Businesses For Sale

Why selling a business in California is different

Selling your business is a life-changing event.

Selling a California Business

There is no other way to say it.  Selling a business in California is different than other US States.  Additionally, the sale will likely be the most significant financial event of your life.  It may also be a large part of your plan for retirement. It’s therefore important that you plan for this event just as carefully, if not more so than you plan for other events in your business and your life. 

When selling a business in California, things can come with more complications and require more planning than in other US states.

The reasons are many and include. 

  • California generally leads the nation in regulations.  These regulations come with many layers including protecting the environment and labor laws.  Many of these involve the fact that you must have a special license and/or certifications in many types of businesses.
  • Labor laws in California are typically more employee friendly than a lot of other US States.

 

These regulations and other requirements affect your ability to find a buyer with the right qualifications.  There are also other laws unique to California that affect how a business is sold. For example, the use of an escrow service, lien searches, Federal and State Tax clearances, filing permits and more.

These business deals can be complex.  They require navigating with the help of a Lifetime Certified Business Broker (LCBB.) They also include proper planning ahead of time.

Please read the information.  It includes lots of details.  If you have a question, please send a message with how we can help.

You might ask yourself the question

The California Economy

You might ask yourself the question, “If California has so many regulations and it is more complicated to sell a business there, why are there so many businesses in California?”

The answer to that question is quite simple: California has a diverse range of industries, and its economy is robust. First Research provides some fantastic statistics.

If Southern California were a country, rather than a part of a US State, it would have the sixth-largest economy in the world. Northern California is home to a significant portion of the tech sector, including Silicon Valley. The Central Valley in California produces about 40% of the agricultural products consumed in the United States. The manufacturing industry is robust in comparison to many other parts of the country.

Of course, that results in a variety of support industries as well. From HVAC and custom home remodeling to medical practices and auto repair shops, there’s no end to the types of businesses to operate successfully in California.

To do so, though, it is necessary to know that there are challenges to doing business here.

The specific challenges you will face in California depend in large part on your particular business.

General Challenges of Doing Business in California

Here are some examples:

  • The minimum wage is higher than in many other US states. If you hire entry-level workers, it will affect your bottom line.
  • In 2020, the California Consumer Privacy Act became law. This act goes further than GDPR in some areas and not as far in others.  However, it is likely a precursor to Federal action on consumer privacy.
  • California Assembly Bill 5 (often known as AB5) went into effect this year.  AB5 regulates which workers can be independent contractors and which ones must be employees. If you normally subcontract work in your business, you will want to pay close attention to this change in regulation.
  • Changes in business technology that originate in Silicon Valley in the Bay Area disrupt industries geographically  closest to them.  This is often a pressure point for California businesses to keep up with their competition.

 

To a new Buyer just moving into California, this can seem daunting. This can also be a factor when selling your business.

It is important that businesses of all sizes understand this law and how it could affect them.

The California Consumer Privacy Act

Before you read the first part of the act and think it does not apply to your company because you don’t have over $25 million in annual revenue, look at the other requirements. The truth is, even if the location of your business is in another US State but you do business with California residents, you must also comply.

Here are some other conditions of the act:

  • Companies of any size that have personal data on more than 50,000 people,
  • Companies that collect more than half of their revenue from the sale of personal data.

These are not the only challenges that face California business owners. There are several more.

AB5 Specifics

This law essentially prohibits the gig economy in California on several levels, and some consider it a grave mistake on the part of the state. While that remains to be seen, what is essential is to know that if you employ drivers who are independent contractors and your main business is driving and delivery, you must treat those contractors as employees. This affects Uber and many other companies.

The only way you can have a freelance contractor is if they do not do the thing that your business primarily does. Therefore, a freelance writer can write content for a pharmaceutical company, but they cannot create content for an SEO company that regularly produces content for its clients. In that case, they must be employees.

While many home builders and other contractors already use an employee model, those who do not may be significantly affected by this legislation. If you use this type of contract labor, the Buyer needs to understand how this law will affect them going forward.

The high level of consumer protection in California means that there are licensing requirements for common types of businesses

Licensing for Specific Industries

When selling that type of business, it means you must be more specific in your search for a qualified Buyer. In some cases, the Buyer can hire someone with the correct certifications and licenses, but in others, they will need to have those items themselves.

Here are some examples and their meanings.

To own and operate a business in the construction industry, the owner must be licensed by the Contractors State License Board of California.

The Construction Industry

To own and operate a business in the construction industry, the owner must have a license with the Contractors State License Board of California. The construction industry is defined as “businesses and individuals who construct or alter any building, highway, road, parking facility, railroad, excavation, or other structure in California must be licensed to perform work if the total cost (labor and materials) of one or more contracts on the project exceeds $500.”

