Once the decision to sell has been made, seek professional advice, it will pay for itself and could save you a lot of undue stress. Accountants, Bank managers, Advocates and estate agents may have a more pragmatic and dispassionate view of the value of your business than you.

Ultimately it is only worth what someone is willing to pay for it.

The following comments are designed to give business owners a structured process and check list, enabling you to plan your ‘selling’ campaign, possibly years in advance.

Establish your goals and strategies

• Why do you want to sell, what do you want personally from it, and what do you want for the company?
• Do you intend to remain on board, or only during the transition period?
• Do you want a cash deal or are you willing to accept deferred terms linked to future profitability?
• Do you have children in the business, what continued role do you see for them?
• Do you want to retain any land or property separately from the business?

Guernsey is a more difficult place than most to sell a business, in that you want as wide an audience as possible to know about your impending sale, yet you want to keep the fact from your competitors until the last possible moment. This requires astute judgement and knowledge of the market place, in terms of product offerings, personnel changes, commercial climate and last, but not least, timing. Perhaps this explains why there are many management buy outs in Guernsey, enabling sensitive commercial information to remain ‘within the firm’

One of the most commonly used methods of valuing a business is the price/ earnings ratio, which usually represents the selling price, divided by the annual profit and is expressed as a multiple of earnings. However it cannot be taken in isolation, as you will see in the following example;

Fred wanted to sell his long established business that had sales of £500,000 per annum and net profit, after expenses, of £100,000. He thought the business was worth £300,000, in other words a P/E ratio of 3, giving what he thought was a 33% annual return to the prospective purchaser. In addition, he wanted £200,000 for the assets, tied up in stock, plant and leased equipment, meaning an overall selling price of £500,000.

When a prospective buyer (John) came along, other factors came into the equation, ROCE or return on capital employed being one of them. John employed a firm of qualified accountants to examine Fred’s accounts. They informed John that he would have to depreciate the assets by 20% per annum, equalling some £40,000, thus reducing the annual net profit to £60,000 before tax or only 12% ROCE.

They also informed John that Fred was actively engaged in the business for 50 weeks a year at 50 hours or so per week, while not appearing on the payroll. The real equation looked more like £60,000 divided by 2,500 annual hours or £24 per hour, before social security and tax, without taking into consideration the loss of investment income from John’s £500,000.

John did eventually buy the business, but for a lot less than Fred wanted!

Planning ahead for impending sale

• Have your financial statements audited
• Ensure there is a full declaration of profits for at least 2 years prior to sale
• Try to formalise existing agencies, longer leases, good staff, by suitable terms & conditions
• Make sure your computer systems and controls are consistent with your needs 
• Spruce up your place of work, repaint the walls
• Straighten out and bring up to date old records, including tax, compliance, property, health and safety, personnel, pensions etc.

The one question to ask yourself, when preparing your business for sale is, “If I were going to buy this company, what are the items that would worry me?”

By identifying and remedying them, you must make you business more attractive to prospective purchasers.

When it comes to presenting your company in the best light, you could impress potential buyers by preparing an information memorandum on your company.

This would entail such items as;

• Financial information
• Management, employee information
• Products & services
• History of ownership
• Premises & plant
• Marketing analysis
• Sales and competition analysis
• SWOT analysis
• Reasons for sale
• Confidentiality agreement
• Any appendices relating to financial statements, property, equipment etc.

By having this prepared document of full disclosure, any potential buyer cannot fail to be impressed. Before contemplating parting with this document, you must ensure that the penalties for breaching the confidentiality agreement (or non disclosure agreements) are well understood by the prospective purchaser. You can obtain copies of the sorts used from The Guernsey Enterprise Agency.

Once two parties reach an agreement in principal as to the basic price, structure and terms of a transaction, they typically enter into what is termed a ‘heads of agreement’. This is a written outline of the general understanding between the buyer and seller, usually drafted by the buyer. It sets out the proposed price, terms and structure, as well as conditions and contingencies upon completing the deal. This does not create a binding obligation; it merely spells out the intent of both parties to close the transaction upon agreed terms.

You still have the matters of due diligence and the execution of a sale and purchase agreement before you receive the cash, so it’s advisable to insist on a time frame, because, unlike wine, deals of this nature do not age well.

Due diligence inquiries generally focus on such areas as corporate structure/ ownership, financial results and balance sheet, legal issues, customers and suppliers.

You must be prepared that prospective buyers will need to speak through their lawyers to yours, likewise their accountants, and lastly they will need access to your premises and workforce, in order to convince themselves that all is well.

There are also such complications as covenants, indemnities and conditions under which either the buyer or the seller has the right to terminate the agreement without being liable for damages.

Still sure you want to sell ?