How to Sell a Business in California​ – Website Closers

When you sell a business in California, expect to encounter unique requirements, challenges, and other considerations that won’t be found in other locations. Its most advanced regulations largely impacted the state’s progressive mindset.

California is known for its strong environmental activism, so part of its regulations are centric on sustainability. It also places great importance on employee rights and consumer protection. Hence, forward-thinking policies are expected to impact a variety of aspects, from due diligence requirements to deal structuring.

Key Takeaways

• The preparations necessary for the sale of a California business are generally the same as the typical steps required to sell a business, including valuation, marketing, buyer screening, negotiation, and legal compliance. However, there will be additional considerations for state-specific and county-specific tax and regulatory requirements.
• When selling an entity in California, the owner must handle ownership transfer and sales tax remittance to the CDTFA. The buyers need to see that every aspect of the operations is legally compliant. Buyers and sellers can negotiate tax terms in writing. CalGOLD helps identify necessary licenses, permits, and compliance requirements before and after the sale.
• Business valuation in California depends on location, industry trends, key personnel, and financial performance. A company operating in a strategic location will boost its value, while high-growth sectors like tech attract higher multiples. Experienced leadership adds stability, and strong financials with consistent profitability increase a business’s worth, especially in competitive industries.

Preparing Your California Business for Sale

Any advice on how to sell a business in California will tell you that the following processes will always be part of the pre-sale planning:

• Preparation of financial documentation. A buyer needs to look into the financial health of a company. Clean records will help justify the asking price. It is reflected in the following financial documents:
  •  balance sheets
  • income statements
  • cash flow statements
• Business valuation. Get professionals who can look at your business from an unbiased perspective. Work with business brokers or appraisers who are experts at how to sell your business in California and can assign values to different areas of your business (e.g., tangible and intangible assets) and factors that influence growth figures. They can also suggest ways to further maximize the California business’s value.
• Due diligence readiness. This process is where you get into the specifics of abiding by California laws. In particular, a seller needs to prepare local and county permits and licenses relevant to the operations prior to the sale of the company.
• The deal structure: asset or stock sale. The seller can choose between an asset or a stock sale. Whichever a business owner chooses, they need to determine whether the California bulk sales law (a code that protects creditors and purchasers) will apply to the transaction.

Legal Requirements for Selling a Business in California

The California Office of the Small Business Advocate highlights the need to perform a transfer of ownership when selling a company. When this occurs, the seller needs to be prepared for the implications of the transaction.

In California, when selling a lower-middle-market business, the seller’s responsibility is collecting and remitting sales tax on the transaction. Sales taxes are added to the taxable portion of the sale price and must be reported to the California Department of Tax and Fee Administration (CDTFA) by the seller in accordance with California tax laws.

However, buyers and sellers can negotiate terms in the pre-sale agreement, such as the seller paying all sales taxes before the official transfer date. Any such agreements should be documented in writing, signed by the buy side and sell side, and submitted to the state board of equalization within 90 days of the sale.

Required licenses and permits, as well as the state-specific regulations and compliance, can be identified using CalGOLD. This online platform assists with updating records, renewing permits, and ensuring compliance before and after the sale.

Valuation Methods for California Businesses

For company owners planning for either an exit or to be acquired, they will discover that one of the most important parts of “how to sell a business California” is the valuation process. Working with professional business appraisers will help them arrive at fair asking prices.

The valuation expert you’ll hire will generally use any of the common valuation approaches below:

• Market Approach. This method determines fair market value by comparing your business to similar recently sold California businesses. Especially useful for small businesses in competitive markets, it works like real estate comparisons, using local sales data to assess business worth.
• Income Approach. Brokers arrive at the value of a business when they use a revenue multiplier to determine its earning potential. It’s ideal for service businesses with steady cash flow. Tech companies, which are part of high-growth sectors, will get higher multiples. On the other hand, companies in lower-growth industries like retail will be assigned lower multipliers.
• Asset-Based Approach. The business worth is calculated by subtracting liabilities from total assets. Are you an asset-heavy business, or will you be going through liquidation? This will be the method used to calculate the value.

Industry-specific valuation factors in California:

• Prime California areas—such as major metropolitan hubs or high-demand regions—will greatly increase business value. Location matters.
• Industry trends influence the valuations of a business in California. Those in expanding sectors (e.g., tech, renewable energy) attract higher multiples.
• Key persons working for the company add value. This is particularly true when they embolden industries with their expertise and leadership, leading the business to thrive and gain investor confidence.
• Financial performance remains a crucial factor, with consistent growth and profitability driving higher valuations, especially in competitive or high-growth industries.

Finding Potential Buyers

Finding a qualified buyer for a California business is challenging due to strict regulations. Many industries require specific licenses and permits, adding time and cost to the process. If potential buyers lack the necessary credentials, delays or deal failures can occur, making it harder to secure a smooth and timely sale.

