Steps to Sell A Business
Steps to sell a business in California is fairly complex–but ultimately rewarding–process. It is one exit strategy that business owners use to realize gains from building and operating a successful business. Because there are so many moving parts to selling a business, clear documentation of the terms of the sale is critical.
In general, there are four stages to selling a business: preparation, negotiation, due diligence, and documentation. This article presents an overview of some of the factors to consider in each of the four stages of selling a business in California.
Selling a business is not that different from selling a car or a house. You need to know what you are selling and how much money you are willing to accept. In addition, you need to clean up and advertise your business. The following items summarize some actions you should take to prepare your business for a sale.
1. Steps to Sell A Business: Prepare Your Business For Sale
Once you have prepared your business for sale you can list it with a California business broker or use some other form of advertisement to communicate to potential buyers that it is for sale. Interested buyers and brokers will want to discuss a variety of terms that will eventually be a part of any sales transaction.
You will also need to advertise the sell of your business, which can be done with a selling memorandum (a document that offers factual information about many of your company’s operations).
Here are some items you should be prepared to negotiate with potential buyers for your business:
- Sale price: The sale price of your business is one of the most important negotiation points. You should be prepared to justify your asking price based on your business’s financials, growth potential, and industry trends. Be open to negotiating with potential buyers to find a fair price that works for both parties.
- Terms of payment: You and the potential buyer will need to negotiate the terms of payment, including the payment schedule and any contingencies or conditions for payment. Some buyers may want to pay in installments, while others may offer to pay in full upfront. Be prepared to discuss and negotiate the payment terms that work best for both parties.
- Assets and liabilities: Buyers will want to know about your business’s assets and liabilities, including any outstanding debts or legal issues. Be prepared to negotiate the transfer of assets and liabilities, and be transparent about any potential risks or challenges.
- Employees and management: If your business has employees or a management team, potential buyers may want to negotiate their retention or compensation. Be prepared to discuss and negotiate the terms of their employment, including salaries, benefits, and bonuses.
- Intellectual property: If your business has intellectual property, such as patents, trademarks, or copyrights, potential buyers may want to negotiate ownership or licensing agreements. Be prepared to discuss and negotiate the terms of these agreements to protect your intellectual property and ensure a fair deal for both parties.
By being prepared to negotiate on these items, you can ensure a smooth and successful sale of your business. It’s important to work with a professional advisor, such as a business broker or attorney, to help you navigate the negotiation process and protect your interests.
2. Steps to Sell A Business: Negotiating The Sale
Once you have prepared your business for sale and attracted potential buyers, the negotiation process can begin. Negotiating the sale of your business can be a complex and emotional process, but with the right preparation and guidance, you can navigate it successfully. Here are some steps to consider when negotiating the sale of your business:
- Establish your negotiation goals: Before entering into negotiations, it’s important to establish your goals and priorities for the sale of your business. What are the minimum and maximum prices you are willing to accept? What are your non-negotiable terms, such as the transfer of assets or the retention of key employees? Having a clear understanding of your negotiation goals can help you stay focused and make informed decisions during the negotiation process.
- Understand the buyer’s motivations: Understanding the buyer’s motivations for purchasing your business can help you tailor your negotiation strategy to their needs. Are they looking to expand their market share, acquire new technology, or enter a new industry? Knowing their motivations can help you highlight the strengths of your business that align with their goals.
- Communicate openly and honestly: Open and honest communication is key to successful negotiations. Be transparent about your business’s financials, growth potential, and any potential risks or challenges. Listen carefully to the buyer’s concerns and questions, and be prepared to address them in a constructive and respectful manner.
- Consider creative solutions: In some cases, creative solutions can help bridge the gap between your negotiation goals and the buyer’s needs. For example, you may be able to offer financing options or agree to a earn-out structure where a portion of the sale price is contingent on the business’s performance after the sale. Be open to exploring these types of solutions to find a win-win agreement that works for both parties.
- Work with a professional advisor: Negotiating the sale of your business can be a complex and emotional process. Working with a professional advisor, such as a business broker or attorney, can help you navigate the negotiation process, protect your interests, and ensure a successful outcome.
