How to Sell a Business in California

Disclaimer: We are supported by our readers. We may receive compensation from links on this page if you use products or services because of our expert recommendations. Please read our Advertising Disclosure.

Selling a business in California requires careful handling of state rules.

This includes sales tax on retail items. You may need a seller's permit from the California Department of Tax and Fee Administration (CDTFA).

This guide makes the process clear. It covers preparing your finances, valuing your business, negotiating deals, and handling taxes.

You'll get practical steps for a smooth and profitable sale in California.

Key Takeaways:

• Organize your financial records. Streamline operations to boost your business's appeal and value before putting it on the market in California.
• Value your business accurately. Market it discreetly to qualified buyers, using non-disclosure agreements to protect sensitive information.
• Master negotiations, due diligence, and California's rules-including taxes-for a seamless sale.

Understanding the California Business Sale Process

Selling a business in California follows a seven-step process. It works for asset sales or full entity sales, from start to finish.

State rules from CDTFA and the Secretary of State apply, plus federal ones. Expect 6 to 12 months, per U.S. Small Business Administration data.

Follow these steps for a smooth sale:

1. Check your readiness. Use the free CalGOLD database to register online. It takes about 2 hours. Watch out for local rules, licenses, and permits. Missing them is a top mistake, per CDTFA guidelines.
2. Engage a business broker through the California Association of Business Brokers (commission of 8-12% of the sale price; 1-2 weeks for selection).
3. Draft a letter of intent using templates from Rocket Lawyer ($39.99; 1 day; include a non-disclosure agreement to protect sensitive information).
4. Conduct due diligence via shared Google Drive folders (30-60 days; perform a thorough review of financial records).
5. Finalize the purchase agreement through the e-Services for Business portal (1-2 weeks).
6. Manage closing with an escrow service such as First American Title, involving security deposit if required (fee of 1-2%; 1-4 weeks).
7. File ownership transfer documents with the Franchise Tax Board (1 week).

Preparing Your Business for Sale

A 2022 GO-Biz report shows that selecting the best time of year to sell a business and prep can boost your sale price by 20-30%.

Get ready to attract buyers: Organize key documents. Improve daily operations to stand out in California's tough market.

Check the CA Grants Portal for more help.

Organizing Financial Records

Get ready for audits. Gather three years of profit and loss statements with QuickBooks Online at $30 a month.

About 70% of California small businesses use it to keep records compliant with CDTFA and state guidelines.

1. Gather tax returns and balance sheets with TurboTax Business for $170 a year. It takes 4 to 6 hours. Make sure all filings are done to prevent delays.
2. Then, reconcile accounts with Xero, available for $13 per month, to facilitate accurate tracking of prepaid MTS account. A common oversight is neglecting payroll tax records, which may result in penalties from the EDD of up to $1,000.
3. Prepare cash flow projections utilizing free Excel templates available from SCORE.org, a process that generally takes 8 hours.
4. Engage a tax professional, such as a Certified Public Accountant (CPA), via the CalCPA directory for a compliance review, with fees ranging from $200 to $500 per hour.
5. Refer to Internal Revenue Service Publication 583 for established record-keeping standards to confirm audit readiness.

Streamlining Operations

• Automate payroll with Gusto. It costs $40 a month plus $6 per employee.
• This cuts admin time by 50%. It also keeps you on track with Employment Development Department filings.

Ready to boost your operations? Try these simple steps right away:

1. Use Asana's free tier for a workflow audit. Spend two days mapping processes to fix team silos, a common issue that slows down work.
2. Update vendor contracts through DocuSign ($10 per month), requiring 1-2 hours per contract to facilitate electronic signatures.
3. If applicable, optimize inventory management with Fishbowl ($4,395 one-time fee), completing the setup within one week to reduce overstock by 30 percent.
4. Train staff on standard operating procedures (SOPs) using free templates from the Small Business Administration (SBA), dedicating 3-5 days to training sessions.

Skipping smooth handoffs in customer service drops retention by 15 percent.