The requirements for licensing are stringent and require:

  • Completed examination application and $330 fee
  • California business license and Tax ID (if LLC or Corporation)
  • Fingerprinting Live Scan
  • Completion of the “Law and Business” exam
  • Completion of the secondary trade-related exam
  • An initial licensing fee of $200
  • Completion of the asbestos open-book examination
  • Contractor bond or a cash deposit of $15,000
  • Bond of QI (if applicable) of $12,500
  • Certificate of Workers’ Compensation Insurance or Certification of Self-Insurance of Workers’ Compensation from the Department of Industrial Relations
  • LLC Employee/Worker Bond (if applicable)
  • LLC liability insurance (if applicable)

 

This means that if your Buyer already has a license, you have no worries. However, if they do not, they face the testing and expense of obtaining one, which may take some time, potentially delaying the sale. Ideally, if you are selling this type of business, you want to find a Buyer who already holds a license.

The same is true with the auto repair industry, defined as Businesses or individuals that receive compensation for repairing, altering, or diagnosing malfunctions of motor vehicles. If you do any of these things, as the business owner, you must be licensed by the Bureau of Auto Repair (BAR).

The Auto-Repair Industry

The same is true with the auto repair industry, defined as Businesses or individuals that receive compensation for repairing, altering, or diagnosing malfunctions of motor vehicles. If you do any of these things, as the business owner, you must be licensed by the Bureau of Auto Repair (BAR). There are several levels of licensure, ranging from a simple brake and lamp station to a smog check station and a complete auto repair facility.

If the name or address of your business changes, you must inform BAR immediately. Additionally, if you expand your business, add more bays to your garage, or take any other action, you must also notify BAR. The license is not transferrable: any new owner will have to get their license from BAR.

In addition to this regulation, most auto repair businesses handle hazardous materials and are required to be licensed by the California EPA to do so. A business must comply with these regulations. Fines are steep, and most will quickly bankrupt a smaller company.

This can get even more complex.

Medical Practices

This can get even more complex. The California State Medical Board must license a doctor; merely being licensed in another state does not guarantee compliance with California’s requirements.

As a business owner, it is essential to be aware of this. If you want to sell your medical practice, you must ensure that your Buyer either already meets these requirements or is likely to meet them when they purchase the business.

These businesses are also subject to privacy laws and other regulatory restrictions.

As you know as a business owner, the manufacturing industry sector is also heavily regulated in California.

Manufacturing

As a business owner, you are aware that the manufacturing industry sector in California is also heavily regulated. Depending on the type of product you manufacture, there are EPA regulations, strict labor regulations, and insurance requirements. To sell your business, you must find a Buyer who is familiar with and understands these regulations, requirements, and associated expenses.

This is one of the many reasons for hiring a business broker with experience in these areas.

Local Licenses, Certifications, and Fees

In addition to overall state regulations, many cities and counties have their own rules regarding licensing, certifications, and even business fees. Your Buyer needs to be aware of these and take them into account before purchasing your business.

Despite the challenges of doing business in California, the payoff is worth it in the long run, and this is how you can overcome any reluctance and pain points that potential buyers may have. This is one of the many reasons for hiring a business broker with experience in these areas.

we can’t forget to mention taxes.

California and Taxes

While we are being honest about the challenges faced by business owners and sellers in California, we must also acknowledge the significant impact of taxes. Taxes in California are typically higher than in other states, and they include several aspects of taxation:

In addition to federal payroll taxes and social security, California also has a personal income tax.

Personal and Corporate Income Tax

California also has a corporate income tax rate of 8.84%, according to Investopedia. However, there are a couple of unique things about how business owners pay taxes in California.

Federally, small business owners who organize as LLCs and other pass-through corporations do not pay double taxes. In other words, since income passes through to the owner, they simply pay personal income tax on that amount. The Federal government considers that to be double taxation. However, California charges taxes on both corporate and individual income taxes, even if your company is set up as an LLC. Depending on this policy, it can potentially double the taxes a small business owner pays the state. Thus, how the owner pays themselves a salary and what is counted for business deductions is especially important to minimize tax liability.

Corporations are not subject to a franchise tax, but they must adhere to an alternative minimum tax of 6.65%.

The Alternative Minimum Tax

In other words, a company cannot take so many deductions that it pays nothing in taxes. This changes the deductions a company can, would, and should take.

In short, you will need an experienced tax accountant to do business in California and stay in compliance with all the state taxation expectations.

There is a state sales tax, but often there are city taxes as well, and even companies who do business online must charge sales tax, collect it, and report it and remit it to the state, city, or county they are in.

The Collection of Sales Tax

There is a state sales tax, but often, there are also city taxes. Additionally, companies that conduct business online must charge, collect, report, and remit sales tax to the state, city, or county in which they operate.

Even business owners from neighboring states, such as Oregon (with no sales tax) or Arizona (with lower sales taxes), may be surprised not only by the amount of taxes they need to charge and collect but also by the administrative process for doing so.

When selling your business, ensure the Buyer understands the complexities associated with California taxation. If they are from another state, you may want to recommend your tax accountant, since they already know your business and the unique tax picture in California.

As a part of consumer protection practices, when you buy a home in California, you go through an escrow process.

