Key Highlights of Selling Your Business
- Find out why and when you should think about selling your business.
- Guide the best way to sell a business.
- Legal and financial considerations in selling your business.
Key Considerations for Selling Your Business Successfully
The decision to sell your business is one of the biggest decisions an owner will make; it requires thoughtful consideration and careful planning based on the financial capacity and trends of the company and your reasons for selling your business. The guide below goes through the best way to sell a business by reviewing points a business owner should consider while preparing their business for sale so that the sales process goes smoothly, and you are satisfied with the outcome.
The Importance of Timing in the Sale Process
Many sellers ask us if now is the “right time” to sell my business given the economy.
The truth is that business sales in the middle market have continued to thrive. The reason for this largely is that there is a complimentary occurrence of: 1) the younger/middle-aged generation seeking to strike out on their own as opposed to burning out in the rat race and never quite achieving their idea of success; and 2) the present retiring generation seeking to exit their company while their company is successful and before they are forced to sale or close due to uncontrollable circumstances such as their own health or a family member’s health. Regardless of the economic cycles, there is no shortage of entrepreneurs that are driven to grow their wealth through business ownership and acquisitions.
Because of the above, we recommend sellers to focus on their own personal circumstances by analyzing what are your reasons to sell your business and whether that aligns from a timing perspective with the present performance of your business. A careful analysis of the value of your business and whether the present value gets you what you want/need for exiting your business will provide you with the answer of when the “right time” to sell is.
Knowing Your “Why”
Before talking to a business broker to inquire about selling your business it is important to identify the “why.” Identifying the “why” will help the business broker have a productive conversation with you based on the timing the “why” lends itself to. You should be asking yourself what are the reasons to sell your business?
If the “why” is long term preparation or an interest in exploring other opportunities, then the conversation will focus on the present financial condition and trends of your business, growth opportunities, keeping an eye on net income, and ensuring you are having conversations with financial professionals to identify tax strategies for deferring taxes on the income from the sale of your business.
If the “why” is based upon a necessity such as health problems or immediate family needs, then this will help the business broker identify your options and potential outcomes for the sale of your business.
Further, every buyer will ask you why you are selling. Having clear insight into your “why” will facilitate discussions of terms and transition timing with each buyer.
The Beginner’s Guide to Selling Your Business
Selling your business is one of the biggest milestones for any business owner. The right information, resources, and preparation aids in a smoother transaction with lower stress. This guide will outline the best way to sell a business with a California business broker.
Below is a brief outline of the best way to sell a business with a California business broker:
- Prepare: Collect all necessary financial documents and get a valuation from a business broker.
- List Your Business with a California Business Broker
- Negotiate the Terms of the Sale of Your Business: With your business broker, interview potential buyers. Work with your business broker to come to an agreement on price, terms, and conditions that work for both sides.
- Due Diligence: Exchange all information necessary to understand the financial, legal, and operational aspects of your business. Request information from the buyer to understand their ability to fund the transaction and successfully operate the business.
- Closing: Complete the sale by signing all necessary documents and receive funding.
- Transition: Set the buyer up for success post-closing
Step 1: Prepare – Gather Essential Documents and Find out the Value of Your Business
Gather Essential Documents and Financial Records
The first step for the best way to sell a business in California is to gather all your financials and make sure they are current. These records enable you to obtain a valuation from a California business broker and will be the documents requested by the buyer during the transaction process.
Buyers will want to see that your records are transparent and consistent with the performance reflected in the information conveyed.
The documents that will be required will be:
- three years of tax returns
- three years of profit and loss statements
- year-to-date profit and loss statement
- end of year and year-to-date balance sheets.
During the transaction, buyers will also request other reports that are specific to your business. Ideally, you should have your records up to date in an accounting system such as QuickBooks.
Up-to-date records are necessary for any business sale. If you need a resource to bring your records up to date, Pacific Business Sales can connect you with the appropriate financial professional to assist you in this endeavor.
Get a Business Valuation from a Business Broker
A business broker can provide you with a business valuation so that you can assess whether the present value is at a point at which you feel comfortable selling your business.
Pacific Business Sales will provide a free market valuation to sellers who are interested in listing their business within the next five years.
Share this Valuation with an Exit Planning Strategy Professional to Explore Tax Deferral Opportunities
Business value is only half the information that a seller needs before listing. The other half of the information is what is the likely cash at closing after taxes and liabilities.
The valuation from the business broker will explain what is included and is not included in the value of your business. Provide this valuation to your CPA and financial planner to construct a tax strategy to defer taxes, if you can, given your cash needs/goals.
It is important to talk about these strategies as early as possible as some tax deferral strategies are not available once an offer is signed with a buyer.
Pacific Business Sales, Orange County business brokers can connect you with tax deferral strategists if you need assistance with a deferral plan prior to listing.