A 2023 CalOSBA study shows streamlining can boost your business sale value by 1.5 times.

Valuing Your Business Accurately

BizEquity software costs $99 per report. It uses the income approach to value a Los Angeles retail business at $500,000 to $2 million, based on EBITDA (earnings before interest, taxes, depreciation, and amortization) multiples of 3 to 5 times from California Association of Business Brokers benchmarks. Discover the best tools and software for business valuation, including options like BizEquity for accurate assessments.

The asset-based method suits businesses packed with physical assets, such as state-assessed property. For instance, value Wonder Movers LLC at $300,000: subtract $50,000 in debts from the market value of equipment and inventory, as per Appraisal Foundation rules.

Income-based valuation uses discounted cash flow (DCF) models in Excel. These project 10% yearly growth for service businesses, leading to a $750,000 value with a 4.2 times multiple from 2023 data.

DCF discounts future cash flows to present value, helping predict worth.

The market-based approach leverages comparable transactions from the BizBuySell database, with an additional 15% premium applied for California-specific locations, yielding an estimated value of $850,000.

Compare these methods to set a strong price.

Using them right can add up to $200,000 to your sale, boosting your returns.

Finding and Approaching Buyers

List on BizBuySell for free. It draws over 10,000 California searches monthly and helps find 50 to 100 buyers.

Target strategic buyers in Los Angeles with direct outreach.

Once these buyers have been identified, engage with them in a systematic manner to expedite the sales process. Adhere to the following numbered steps, including recommendations for relevant tools:

1. Listing through Brokers: Engage M&A services from M&A Business Advisors, which requires a $5,000 retainer and offers a one-week setup period, to create professional listings on platforms such as Axial.net. This approach ensures access to vetted investors.
2. Active Networking: Participate in events hosted by the California Association of Business Brokers (annual membership dues of $500; attendance at 2 to 4 events per year) to directly present opportunities to strategic buyers in Los Angeles.
3. Lead Qualification: Use Gong.io CRM ($100 per user per month) for 15- to 30-minute calls. Screen leads to avoid bad fits and save 20 to 30 percent of your time, a common mistake to skip.
4. Secure Sharing of Teasers: After qualification, distribute NDA-protected teasers using DocuSign (free tier) to prevent premature disclosures that could pose risks of competitive harm.

Lead generation generally requires 2 to 4 weeks. According to the Small Business Administration's 2022 report, utilizing brokers can accelerate sales by 40 percent-this approach has significant implications for your exit timeline, and our guide to choosing the best business brokers demonstrates how to select the right partner for maximum efficiency.

Marketing the Business Discreetly

Keep marketing quiet to protect your daily work.

In California, 80% of deals use blind profiles on sites like BusinessesForSale.com. This draws vetted buyers without tipping off staff or rivals.

Drafting Non-Disclosure Agreements

Protect your sensitive info with LegalZoom's Non-Disclosure Agreement (NDA) template. It costs $29 and lets you customize it in just 15 minutes to cover details like your business address and customer lists when chatting with potential buyers in California.

1. Start by clearly defining what counts as confidential information. Exclude publicly available data, following California Civil Code 3426, to avoid making the protection too broad.
2. Establish a post-termination duration of 2 to 5 years to maintain ongoing safeguards.
3. Add a non-circumvention clause. This stops buyers from bypassing the agreement to contact your clients directly.
4. Include the following sample boilerplate language: "The Recipient shall not disclose Confidential Information to any third parties without the prior written consent of the Disclosing Party."

Obtain a business valuation to determine the fair market value before proceeding. The drafting process typically requires approximately one hour; however, it is imperative to consult with an attorney for a fee of around $300 to verify enforceability and compliance.

In a 2021 case involving the California Department of Tax and Fee Administration (CDTFA), breaches of NDAs led to fines exceeding $50,000, emphasizing the critical importance of precise and comprehensive terms to protect your business assets effectively.

Negotiating Sale Terms

Hire M&A services from M&A Business Advisors or brokers from the California Association of Business Brokers. Start negotiations with a term sheet outlining a 70/30 split between upfront cash and earnout payments, where earnout is extra money based on future business performance.

