Leaving a small business in California is a common occurrence. Many situations warrant this result, some of which are:
- Retirement and selling the small business to either a third party, a family member, a 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 all of them 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 small business in California.
Why a Business Exit Plan is Different in California
Selling a business in California differs from selling one in other US states, and this is for several 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 other states in the United States. Two current examples include the California Consumer Privacy Act and the work of the California Legislature to bring Gig workers, such as those employed by companies like Uber, Lyft, and DoorDash, into the company as employees rather than independent contractors.
- The Construction Industry is fully licensed in California, from General Contractors to each construction specialty. If the business does not have the proper construction license, it is 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, a payroll tax, a sales tax, which is collected on certain goods at a rate determined at the county level, and Workers’ Compensation to assist employees injured on the job or while driving to or from work. We also have a range of small taxes, including health permits, liquor license taxes, certifications, and fees, among others.
- If you own and operate a medical practice in California, the doctor must be licensed by the California Medical Board.
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 business, it’s 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 begins to plummet. In this case, you may not be able to achieve the highest possible selling price or be willing to find a qualified and motivated Buyer.
A well-structured Exit Plan, or a detailed plan for handling the transition of the business to a new owner or operator, is not only essential but also good business practice.
The best Exit Plan will depend on your specific type of business, the industry you are in, and what is happening in the local, regional, state, and possibly national economy.
This is all in addition to what is essential 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 pursue a new challenge can be the best approach. Whatever the decision, it will affect the final financial benefit that flows to the California business owner.
Business Succession
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 standard exit plans that people use when moving on from their entrepreneurial ventures.
Initial Public Offerings (IPOs)
Taking the IPO exit plan route can be time-consuming, costly, and require a higher level of profit. It is also a strategy for much larger businesses than the business in the Lower Middle Market.
Strategic Buyer
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 handing over the strategic direction of your small company and having to report to a manager or Board of Directors, which you may have 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 strengthen their position in the industry and market by matching the strengths of their business with those of your business, thereby bringing buying and operational synergies that generate a higher return on investment for the acquiring company.
Management Buyout (MBO)
Another business exit plan is a Management Buyout (MBO). This option enables key employees or those in management positions within a company to become joint owners of the business, while the original owner or principal steps back from ownership and day-to-day decision-making to run the small business. To do this successfully, a manager may need to obtain financing or take on some form of debt to purchase a portion of the company from the Seller or create an ESOP, or Employee Stock Ownership Plan.
This route requires some maneuvering to set up. Operating a small business model on a day-to-day basis is an expensive endeavor, as it requires regular updates to employees about the business’s performance and direction.
Additionally, the previous owner may want to remain in some official capacity with the business, making it difficult for key employees as they try to make decisions about the direction and future of the company. That is, in this case, it can be challenging to see those whom you once supervised as equal partners in your company.
Why Do You Need a Small Business Exit Plan?
All businesses need exit plans, which is why there are business brokers who can help you navigate the process. A business broker like Andrew Rogerson of Rogerson Business Services will help guide you and your California small company successfully through various exit strategies, such as mergers and Acquisitions, by utilizing the strategy and framework discussed with you to achieve the desired result.
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. Navigating the selling process will be significantly less stressful with the assistance of a California-certified business broker.
Business Exit Plan Template
Regardless of the option you choose, planning is a crucial part of the process. This area is one where a business broker can assist you and help you make informed decisions for your small business.
The most vital components of business exit planning that an advisor will handle include:
- Valuation of your business.
- Creating the essential 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 ensuring that each item is completed correctly.
- The sale of the small business can close successfully.
Final Take
After taking the initiative to start a small company and then deciding it’s time to sell and pass it to a new owner, your last and most important contribution is creating 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 several routes you can take to create an effective exit plan. These routes do not have to be taken alone, as a California-certified business broker is well-versed in different exit planning strategies and can guide you through the process.
Selling a privately held business in California is typically only done once by a business owner. In addition, the circumstances that lead to the successful sale of the small business are generally 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 proper knowledge and attention to detail.
Are you ready to develop 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!
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.