Reseller makeover: Aquatech

"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."