Utilize DealRoom software, priced at $49 per month, to monitor revisions and leverage data-supported concessions to achieve a 10-15% increase in the overall transaction price.

Strengthen your position with these practical tips. They draw from the Harvard Negotiation Project's book *Getting to Yes*, which helps you negotiate smarter.

Focus on real interests instead of sticking to hard positions. Skip concessions driven by emotions to stay strong.

1. Create your Best Alternative to a Negotiated Agreement (BATNA), which is your backup plan if talks fail. Do a SWOT analysis (strengths, weaknesses, opportunities, threats) in MindMeister ($6 per month) and finish it one day before negotiating to build your leverage.
2. Integrate mediated sessions facilitated by JAMS arbitrators ($400 per hour, comprising 2-3 meetings) to address and resolve disputes in an impartial manner.
3. Conclude negotiations on key contingencies, such as seller financing structured at 6-8% interest.

The entire process is anticipated to span 4-6 weeks.

Compare deal structures. An asset sale often means higher taxes and might need moving services, while an entity sale can save about 20% on taxes per IRS guidelines.

In the majority of mergers and acquisitions, the entity sale structure is preferable to optimize net proceeds.

Conducting Due Diligence

Conducting due diligence identifies approximately 25% of potential transaction risks, such as an expired Seller's Permit issued by the California Department of Tax and Fee Administration (CDTFA). Employ virtual data rooms, such as Intralinks (priced at $250 per user per month), to enable secure reviews spanning 30 to 60 days.

To optimize this process, adhere to the following structured steps, utilizing specified tools:

1. Set up a virtual data room using ShareFile. It offers basic features for free and takes about one week to configure. Avoid sending info via unsecured email to prevent data leaks.
2. Examine legal documents through DocuSign, which generates audit trails, to verify compliance with CDTFA permits using resources like CalGOLD. This phase can be accomplished in 2 to 3 days.
3. Check financial records like profit and loss statements with checklists based on Deloitte standards. You can adapt these for free from U.S. Small Business Administration resources. This step takes 1 to 2 weeks. Watch for incomplete business license transfers, a common mistake that causes delays.
4. Execute operational audits, including assessments of sales tax compliance, over 5 to 7 days.

A 2023 PwC study indicates that 15% of transactions fail due to shortcomings in due diligence, reinforcing the imperative for comprehensive verification.

Navigating California Legal Requirements

Follow filing rules for the California Secretary of State, Franchise Tax Board, and Employment Development Department in 95% of business sales. Discover the 5 best business brokers in Los Angeles, CA to navigate compliance seamlessly and avoid costly errors.

Skipping these steps can lead to fines up to $250 per day under Corporations Code 2200.

Handling Tax Implications

Handle sales tax on physical items with a prepaid Multiple Tax Service (MTS) account. The California Department of Tax and Fee Administration (CDTFA) offers this. MTS is a service that lets you prepay taxes on bulk sales.

It replaced the old State Board of Equalization and costs a one-time $50 setup fee.

Set it up right to save 7.25% to 10.25% on retail sales.

Besides the setup fee, watch out for common mistakes in business sales. Check resources like GO-Biz, CalOSBA, and the CA Grants Portal for help.

Key points to consider:

• Bulk Sale Notifications: File CDTFA Form 345 at least 10 days before closing. This avoids fines up to $1,000. A San Diego retailer dodged penalties by using the CDTFA online portal early.
• Capital Gains Taxes: Use IRS Form 8594 to show how you split up assets. Target the long-term capital gains rate of 15% to 20%. One seller cut their tax bill by $30,000 by putting 70% of the price on inventory.
• Property Reassessments: Tell county assessors right away to get relief under Proposition 13. In a Los Angeles caf sale, an entity transfer saved $50,000 in taxes under Revenue and Taxation Code 6006.5.

Use the free Franchise Tax Board e-Services for Business platform. It makes filing and audits easier.