Using Advisors Wisely

Most business owners and executives rely on professional advisors for outside counsel. It is crucial to not just select the right individuals to be your advisors, but to seek their advice on the appropriate matters and to manage your advisors properly.

Human nature teaches us to surround ourselves with people we trust. Listening to your instinct and selecting advisors you trust is a good start. But when it comes to using those advisors wisely, many business owners get into trouble.

Here are a couple guidelines to help you consistently receive quality, objective advice from your advisors and avoid the common mistakes business owners make when seeking professional guidance:

1. Understand your advisor’s distinctive competence.

Perhaps the most common trap business owners fall into when seeking guidance is to go back to the same trusted advisor for counsel regardless of the issue, sometimes when the matter is outside that advisor’s competence.

As an example, few entrepreneurs have financial backgrounds, so they are forced to rely on their CPA to guide them through the numerous tax, financial reporting and regulatory quagmires faced by businesses. In the process, they learn to rely on the expertise of their CPA – for everything.

Business owners should have a team of professionals, each with their own distinctive competence. No one individual can be an expert in everything.

While your CPA may be a guru when it comes to preparing financial statements or doing your taxes, in most cases there are professionals who are better versed in estate planning or managing your investments.

This principal applies to all professional advisors, not just CPAs. I have dealt with numerous business owners who have a trusted lawyer whom they turn to no matter what the legal matter. Just because a lawyer helped incorporate your business, defend an employee lawsuit or handled your divorce proficiently does not mean they are the right person to represent you if you are selling your business. There is a minefield of risks that arise if the purchase agreement you sign to sell your company does not contain the right representations, warrantees and indemnities.

For special circumstances, you need special counsel. You would never allow your general medicine practitioner, no matter how much you trust them and no matter how many years they took care of your mother, to perform open-heart surgery on you. Why would you let a GP lawyer who does not have a background in securities and transactions represent you in the most important financial transaction of your life?

2. Understand the bias of your advisor.

Everyone in business has an agenda. There is nothing wrong with this; it is human nature. It is also what makes us successful at what we do. But if a business owner overlooks this fact, they can be led down the wrong path by their advisors.

Even if you are confident in the integrity of your advisors, it is wise to first consider what makes that individual successful in their practice when soliciting their advice. By understanding your advisor’s agenda, you can filter their advice so that your interests remain paramount.

A good place to start is to consider how they get paid. If a professional is paid on an hourly basis, they are going to have partners beating on them weekly to bill more hours. If you assume this has no impact on their psyche, you are probably vulnerable to being sold services you don’t need or having matters drawn out longer than necessary.

Most CPAs and lawyers I know are too ethical to milk their clients. Yet we all know a story of someone who has had their brokerage account churned to run up commissions or who had worked out the terms of their divorce amicably until the lawyers got involved.

Typically, though, the bias is much more subtle. For example, there are some financial planners who offer services to help business owners get their estates in order whose principal source of revenue is driven by commissions derived from selling insurance. You can bet that in 99 percent of the estate plans they draft there will be a major purchase of insurance involved. Their services may sound very affordable compared to a fee-only planning firm. But in many cases it is because fees are hidden in the products they sell you.

One of the most pervasive biases that is difficult to detect occurs when the advisor’s services are either dependent upon or disappear in the event of a certain outcome. Since my primary business is selling companies, I will pick on my profession. Most people in the M&A business derive 100 percent of their income from selling companies. So rarely do they advise a client to wait three years until their company’s performance has improved or the market is more favorable to sell their business.

If you are thinking about hiring an M&A advisor, ask them for a list of clients they have counseled to not sell their company, or to wait until a better time. To avoid the above temptation, my firm operates a business valuation practice, which pays the overhead in down markets and allows us to diversify our revenue stream, so we don’t live or die based on when our clients sell their companies.

On the flip side, if your banker, financial planner or CPA has never sat you down to develop a plan for transitioning the ownership of your business, they are not looking out for your best interest. To these individuals, your account is an annuity. If you sell your company, your CPA or banker is unlikely to retain you as a client.Consequently, they have a strong bias to either persuade you to hold on to your business for as long as possible or to transition the ownership to children or management, where they have a shot at retaining the account. Yet only 30 percent of companies are successfully transitioned to the next generation of management. And in almost all cases an internal sale yields lower proceeds than a sale to a third party.

Sadly, I have witnessed cases where a CPA or banker overtly tried to convince a business owner to not sell their company when it was in their client’s best interest to sell. In one case, the CPA, who the business owner trusted implicitly, egregiously understated his estimate of the after-tax proceeds the owner would receive if he accepted an offer and talked the seller into walking away from a deal that he may never see again.

More common is denial. I recently had a business owner call me who had been referred by her banker. She and her partner were both approaching retirement age and neither had children in the business. They had been approached by a major, national trucking company that was interested in buying their business, and they felt they needed professional advice.

In the course of the conversation, as I shared with her my philosophy of assembling the right team of advisors when confronting such a major decision — that included a CPA and a lawyer — I asked her the name of her CPA firm. When she told me, knowing that this firm had a formal alliance with my company to refer clients who were contemplating the sale of their business, I asked her if her CPA had ever discussed with her how she planned to transition the ownership of her business. She laughed, and replied, “Are you kidding?”

​Regardless of the professionalism and integrity of your advisors, they are human. That means they are not all-knowing. They have limited areas of expertise. They also provide for their families. That means certain outcomes benefit them more than others. Your best bet is to assemble a team of professional advisors and manage them wisely so you receive the right advice on the right subject.

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