How to Sell a Business in California
Selling a business in the State of California can be arduous. However, once you have the right knowledge and qualified assistance, it’s possible to get through the process and complete a satisfactory sale.
Foreign USA notes that California ranks #1 for the most number of small businesses in any U.S. state by a country mile, and quotes the SBA’s 2020 count of 4.1 million small businesses in the state. According to the California State Assembly, the state runs a $2.9 trillion economy.
Given numbers like that, there’s no shortage of opportunity to buy or sell businesses in California, from the thriving tech sector in Silicon Valley to the booming local economy of the Los Angeles metro area. What matters is following a solid process.
You can successfully sell your business for a high price if you plan carefully, follow each step in detail, and work with a professional business broker who can lead you through the process.
Decisions to Make Before Selling Your California Business
No matter what kind of business you have — whether it’s online or offline, a small local establishment or a mid-size corporate business — you’ll have to make a few key decisions early on to ensure you’re in the best position to sell.
Asset vs. Entity Sale
An asset sale is when you sell off just the assets of the business, and an entity sale entails selling the entire business with all assets and liabilities included.
Asset sales attract buyers because they can take over the profit-producing elements of the business without getting entangled in extra debt. On the other hand, an entity sale is helpful to you as a seller, because it frees you of lingering costs and liabilities. The California Secretary of State can help assess whether your entity is in good standing to sell as-is.
Depending on the size of your business, the complexity of your financials, and other factors, one type of sale will make more sense than the other. A good broker can walk you through the process.
Choosing When to Exit
Selling a business is a very personal decision. Afterwards, it’s natural to want to exit sooner rather than later. However, extending the timeline can enable you to make your business even more profitable, and put you in a much better selling position.
Selling Solo vs. Working With a Broker
Selling your business independently might be a viable choice, especially for very small businesses with just one owner. However, the larger your business is, the greater the risks are in going it alone.
Working with a broker who understands the M&A market in California is your best bet for completing all the state-mandated steps and getting a fair price in the end.
Factors in Valuing Your California Business
Whether you own a small shop or a midsize corporation, many different factors play into how your business is valued. These can become very burdensome for a California business owner navigating the process without a broker’s help.
License requirements are widespread in the business landscape and vary widely by business type.
For example, construction business owners have to be licensed by the Contractors State License Board of California. Businesses that purchase items for resale to consumers need a California Resale Certificate, as required by the Department of Tax and Fee Administration.
Doctors must meet the specific requirements of the California Department of Public Health Licensing and Certification Program (L&C), which in some cases can be more stringent than federal requirements alone.
Worker and Consumer Protection Laws
California also has many laws enacted to protect the rights of workers. A prime example is Assembly Bill 5 (AB5), which strictly limits the ability of businesses to work with freelancers, forcing many of them to instead hire would-be contractors as employees.
Another issue is California’s relatively high minimum wage, which is $14 per hour as of January 1, 2021.
Consumer protections are very important in California as well. The California Consumer Privacy Act (CCPA) applies to any business that collects the personal data of more than 50,000 people, or that acts as a “data broker” or reseller of such data. Businesses must respond within mandated timeframes to consumer inquiries about data handling.
Some business buyers are discouraged from taking on the added cost of paying a higher-than-average minimum wage, as well as the extra liability and expense of hiring employees where contractors are preferred.
Such buyers may look instead at comparable businesses to acquire in other states — unless your business is unusually attractive or has great profit potential. A broker can help you with the positioning of your California business.
The California Environmental Protection Agency (CalEPA) details strict requirements for businesses around handling toxic materials and protecting air, water, and other natural resources. These regulations are continually updated and strictly enforced.
Coming up short in these requirements can mean hefty fines for California businesses. Similarly, it’s yet another source of risk for would-be business buyers.
Despite all of California’s business regulations, a broker can help you position your business attractively, while using valuation formulas to generate a reasonable range of prices you can expect to get out of a sale.
Valuation Formulas for California Businesses
A broker may apply the EBITDA and SDE formulas to help determine the fair value of your business.
EBITDA, or “earnings before interest, taxes, depreciation, and amortization,” adds back some expenses to the business earnings total, as suggested by the name.
The SDE, or “seller’s discretionary earnings” balance, measures the value of a business based on the earnings that the owner generates from it. The formula for SDE is as follows:
(Pre-tax, pre-interest earnings) + (such as travel, vehicles, and other transactions listed as business expenses) = SDE
SDE adds back business expenses that have some personal benefit to the owner. The formula gives a potential buyer of your business a picture of their possible earnings, should they find themselves in similar situations as yourself throughout day-to-day operations.
Finding buyers for your California business requires an understanding of what makes buyers qualified, and what they must agree to in the process.
The Process of Transacting With Buyers in California
Finding a buyer for your business may not be easy.
First, many potential buyers are intimidated. It’s challenging for buyers and investors to take on the responsibilities and costs that are unique to owning a business in the state.
Taxes are another point of contention for many would-be buyers. California’s business taxes are high relative to other states. For example, individuals who form an LLC to avoid double tax liability will have to pay extra state tax in California, which unlike other states, will require both personal and business taxes.
In addition, the relatively-high corporate tax, alternative minimum tax, and franchise tax (where applicable) mean financial responsibilities that only the most highly-motivated buyers are willing to take on.
Here are some other aspects of finding and working with buyers in California:
To protect both business buyers and sellers, funds are held in escrow by an impartial third party until the transaction is complete (that is, until the business completely changes owners and the deal is finalized).
Many documents, such as the purchase agreement, allocation of purchase price, and bill of sale, must be signed by both the buyer and seller. These help ensure all debts are paid and the business changes hands without complications springing up down the line.
As a seller, you must complete a thorough financial inventory of your business, which entails gathering together your profit and loss (P&L) statement, balance sheets, accounts receivables, and all other financial instruments.
You’ll also have to prepare all relevant business assets for transfer, and document all major client and vendor relationships.
Following this, the buyer enters their own due diligence process. They will conduct a thorough assessment of your business to verify that it’s in the shape you’ve legally represented to them.
As the seller, near the end of the process, you must file a Certificate of Dissolution or Certificate of Cancellation with the CA Secretary of State to terminate your business as it existed before the sale.
Other forms must also be filed with the state’s Employment Development Department to release the buyer from certain liabilities, as well as finalize your reporting on payroll taxes and wages paid to employees.
A broker’s help is essential in ensuring you’ve left no stone unturned before handing over the keys to the buyer. Missteps in your due diligence can bring a good deal to a halt before it’s fully done.
Why Work With a Broker?
Selling a business in California can be rife with complications. There are many potential obstacles for sellers, thanks to the stringent laws that govern M&A and business-buying activity in the state.
Finding and negotiating with buyers who understand and are willing to take on the risks is a complex process best shepherded by a broker who understands California’s legislation. That’s where Raincatcher can help.
Raincatcher’s brokers know the process of selling businesses in California and all that it entails. Working with one of our professionals will take away the burden of knowing what documents to gather and sign, will adhere to all restrictions, and find qualified buyers who will pay a decently-high price for your business.