By following these steps, you can negotiate the sale of your business with confidence and achieve a successful outcome that meets your goals and objectives.
3. Steps to Sell A Business: Due Diligence
Once you have a serious buyer who has signed a confidentiality agreement and a letter of intent, they will want some time to inspect your business to make sure everything you have represented checks out. This process is called “due diligence“. The due diligence inspection period gives the buyer the opportunity to inspect the physical state of your business including the building, equipment, inventory and employees, as well as the financial records, legal contracts and company books. In order to ensure a smooth transition for the new buyer, you want to make sure that you disclose everything up front.
A lack of transparency can torpedo all the effort you’ve put into negotiations. A buyer will need ample time properly to inspect your business and confirm that what you have promised them is up to par. This includes everything from inventory and contract agreements, to employees and equipment. Many buyers will conduct a background check as well in the form of calls to past vendors and business partners. Honesty is your best asset; use it to your advantage.
In addition to inspecting records and physical facilities of your business, a prudent buyer will want to contact business partners who have experience doing business with you. This might include speaking with vendors, customers, distributors, or other business partners to assess the strength of the various business relationships. If there are skeletons in the closet of your business, it is a good idea to deal with them in a straightforward and honest manner. The more information the buyer has about potential problems the better equipped they will be to handle those problems after you close the transaction.
A purchase agreement is the primary legal document used for the acquisition of a business. The purchase agreement outlines all of the details of the sale and mirrors the letter of intent. Depending on how you structure this transaction you may also need a bill of sale, promissory note, security agreement, stock transfer certificate, and company resolutions. The purchase agreement should include all of the following:
As with any sale, the negotiation is probably the most important aspect of selling your business. If you have chosen to hire a valuation expert, you should have the upper hand when negotiating the purchase price, but this doesn’t mean you shouldn’t allow some flexibility.
Additionally, you will have to decide if you are seeking a lump sum as payment or willing to negotiate a payment period for the buyer. The latter is the most common option, and if this is what you choose, the terms of financing and interest will need to be made clear prior to purchase. Another option (If you have a lease on office space) is negotiating a sublease arrangement so that the buyer can take over your current lease.
Finalizing the sale of your business means you must finalize the purchase agreement between yourself and the buyer. This is when having a seasoned attorney can prove exceptionally valuable. Once the language of the agreement is determined, both parties will sign, and the final transfer of ownership and possession of the business will occur on the date stated on your contract, including when the seller will receive the money.
4. Steps to Sell A Business: Documenting The Sale
Even honest people are sometimes forgetful. By documenting the details of the business sale, a business seller can avoid an expensive and time-consuming legal battle. It is important to organize any vital company documents, including contracts or agreements for potential buyers and determine whether you will be seeking an asset or entity sale.
When a business entity closes and no longer does business in California they must terminate their legal existence by dissolving, surrendering, or canceling their business. When closing your current business it is important to keep in mind that this will require you to close out your affiliated state and local accounts or registration filings.
You will also need to finalize your tax status for your business with the California Franchise Tax Board (FTB) which administers personal and corporate income and franchise taxes for the State of California. All businesses are required to submit an annual Business Income Tax Statement to the FTB which you will use to let them know that you sold the business and will no longer file subsequent tax returns for your sold business. You will want to consult with your accountant to assure that you have properly notified FTB about the sale.
If you close your business, and you have or had employees, you should have registered with California Employment Development Department (EDD) for state income tax withholding and employment taxes. For the EDD to close your employer account, you will be required to submit documentation of the sale and additional information to conclude your reporting obligations.
In conclusion, selling a business is a complex and multifaceted process that requires careful planning and execution. However, with the right preparation and guidance, business owners can successfully navigate the stages of selling their business and achieve a successful outcome. Whether you are preparing your business for sale, negotiating with potential buyers, conducting due diligence, or finalizing documentation, it’s important to approach each stage with a clear understanding of your goals and priorities. By following the steps outlined in this article, business owners in California can prepare themselves for a successful sale and realize the gains from building and operating a successful business.