How to Sell My Business in California
Whether you’re looking for a new business venture, looking to accomplish a new life-changing event, or a Baby Boomer looking to retire or move into something new, you’ve decided to sell your business in California.
You’ve spent a lot of time, money, and hard work building your business, and now you’re looking to get maximum value from your company and brand.
There are various steps involved in exiting your California company. It’s important to follow precise processes, such as knowing the value of your business, having a clear understanding of a prospected buyer’s suitability before you arrange a meeting to discuss the selling terms, knowing the company’s competitive position in the market, and more.
Successfully selling your California business requires organized planning—from organizing financial statements to making sure the business presents as positively as possible to prospective buyers.
As you approach the sale of your California small business, look at things not only from your perspective as the seller but equally important, through the eyes of a buyer. One of the fastest ways a growing company expands is through mergers and acquisitions or an M&A transaction. According to PitchBook, the vast majority of M&A transactions are with companies from the lower-middle market or worth under $100 million. This fact alone makes your small company attractive to lower middle-market companies looking to expand and grow their business in California.
See more the types of M&A agreements are structured.
The number of small businesses with annual revenues under $2 million for sale only continues to grow. This category of small businesses is also known as main street businesses according to business intermediaries like a certified business broker in California that helps in the process of valuing and selling a small business in transactions under $2 million.
In 2020, there are over 10,000 small business sold according to a report by BizBuySell
Over the past few years, there’s been a particular attraction to smaller businesses since they’re far easier to find and integrate.
There are also several exit business planning when it comes to exiting your small company in California, but we’ve narrowed down the process to 10 steps:
- Find out how much your company is worth
- Ensure your financial statements are up to date and accurate with your CPA or tax expert/consultant.
- Find an intermediary or a main street certified business broker.
- Create a management organizational summary of your company’s structure.
- List your business and market the business for sale online in various marketplaces for selling a business.
- Receive and negotiate offers from prospective buyers.
- Make sure all legal documents are prepared by a qualified legal advisor
- Resolve and close the sale of your company.
- Move into transferring ownership.
- Ready to start your new life-changing phase and achieve your retirement goals or more into new ventures.
While there’s still a lot that goes on in between each step, selling your small business in California largely depends on the business type and category.
So, if you’ve been considering, “how do I sell my business,” you’ve come to the right place. In this post, we’ll go through tips, and helpful steps to sell your small business for the highest value/price.
Business Exit Planning
Considering an exit plan is just as important as any step in the selling process. The route which you decide to take may determine business development decisions.
Many factors determine which business exit strategy framework a business owner chooses, such as how involved they (the business owner) want to keep in the business, whether they’re willing to see the business shift directions, or whether they want the new owners and their executive team runs the business in the same manner after their exit/transition phase.
Business exit planning also depends on the business gross revenue, industry sector the business is in, what’s happening in the local, regional, state, and national economy. For example, a practice in the medical field might benefit from selling to another practice in the same discipline.
On the other hand, an owner’s unusual exit strategy may just be to make as much money as possible, then shut down the business. Yes – unusual – but it does happen – thankfully not too often.
If the business has two or three partners, each parties’ interests must be considered.
Sell My Business for the Maximum Value
Stary By Calculating the Company Value
There are many different ways in which a California small business is valued. Below, you can learn about several of these valuation approaches.
1. Market Capitalization
When it comes to business valuation in general, many business owners view market capitalization as the most straightforward method. Market capitalization works by multiplying the total number of shares outstanding by the company’s share price.
In simple terms, market capitalization is how much a company is worth according to the stock market of a publicly-traded business. As we are dealing with a small business that is privately held, the Market Capitalization rate is not used
2. Earnings Multiplier
Another popular business valuation method is the earnings multiplier method. Compared to sales revenue, a business’s Net Income or profit serves as a more reliable indicator of its value as it reflects what the owner gets to keep after all expenses. To help with this concept, would you pay more for a business with $1 million in gross revenue and costs $1.2 million to operate or a business with $1 million in gross revenue and costs $500 thousand to operate?
3. Times Revenue
The times’ revenue method uses one current revenue to determine the maximum value for a business. However, this specific method isn’t always reliable when it comes to business valuation as we showed in the illustration above in the Earnings Multiplier method.
Valuing a business based on revenue isn’t the same thing as valuing a business based on profit, and an increase in revenue doesn’t always convert to profit growth.
4. Discounted Cash Flow
The discounted cash flow, or DCF method of business valuation, bases its value on its projected cash flows, adjusted to attain the business’s ongoing market value. This method also considers inflation when calculating value.
5. Tally the value of assets
This valuation method calculates the total value of everything the business owns, like inventory and equipment. It then deducts any existing liabilities or debts. The value you get from this can serve as a starting point for finding the business’s worth.
However, a business is most likely worth more than its assets so use this valuation method carefully.
6 Tips to Ready Your Business for Sale in California
Below are six steps on how to prepare to value and then sell/exit your small business in California.
1. Obtain a business valuation.
First of all, you should secure a realistic idea of what your business is worth from an unbiased source. Obtaining a professional financial appraisal will establish a foundation for measuring future offers. It also gives you a general picture of what you can expect to get from the sale of your small business.
There are many professionals who offer a valuation. Make sure you engage with a certified business appraiser professional for the best results. However, you can get a professional valuation from numerous sources. Contact your nearest business broker will be a great starting point.
2. Arrange your financial statements.
When a potential buyer evaluates your business, they’ll typically require at least three years’ worth of financial statements including tax returns.
The more organized and well-ordered your financial statements, the more comfortable you’ll make the buyer and their team of advisors.
3. Due Diligence: Net Income or Seller’s Discretionary Earnings.
As part of a buyer’s Due Diligence when buying a small business, they can request any document they need so they can examine and be comfortable with the accuracy of the financial statements
4. See your financial advisor.
You may also want to speak to your financial or tax advisor to help plan the future for your finances and the necessary taxes to pay when you sell and exit your small business. Having a clear understanding of your tax situation may help point out any viable options regarding deal structure.
5. Arrange your legal paperwork.
Make sure to go over associated permits, leases, licensing agreements, vendor and customer contracts, and any other related papers. When it comes time to meet with potential buyers, have the documents needed to sell your business readily available and in order. This applies especially when you are buying a business in California as there are license requirements and more to own and operate most businesses in California.
6. Have an advisory team in place.
Begin conducting interviews with accountants and attorneys who are skilled in business transactions. You may also want to consider hiring a licensed business broker. Their role is to help accurately value the business and lead the transaction to source potential buyers and assist you, as the owner of the business, in the selling a business process.
While we’ve presented plenty of helpful tips on how to sell your small business in California, contacting a business broker near you, or preparing a business exit strategy can be the difference between selling your small business and almost selling your small business. It is estimated that only 25% of privately held small businesses actually sell. Increase your odds by getting a professional business broker to assist you.
Main street businesses simply refer to a smaller company considering selling or exiting their business. Examples of a main street business exit planning include:
- The seller looking to retire or move into another venture.
- Several buyers may bid against each other, elevating your business’ value.
- You’re more likely to negotiate a higher price when you sell to a competitor as opposed to an outside party.
Additionally, using a main street business broker can help give you a competitive edge in the market and eliminate or reduce friction points or roadblocks in the selling process.
Is your business worth $3 million and above? See how to exit/sell a business in the lower middle market category.