How to Sell a Business Quickly (And for Top Dollar) in California
You’ve decided it’s time to move on and sell your business. As attorneys assisting small business owners across California, we know that exiting your company likely feels bittersweet.
You’ve invested blood, sweat, and tears into making it succeed. Now, you want to ensure all that hard work pays off with a profitable sale on your timeline.
The business sale process involves everything from valuation and marketing to negotiations with prospective buyers. Handling the legal, financial, and operational complexity on your own can quickly become overwhelming. Where do you even start?
In this guide, we’ll walk through the key steps and considerations when selling a California company so you can approach the transition strategically and set your business up for a competitive sale.
Step 1: Choosing Between Selling Assets vs The Entire Entity
One of the first decisions to make is whether to sell the tangible business assets or the actual entity itself.
- An asset sale involves transferring ownership of specific company assets – your equipment, inventory, customer lists, intellectual property, etc. The original business entity continues to exist under your ownership.
- An entity sale means selling the entire incorporated business, such as the LLC or corporation, to a buyer. They take over ownership of both your assets and any debts or liabilities still tied to the company.
Sellers typically prefer entity sales because it’s simpler to transfer everything together in one package. However, buyers often favor asset sales, as they can cherry-pick the valuable assets they want and leave behind any unwanted liabilities attached to the business entity.
Ultimately, the type of sale impacts taxes owed, paperwork required, and your future liability exposure. We advise mapping out the pros and cons of each strategy with your legal, tax, and financial advisors early on.
Step 2: Realistically Valuing Your California Business
Having an accurate view of what your company is truly worth is crucial. This valuation anchors negotiations and ensures you competitively price your business.
While online valuation calculators can provide a ballpark figure, they lack context on industry trends and specifics of your operations. We recommend hiring a certified professional appraiser experienced with small businesses for an independent assessment.
- Key factors impacting your valuation include:
- Financial metrics like profit margins, growth, ratios
- Quality of existing assets, inventory, systems
- Competitive landscape and market conditions
- Strength of customer base, contracts, and branding
Ensure you can justify your asking price. Back it with detailed documentation on the business’s financials and operations throughout the sales process.
The valuation report acts as an impartial overview of the business’s worth when it comes time to negotiate with prospective buyers.
Step 3: Preparing Your Books & Records For Prospective Buyers
Once you establish an enticing asking price, prepare for due diligence by getting your books in order. Buyers will scrutinize records to confirm your company aligns with its marketed profile and valuation.
- Gather and organize key materials like:
- Federal tax returns for at least the past 3 years
- Financial statements, profit/loss reports, and projections
- All legal contracts and agreements
- Ownership documents like articles of incorporation
- Commercial leases or property deeds
- Customer lists and sales histories
Thoroughly document assets included in the sale. Clean out redundant equipment and inventory so buyers have an accurate view.
Streamlining financials and operational records demonstrates stability and transparency—qualities that provide leverage when negotiating prices.
Step 4: Spreading the Word To Vetted Prospects
Be strategic with whom you contact about the upcoming business sale. Spreading the news far and wide right away could unsettle employees and partners.
Initially, discretely gauge buyer interest among your personal network, industry contacts, competitors, or financial brokers to identify viable candidates with serious purchasing power. Require interested parties to sign non-disclosure agreements before releasing in-depth business valuations and operating details.
As you vet and build relationships with promising prospects, compile a selling memorandum that synthesizes key information on operations, facilities, management structure, growth potential, and more to captivate buyers.
Step 5: Allowing Time for Prospect Buyer’s Due Diligence
Top contenders will request a due diligence period to inspect records and assess goodwill more closely before committing to an acquisition offer. Be transparent and readily provide supporting materials previously gathered.
Schedule meetings between buyers and key employees, vendors, or landlords to demonstrate stability. Proactively disclose any weaknesses ahead of time and have action plans address them.
This evaluation phase builds trust in your sincerity and confidence in the business. Embrace questions and information requests instead of getting defensive. Nurturing buyer relationships leads to better price negotiations down the road.
Step 6: Structuring Favorable Purchase Terms with the Buyer
Hopefully, your preparation has attracted serious prospect interest and multiple offers by this stage. Now begins the negotiations around legal terms guiding the transition.
Some top deal points to cover include:
- Final sale price – Compromise between your desired profits and what buyers can reasonably take on. Consider financing a portion of the payment yourself to bridge gaps, known as seller financing.
- Payment plans – Schedule of payment amounts and timing. Balance lump sum installments with smaller increments over time.
- Asset allocation – Final determination of specific assets transferring ownership versus those excluded and retained by the seller
- Future involvement – Agreements around non-competes, consulting, and transition support to ease new ownership.
Consult your financial advisor and business attorney on structuring an optimal arrangement covering the obligations of both parties. The terms of the sales agreement should include necessary clauses that protect your interests. Don’t leave money on the table, but ensure terms realistically align with the company’s valuation and the buyer’s means.
Step 7: Closing the Deal and Preparing for What Comes Next
Congratulations, you’ve completed the sale! But the transition isn’t necessarily over yet. Still, take steps to:
- Cancel or transfer commercial insurance policies
- Terminate original business licenses and tax permits
- Shift utility accounts to the buyer
- Notify vendors and customers of the change
- For partial sales, tie up loose ends on retained assets
Additionally, for entity sales, file documentation with the Secretary of State to formally dissolve the original company entity now under new ownership. This administrative housekeeping prevents compliance hang-ups down the road.
Put Your Business Sale on The Fast Track With a California Business Law Attorney
While handing over the reins to your business is bittersweet, a profitable sale liberating you to pursue new ventures makes the effort worthwhile. With proper planning and advice, you can set your California company up for success and exit on the right foot.