The Squirrel. (www.bethetruck.com). Mr. Sherman can be reached at 202-420-5000 or e-mail ShermanA@dicksteinshapiro.com.