Additional Challenges to Selling a Business in California

This means that the Buyer opens escrow by making a down payment, and a third party (not the Buyer, Seller, or any other party in the transaction) processes the paperwork to ensure that ownership passes from one person to another smoothly and legally, and that all money that should change hands at closing does.

While many other states have this practice for buying a home, in California, this process also applies to buying a business. However, the process of selling and buying a business is significantly more complex. It requires navigating the requirements of numerous regulatory agencies, various lenders, including the SBA, which has its specific requirements, as well as other entities.

This process includes:

  • The bulk sale process.
  • The Purchase Price Allocation
  • Property taxes
  • Franchise transfer fees (if applicable)
  • Business license applications
  • Getting a clearance from the California Employment Development Department
  • Getting a clearance from the California Department of Tax and Fee Administration
  • And so much more.

 

We’ve written elsewhere on this website in detail about how the escrow process works in California. There are various services involved in this process, and the best practice is to have a certified business broker with experience in California escrow coordinate this process and advise you on the best steps to take.

There are several legal requirements

Legal Differences when Selling a Business in California

There are several legal requirements to selling a business in California, and many may be things that business owners are not aware of or familiar with.

This is an agreement you have any potential buyer sign before you share with them any detailed information about your business.

Confidentiality Agreements

This is an agreement that you require any potential Buyer to sign before sharing detailed information about your business with them. There are various reasons why you might want your business sale to remain confidential. Still, in addition, you will want to ensure that none of the vital financial information related to your business stays private.

Make no mistake: this information might be very valuable to your competition and other parties. This type of agreement is essential in the sales process.

As soon as your business starts the escrow process

Purchase Agreements and Escrow

As soon as your business starts the escrow process, you will want to have a purchase agreement in place to protect both you and the Buyer from anyone getting “cold feet” and killing the deal.

Other legal items you may also need

Items you may also need:

Other legal items you may also need, depending on the sale of your business, include the following:

  • Bill of Sale: The final sale document signed by both parties.
  • Assignment of Your Lease: If you are transferring the lease of your property to a new owner, you need this document to protect yourself from any further responsibility for rent or other charges.
  • Security Agreements: If you are carrying any financing in the deal, this document ensures that you still retain a lien on the business.
  • Non-compete Agreements: If you are leaving the business to continue in the same field and not retire, you may need to sign an agreement stating that you will not open a company of the same type within a certain distance of this one for a specified time, depending on the circumstances.

 

Note: California has a public policy against non-compete agreements. They are enforceable if reasonable in scope and term, particularly when the sale of the business includes goodwill. However, if the terms are overly broad in scope and/or have a term that exceeds 3-5 years, courts may not enforce them. However, it is a sign of good faith to at least commit your Buyer not to compete with them in a similar business once you have sold them yours.

This complexity of buying a business and doing business in California can discourage potential buyers.

The Complexities of Doing Business in California and Discouraging Buyers

The complexity of buying a business and operating in California can deter potential buyers. The typical Buyer likes to understand what they are getting with the company, including all the factors that affect potential profit, as well as the cost of doing business, in exceptional detail.

Many are also intimidated by the buying process itself, as even if they have purchased a business in another state, they may not be familiar with laws like those in California.

That is why it is the job of a business broker to help them understand this process, and ultimately, to protect both the Buyer and the Seller of the business. There are several examples of how this works. For example:

A few years back, I helped the Buyer of a business close on the sale of a retail T-shirt business. The Seller had not paid a company that had made a set of display stands for the industry. Because the Seller had not paid the supplier and the Buyer of the business now owned the display stands, the supplier asked the Buyer for payment. Because the escrow process had been followed, the Buyer of the company had no liability to the supplier, and so no cost was incurred by the Buyer.

The economy is currently strong and expected to stay that way through this calendar year.

Are You Thinking of Selling Your Business?

The economy is currently strong and is expected to remain that way throughout this calendar year. There is no way to project how this might change with an upcoming election. When you know your business is thriving, it’s the ideal time to sell. This ensures that you receive the best price and the maximum return on your investment.

Because selling a business in California is so different than other states, you must hire the best business broker who knows the ins and outs of the legal process and can help you every step of the way.

With over a decade and a half of experience, Andrew Rogerson and Rogerson Business Services are the business brokers for you. Whether you are developing your exit strategy and seeking a business valuation or you are ready to list your California business for sale, we at Rogerson Business Services are here to support you. Contact us today. We’d love to be your California Business Broker.

Andre Rogerson from Rogerson Business Services

Rogerson Business Services is a business brokerage service based in California.

About Us

Rogerson Business Services is a business brokerage service based in California.

If you are ready to sell your California business, let us know your questions.  Whether you are selling a medical practice, an HVAC business, a landscaping business, or any other business with gross revenue greater than $2 million, contact us today to learn about our successfully selling your business program.

We’re happy to talk with you about the process of selling your business. Give us a call or contact us when you are ready.

Contact Us

  • 6351 Quay Road Am, Tucumcari, New York
  • +1 999 000 12345
  • hello@socialnext.kit
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