This is a fascinating question, as you think the answer would be straightforward. What does it take to sell your business in California?
The answer is that selling a business is anything but simple. And here are several reasons.
Selling your business comes with complications.
The consensus would be that the price of the business is the most essential item. But that’s not always true.
Recently, I put a business on the market that the owner had started around 33 years ago, and it was time, in his mid-sixties, to find a buyer and therefore a new owner for his business. The seller has about 15 employees. He doesn’t want to close the business and throw everything away.
His last full year of operation concluded with Sellers’ Discretionary Earnings of just over $900,000. Any small business owner would consider that a successful year.
You would even think the business was easy to sell, given that it was on the market for a total sale price of $300,000. Yes. You read that correctly. A typical business valuation would have this business worth well over $1,000,000.
In this case, the price was insufficient to sell the business.
Some challenges in selling this business
There were several challenges to try to sell this business. Here are a few of them.
The buyer needs a contractor’s license.
The first challenge was that the business owner or buyer would need a General Contractors License with the Contractors State License Board of California. This is typically a license that takes a minimum of 4 years to obtain, as it requires an education component and experience in the construction industry. There are ways to shorten this to less than 4 years, but it’s not something that can be achieved in a week or two.
An employee may obtain the contractor’s license, but that’s not a good business decision for the buyer and new owner of the business. If the employee makes salary, ownership equity, or any other demand, and the buyer doesn’t have the contractor’s license, they have no choice but to agree to those demands; otherwise, the business shuts down and the buyer loses their investment.
A buyer wants to understand the current business performance
The second challenge is that a business doesn’t sell quickly, and the buyer can take their time to research and become comfortable with the business’s operation before making an offer.
A buyer wants to understand the monthly peaks and troughs of the business, as well as the current and previous customers’ levels of satisfaction.
This also includes the current employees’ satisfaction and their willingness to stay and work for a new owner. A buyer is investing and wants to ensure their investment is made with proper care and consideration.
The buyer needs a new lease.
The third challenge was that the business owner had sold the building where the business was operating. This was a good business decision for the seller, but it now meant any buyer had to negotiate a new lease with the new owner of the building.
The new owner of the building was very reasonable and willing to negotiate, but this all takes time and attention to detail.
How were sales performing?
The fourth challenge was that the seller of the business had been very successful in the previous calendar year but began losing motivation as the end of the year approached, and this trend continued when the business came onto the market.
The result was that the pipeline of new sales was lower than usual, which created a pause for potential buyers, as it meant the pipeline would have to be rebuilt.
As is typical in every transaction, there were other items to consider. These include whether the transaction is an asset or stock sale, and:
- Who completes the existing contracts?
- Is financing necessary, and if so, readily available?
- What taxes affect the seller and what taxes affect the buyer?
- What technology is the business using?
- What accounting software does the business use?
- Are there any legal matters pending?
There are many more questions that a buyer will often ask, as well as things they want to consider.
How motivated is the buyer to buy the business?
There is one crucial item still missing, and it’s probably the most important of all.
How is the buyer feeling, or more importantly, how are the buyer and their family and friends feeling?
Almost without exception, a buyer will not buy a business in a vacuum. They will consult with their loved ones and friends to ensure they are making a good decision and not making a mistake. It’s amazing how many buyers drop out of the process of buying a business because a loved one or friend thinks this is the wrong approach.
How do you sell your business in California?
The answer to this question is simple. It was captured in what is referred to as IRS ruling 59-60.
In part, IRS ruling 59-60 says that the Fair Market Value for a privately held business is:
“The amount at which the property would change hands between a willing buyer and willing seller when the former is not under any compulsion to buy, and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.”
Where to start if you are ready to sell your business in California?
If you are ready to sell your business in California, the first significant step to take is to get a business valuation.
A proper business valuation from a qualified appraiser should include “having a reasonable knowledge of relevant facts.” Bear in mind that these facts are subject to change and can change quickly.
The business valuation will include an analysis of financial statements. The analysis should be written and presented transparently, making it easy for a buyer and potential SBA lender to understand the business’s performance and cash flow.
For more information, please visit our Business Valuation page.
Andrew Rogerson is a certified business broker based in Sacramento, California. Call Toll-Free at (844) 414-9700. If you prefer, email him at support@rogersonbusinessservices.com. Andrew services the whole state of California.