If you want to find the best buyer within the timeframe you’ve set before your exit, consider the following marketing strategies for selling your business in California:

• Start by discreetly assessing buyer interest within your network, industry contacts, competitors, or financial brokers to find serious prospects. Ensure that potential buyers sign non-disclosure agreements before sharing detailed business valuations and operational information.
• If your business requires special licensing, permits, or certifications, reach out to a business broker well before you plan to sell. They can help identify the qualifications a buyer must meet, ensuring a smoother sale process when the time comes.

Negotiating the Sale

Potential buyers and their corresponding brokers will want to negotiate various terms that will ultimately be included in the purchase agreement. Sellers, on the other hand, must be prepared to negotiate the following:

• Transaction structure. Most sellers prefer an asset sale, but at the end of the day, structuring the deal is a decision finalized by the two sides of the deal.
• Final sale price. Buyers will likely attempt to negotiate a lower price than your listed asking price. Setting a price with some flexibility allows for productive negotiations. Obtaining a professional appraisal adds credibility and provides a strong basis for justifying your valuation.
• Financing options for buyers. When selling a California business, the purchase price can be paid upfront or through structured payments over time. Many buyers secure funding via bank loans or alternative lenders, while some sellers offer financing. If you provide seller financing, be mindful of California’s usury laws, which regulate allowable interest rates.

Once you’ve negotiated the key terms of your business sale, you and the buyer will sign a letter of intent (LOI), a document summarizing those terms. While not legally binding, the LOI helps track agreed-upon points and streamlines the drafting of the final purchase agreement.

California Business Closing

Closing a business sale in California requires following California business closing procedures. Included is the opening of escrow, a third-party service mandated for certain transactions.

What does an escrow process do?

• It gives way to a smooth transfer of ownership by securely holding funds documents, and assets until all conditions are met. The service collects the buyer’s full payment, holds important documents, and oversees the transition of items like leases, passwords, and licenses.
• It prevents delays, financial losses, and disputes through legal protection and compliance with California state regulations. Funds are only released after fulfillment of conditions agreed upon.

Regulatory approvals are another part of closing the transaction. What the business needs will depend on its structure, industry, size of the transaction, and whether specific licenses, permits, or compliance obligations are involved.

Transfers and transitions also commence after the selling process. Tie up loose ends on every sales transaction, unfulfilled order, or service request, and inform suppliers and customers about the changes that are about to occur.

How to Sell a Small Business in California

Entrepreneurs who started their companies in The Golden State and have made them profitable will consider cashing out on their efforts and wonder, “How do I sell my business in California?” Despite its strict regulations, the state is known for its robust economy that provides multiple industries to grow—and that includes small businesses in various niches.

A small business will go through the process we’ve discussed above. However, when it comes to valuation approaches, brokers commonly apply the Seller’s discretionary earnings (SDE) method in calculating its value.

Business buyers in California commonly acquire a company using any of the three ways to purchase a company:

• Seller financing
• Cash
• SBA financing

Even small businesses benefit from working with brokers or appraisers to determine an accurate value and identify ways to further increase the sale price.

FAQ

What is the obligation of a business owner after selling a company in California?

After selling a business in California, you may owe capital gains tax on the profit. Capital gains are taxed as regular income, with rates ranging from 1% to 13.3%. Ask a tax advisor to determine your exact tax obligations.

Should I offer seller financing?

It is an excellent offer, especially if no other funding options are available to the buyer. Seller financing is a common way of acquiring a business. It expedites the transaction and defers capital gains tax as an added advantage.

A 2023 Private Capital Markets Report by Pepperdine Graziado Business School performed a study on 138 investment bankers and discovered that seller financing was involved in 48% of business sales completed that year.

I want to sell a business California quickly. How do I go about it?

There are two ways to answer this question.

Firstly, if you’re planning far ahead, the best way to sell your business quickly is to clean your books and optimize every aspect of the operations. When potential buyers clearly see the benefits of the business, they will be eager to buy it instead of dragging out negotiations.

On the other hand, if you decide abruptly, the best way is to approach the professionals and be clear about your goals for selling immediately. Making a quick exit, however, might result in a lower valuation.

When selling business in California, how long will it take?

On average, selling a company takes between five to eight months. However, the timeline varies. There are bound to be businesses that sell fast, while others will take longer. Company owners who can deliver clear due diligence documentation to prospects and ask for a fair price can help shorten the process.

Conclusion

You can expect that the processes of selling a business in California are similar to those in other states, especially the valuation methods and marketing strategies. However, they will differ in legal compliance and tax obligations. Business owners should set realistic timeline expectations when offering a California company for sale, as the process typically takes five to eight months but can vary.

Proper preparation, accurate pricing, and awareness of state-specific regulations—such as sales tax remittance to the CDTFA—are just some ways to make the transaction smooth. Additionally, location, industry trends, and financial performance are factors that will influence the company’s value.