Reseller makeover: Aquatech

Engineering firm and software developer Aquatech Consulting had made a successful business selling irrigation software to private farmers.

The small company - three engineers and two technicians - had created a useful product that had potential. Its WaterTrack Optimiser program had been noticed by Austrade, which was keen to promote it internationally.

The owner, Jim Purcell, 55, who had run the business for 10 years and worked in the industry for 23, realised one day he needed an exit plan.

Purcell turned to Peter Scolari of Scolari Comerford, who suggested a valuation model called Bstar that had been designed by a company in Queensland.

The Bstar process begins with a series of questionnaires intended to understand the business, its financials and the current and prospective owners' aspirations.

Purcell and his wife spent a day with Scolari and a Bstar representative to discuss Purcell's ambitions, Aquatech's strengths and weaknesses - "what you think makes the business tick", says Purcell.

Then senior engineer Antony Fairfull and his wife went through the same process to discover his ambitions for Aquatech as its prospective owner.

"There's a lot of time spent trying to understand the business from both sides. The senior engineer and myself found that process very good," says Purcell.

Both parties compared and discussed their results, and directors' agreements were drawn up covering issues like a director's retirement, direction of the business, investment and division control. The agreements also helped Scolari determine a multiplier for the business' profit and calculate a valuation.

"We're analytical people as engineers, I guess, but there certainly seemed to be a lot of logical processes we went through to come up with the valuation. Neither one of us had any problem with the valuation at the end of the day, mainly because it wasn't something that someone pulled out of their left pocket."

A succession plan should be considered within the first two to three years of starting up a business, says Scolari. Succession planning can form part of a company's expansion plans, depending on the owner's ambition.

"Every small business owner should be considering a succession plan even if they are quite young as business owners. It is not just considering the value of the business and expanding that for retirement, it's also about whether they want to tie up key staff and expand the business," says Scolari.

"It's not a great idea to wait until you're nearing retirement. The earlier you do it the better, because there are a whole range of issues that could impact on the business if you don't understand it now."

Succession plans can be a powerful incentive for key employees to remain rather than leave to set up a competitor. Introducing staff as owners can help a business grow exponentially, claims Scolari.

A staged exit suits all parties. Communicating between existing owners about how they intend to exit the senior owners out of the business reduces the likelihood of conflict or disappointment. "There isn't conflict at the time you intend to do it," says Scolari.

A lot of businesses are valued on their past profit and future profit, says Scolari. Normally the capitalisation rate of those maintainable earnings can vary between 0 and as high as five.

"A lot of people have just gone, 'We'll do a little sum and base the value of their business on a profit of three,' but there's no real science to it," says Scolari.

Scolari Comerford is a registered agent for Bstar's products, which include the web-based business evaluation process. The 70-question multiple choice breaks down various parts of a business; performance, potential to grow, ability to systemise their business, degree of owner reliance, and so on.

The answers to those questions works out the investor payback return, which in turn forms part of the capitalisation rate and the multiple. Businesses burdened by problems or lacking in systemised processes have reduced values.

"It's a great way of getting a scientific and realistic way to value their business. A lot of people don't know how to value their business or have an unrealistic value of it."

Succession planning has several uses beyond determining how an owner parts ways with a company. Valuations can reveal areas of the business which are underperforming or are underdeveloped and help create a strategy to improve performance.

The Bstar method also highlights the importance of reducing owner reliance and of systemising operations.

Bringing on a co-owner can be disastrous if he or she has markedly different  plans to the original owner. Valuations which get current and prospective owners to discuss opportunities and directions before the paperwork is brought can save a lot of headaches.

"Quite often there is a lot of misconception from the purchaser to where they want to take the business [in a direction] opposed to where the existing owner wants to [take it]."

Leaving succession planning to the last minute of the business cycle is a very dangerous way to go about things, says Scolari. "You're just leaving your business open to problems later on, such as how you were thinking about exiting the business and whether new owners would value the businesses in the same way."

Without succession planning business owners can get together without realising what the other was thinking. That's when problems can erupt.

"How are decisions going to be made day to day? Does either party have adequate insurance in case the other one passes away unexpectedly? Would the other have to purchase the other part of the deceased estate?" asks Scolari.

"It's a very structured process to consider all the avenues before the deal is done."

One pitfall of incomplete planning is the younger owner who wants to expand aggressively. "That's generally going to take investment and money" which the original owner may not be willing to invest, says Scolari.

"It's better to identify issues like that before a transaction is done because if you have to unwind a transaction after someone has bought in it's very messy, very expensive and there are very few winners."