Selling a business in California is a fairly complex—but ultimately rewarding—process. It's one exit strategy that business owners use to realize gains from building and operating a successful business. Because there are so many moving parts to selling a business, clear documentation of the terms of the sale is critical.
In general, there are four stages to selling a business:
This article presents an overview of some of the factors to consider in each of the four stages of selling a business in California.
For a more general overview, read our article on the eight steps to selling a business.
Selling a business isn't that different from selling a car or a house. You need to know what you're selling and how much money you're willing to accept. In addition, you need to clean up and advertise your business.
The following items summarize some actions you should take to prepare your business for a sale.
As a preliminary issue, a business owner needs to decide whether to sell the business entity along with all of its assets and liabilities or just the business assets by themselves. For example, a sale of a corporation would be a stock sale and a sale of a limited liability company (LLC) would be a sale of the LLC membership interests.
Buyers will typically favor an asset sale because they can pick and choose which assets they want without assuming unknown liabilities.
For example, suppose Tuck and Ming Ming buy a moving business from Lenny named "Wonder Movers LLC." The purchase is an entity sale and Tuck and Ming Ming become the new members (owners) of the LLC, inheriting all of the company's assets and liabilities. A year after the purchase, a past customer sues Wonder Movers for some damaged furniture from a move that happened two years ago under Lenny's ownership. Tuck and Ming Ming, as the new owners of Wonder Movers LLC, would be responsible for that lawsuit even though the incident happened before they purchased the company.
Sellers will favor an entity sale because it's a simpler process and it allows the owner to unload the entire company along with all of the associated liabilities. If you're considering an entity sale, you should check with the California Secretary of State (SOS) to make sure your business is in good standing.
The type of sale you choose could affect your future liability to the buyer, so it's also wise to get advice from an attorney who specializes in mergers and acquisitions for small businesses.
For more information on the differences between an asset and a stock sale, read our article about business acquisitions.
Before you can sell a business you need to have a good understanding of what it's worth. You can get a rough estimate of your business's value by researching the sales price of other businesses within your industry. However, the number you arrive at is only an estimate.
At some point, you'll need to get an expert opinion from a business valuation expert such as:
Having this piece of information is going to be critical in every other stage of selling your business.
For more on business valuation methods, read our article on how to value your business.
As you prepare to sell your company, it's important to clean up and organize all aspects of your business. So, you'll need to make sure that your relationships with vendors, customers, distributors, and others are well documented. You'll also need to review internal company documents, resolutions, and agreements to make sure they tell a clear story of how the business has been run.
Gathering these documents is especially important if you decide to do an entity sale rather than an asset sale. Annual information statements filed with the SOS can be obtained for a small fee by filing a business entity records order form with the SOS bizfile Online.
A standard form of advertisement used in selling a business is the selling memorandum. This document is used to market a business by presenting accurate information about the operations of the company including its:
You'll want to prepare a selling memorandum for potential buyers to review. Since this document will contain very sensitive information you don't want to distribute it to just anyone. Only serious buyers who've signed a confidentiality agreement—also known as an "NDA" (short for a "nondisclosure agreement")—should receive a copy of the selling memorandum.
Once you've prepared your business for sale, you can list it with a broker or use some other form of advertisement to communicate to potential buyers that it's for sale. Interested buyers and brokers will want to discuss a variety of terms that'll eventually be a part of any sales transaction.
Here are some items you should be prepared to negotiate with potential buyers:
After you've gone through the process of negotiating the basic terms of selling your business, you and the buyer will sign a document that briefly outlines those terms known as a "letter of intent." This letter of intent (LOI) isn't a binding contract but helps to keep track of what's already been negotiated. This document also makes it easier to produce the final purchase agreement.
Once you have a serious buyer who's signed a confidentiality agreement and an LOI, they'll want some time to inspect your business to make sure everything you have represented checks out. The inspection period gives the buyer the opportunity to inspect the physical state of your business including the building, equipment, inventory, and employees, as well as the financial records, legal contracts, and company books.
In order to ensure a smooth transition for the new buyer, you want to make sure that you disclose everything up front. The following is a list of items you should prepare and make available to any serious buyer:
In addition to inspecting the records and physical facilities of your business, a prudent buyer will want to contact business partners who have experience doing business with you. The buyer might ask to speak with vendors, customers, distributors, or other business partners to assess the strength of the various business relationships.
If there are skeletons in the closet of your business, it's a good idea to deal with them in a straightforward and honest manner. The more information the buyer has about potential problems, the better equipped they'll be to handle those problems after you close the transaction.
For more guidance on what'll be investigated when you sell your business, read our guide to the due diligence process.
A purchase agreement is the primary legal document used for the acquisition of a business. The purchase agreement outlines all of the details of the sale and mirrors the LOI. Depending on how you structure this transaction you might also need:
The purchase agreement should include all of the following:
Even honest people are sometimes forgetful. By documenting the details of the business sale, a business seller can avoid an expensive and time-consuming legal battle.
It's important to follow through with the following items once you've closed the sale of your business depending on the type of sale:
For a list of things to do to wind up your business, see our checklist for closing your business.
Your business is likely one of the most important things to you—both professionally and personally—and selling it is probably bittersweet. You need to take care to arrange for a legal sale that'll compensate you fairly for your company and that won't result in any issues years after the sale is finalized.
To protect yourself, it's a good idea to surround yourself with a team of professionals and advisers that can work with the other side to close the sale. Consider working with a business valuation expert, accountant, tax adviser, or business attorney during the process. Do your research on potential buyers and keep your records organized and ready to present. A business sale is a lengthy process but it can be a rewarding send-off once the ink has dried on the purchase agreement.