How to Prepare a California Small Business Exit Plan
Leaving a California small business is not an unusual occurrence. Many situations warrant this result, some of which are:
- Retirement and selling the small business to either a third party or family member or key employee or employees.
- An unsolicited offer for the business such as an acquisition from a strategic buyer.
- Closing the doors, and doing nothing.
All these circumstances are unique in their way. However, a common denominator associated with them all is the need to prepare a small business exit plan.
There are many routes you can take to create and plan an effective small business exit plan. This article will help guide you if you own and operate a privately held California small business.
Why a Business Exit Plan is Different in California
Selling a business in California is different than in other US states, and this is for many reasons.
At a simple level, these include:
- The California economy is one of the largest and most diverse economies in the world. It is typical for laws to be passed in California and then gradually adopted by the other US states. Two current examples include the California Consumer Privacy Act and the work of the California Congress to bring Gig workers with companies like Uber, Lyft, and DoorDash into the company as employees and not Independent Contractors.
- The Construction Industry is fully licensed in California from General Contractors to each construction specialty. If the business does not have the right construction license its exposed to inspection by the Contractors State License Board.
- Many US states do not have state taxes. In California, we have a State personal tax, payroll tax, sales tax which is collected on certain goods and at a rate that is determined at each county level, and Workers’ Compensation to assist employees injured on the job or while even driving to or from work. We also have a whole range of small taxes, from health permits to liquor license taxes to certifications and fees, amongst more.
- If you own and operate a medical practice in California, the doctor must be licensed by the Medical Board of California.
A good read: 5 Ways to Exit Your Small Business
What Is An Exit Plan?
As a California business owner of a privately held small business, when you find yourself no longer enjoying the demands of owning and operating your small business, it is time to make a move.
If you don’t, your reduced motivation may start to affect the performance of the small business to the point where it starts plummeting. In this case, you may not bring the highest selling price possible or be willing to find a qualified and motivated buyer.
A well-put-together Exit Plan or a detailed plan for handling the transition of the business to a new owner or operator is not only essential; it is good business practice.
The best Exit Plan will depend on your specific type of business, the industry you are in, what is happening in the local, regional, state, and possibly national economy, and the effect of COVID-19 on your small business (which is now hopefully starting to fall away).
This is all in addition to what is important to you as the owner of your small business and what you would like to see happen to it.
Probably more important than the above, as the owner of the California small business, you’re choosing the path you wish to pursue.
For some, this means staying on in the business in some capacity. For others, an outright sale to move onto a new challenge can be the way to go. Whatever the decision, it will affect the final financial benefit that flows to the California business owner.
Here is more on the benefits of an exit plan.
How do you know which path is the right one for you, your California small business, and your future endeavors? To figure that out, it is best to learn more about the common exit plan that people use when moving on from their entrepreneurship.
Initial Public Offerings (IPOs)
Taking the IPO exit plan route can be time-consuming, costly, and require you to have a higher level of profit. It is also a strategy for much larger businesses than the business in the Lower Middle Market.
When you choose to go in the direction of allowing a buyer to grow through an acquisition, you effectively sell and therefore hand over your business to another for a determined amount of money.
With a Strategic Buyer, there are times when the acquirer wants to keep you in a similar management title in the newly acquired company.
More often than not, it means you hand over the strategic direction of your small company and have to report to a manager or Board of Directors which you have probably never had to do before.
The most common size of business to undergo a strategic acquisition is a lower-middle market company. This is because the Strategic Buyer wants to make their position in the industry and market stronger by matching the strengths of their business with the strengths of your business to bring buying and operational synergies which generate a higher return on the investment of the acquiring company.
Management Buyout (MBO)
Another business exit plan is a Management Buyout out or MBA. This option allows those in a company’s management position or the key employees to become joint owners in the business while the original owner or principal steps out of the ownership and day-to-day decision-making to run the small business. To do this successfully, a manager may have to obtain finance or take on some sort of debt to buy a portion of the company from the seller or create an ESOP or Employee Stock Ownership Plan.
This route does take some maneuvering to set up and is an expensive small business model to operate on a day-to-day basis as it requires regular disclosures to the employees about the performance and direction the business is going.
Additionally, the previous owner may want to remain with the business in some sort of official capacity, making it hard for the key employees as they try to make their decisions on the direction and future of the company. That is, in this case, it can be challenging to see those that you once supervised as equal partners in your company.
Why Need a Small Business Exit Plan?
All businesses need exit plans, which is why there are business brokers that can help you navigate the process. A business broker like Andrew Rogerson of Rogerson Business Services will help successfully guide you and your California small company through the different exit strategies, be they Mergers and Acquisitions, by using the strategy and framework discussed with you to achieve the result you are looking for.
Some of the most challenging questions you must address during the process are:
- “How do I sell my business?” and “How much is my business worth?” or “How do I calculate the value of my business?
A business exit plan will cover all these questions and more. Going through the selling process will be much less stressful with a California-certified business broker’s assistance.
Business Exit Plan Template
With whatever option you decide to take, planning is a critical part of the process. This part is an area that a business broker can help you through and aid you in making the best decisions for you and your small company.
The most vital components of business exit planning that an advisor will handle include:
- Valuation of your business.
- Creating the important and necessary outreach documents to attract the right buyers to your California small business.
- Finding potential buyers.
- Deal origination.
- Assisting the buyer to obtain finance; if necessary.
- Negotiation of the purchase price.
- Collecting and managing the financial due diligence.
- Negotiation via a Definitive Purchase Agreement.
- Opening the escrow process and assisting to make sure all the items are correctly completed.
- The sale of the small business can close successfully.
After taking the initiative to start a small company and then deciding it is time to sell and pass to a new owner, your last and most important contribution is making a detailed succession exit plan. The thought of taking all of this on can be stressful, but it does not have to be.
There are many routes you can take to create effective exit planning. These routes do not have to be taken alone, as a California-certified business broker is well-versed in the different exit planning and can lead you through the process.
Selling a privately held business is typically only done once by a business owner. In addition, the circumstances that lead to the successful sale of the small business are typically unique in their way. However, all of them will increase the chances of success with a prepared business exit plan, which can be done with the right knowledge and attention to detail.
Are you ready to get started with an exit plan to transition ownership of your California small business? Get started with this guide or let’s hop on a discovery call. Don’t forget to bring all your questions along. We are more than happy to help you with your pain points indeed!