Step 2: List Your Business with a Licensed California Business Broker
The next step in the best way to sell a business is to list your business with a California Business Broker. Your selected business broker will provide you with a listing agreement with the terms of the listing. The listing agreement will include terms such as: exclusivity, duration, broker’s fees, and warranties. Be sure to also inform your California business broker of any assets you are not including in the sale such as personal vehicles and personal cell phone devices so that this is noted in the representation agreement.
Pacific Business Sales is a member of the California Association of Business Brokers (CABB) and utilizes the CABB representation agreement.
Step 3: Negotiate the Terms of the Sale of Your Business
The negotiation of terms is the make-or-break moment for your transaction. It is not always the highest top line offer that results in the highest cash at close. California business brokers whom you contact should have a healthy understanding of the variety of deal terms available to a seller for negotiation to increase cash at close. California business brokers also understand current trends with items such as buyer listing activity for your listing, seller financing, and deal terms.
Be ready to explain why you are asking for a certain price. This should be based on your business’s financial performance, market value, and its potential for growth. Also, be open to discussing some points, like payment plans or support during the transition, to achieve a fair deal.
It can help to have professionals like California business brokers or a lawyer by your side during negotiations. They have the knowledge to guide you through the tricky legal and financial parts, helping you make informed decisions that keep your interests safe.
Step 4: Closing the Deal
The last step in the sales process is closing the deal. This step encompasses due diligence, finalizing buyer financing, escrow, and signing and handing off all necessary legal documents.
Once the terms are negotiated and agreed upon, due diligence will begin. During due diligence, buyer and seller exchange requested documents to verify that the transaction satisfies each of their expectations. California business brokers will facilitate the exchange of this information.
Most middle market transactions require some type of financing. The lender will require many of the same documents the buyer requests during due diligence such as the financial documents discussed in step one. To close the transaction in a timely manner, it is crucial to keep your financial statements up to date each month as the lender will typically ask for the most recent financial statements each month of the transaction.
Last escrow will begin their process of checking liens on the business, getting authorization from various governmental entities such as the tax board.
Congratulations! You successfully sold your business!
Step 5: Transitioning the Business to New Owners
To avoid any post-closing issues, a smooth, well-thought-out transition is critical. A smooth transition period ensures that your employees, clients, and vendors allow for the business to continue to perform consistently so that issues that could have been prevented do not occur.
It is important that this period be for transition/training the new buyer to step into the seller’s shoes and not just a seller working as an employee for the buyer so that when the training wheels come off and the seller is no longer at the business, the buyer is ready to operate without the seller’s aid.
During the sales process, make a list of what key points you feel are critical to cover with the buyer as part of the transition. Also, make a list of the important people you feel you should do one on one introductions with so that these people trust the new ownership. These lists will also help formulate a timeline so that you can assess what a reasonable transition period is to include as part of your purchase agreement. You should discuss and share these lists with California business brokers so that they become more familiar with the critical persons of your business and your transition process expectations.
Case Study: Successful Business Sales in California by Pacific Business Sales Orange County Business Brokers
California provides a solid foundation for businesses in a variety of industries to thrive. The California economy is strong, especially in Orange County. This is good news for both buyers and sellers in Orange County business sales as it is an opportunity for both to succeed in the business sales process.
Below is a list of transactions by Pacific Business Sales, Orange County business brokers, throughout California and the key success factors for the sale of that business:
| Business Type | Sale Price | Key Success Factors |
| Plumbing Company | $4 Million | Strong team, great location, ambitious buyer. |
| Manufacturing Company | $2 Million | Well-maintained equipment, solid reputation, loyal customers |
| Painting Subcontractor | $3.5 Million | Solid infrastructure, Buyer had excellent past leadership experience, motivated sales team. |
| Construction Materials Distributor and Installer | $3 Million | Exclusive licensing with distributors, solid reputation, well thought out sales process, great location in affluent community |
Frequently Asked Questions
How Do I Determine the Right Time to Sell My Business?
The right time to sell depends on many things. These include your financial goals, the financial trends of the business, and the owner’s personal situation (the reasons to sell your business).
What Are the Key Factors That Attract Buyers to a Business?
The first thing a buyer looks for is steady performance. If a buyer is seeing declining performance this raises red flags, and they may not even inquire for further information. The second thing a buyer looks for is infrastructure. In other words, is the buyer going to feel like a one-person show running the whole business or is there a system of support built into the business that they can see themselves easily transitioning into.
How Long Does the Selling Process Typically Take?
The timeline for the sales process varies from business to business; on average, we tell sellers that they should expect to commit 6-9 months for the sales process. Of course, this can vary based on factors such as holiday seasons, tax season slowing down buyer/seller’s access to their accountants for various reports and analysis requests, and how a transaction is funded (i.e., SBA funded v. Investor funded).
More Frequently Asked Questions about Selling Your Business
Trust Pacific Business Sales to Guide You Through a Successful Business Sale
Selling your business is a big step.
Pacific Business Sales, a fully licensed California Business Broker located in Orange County California, can walk you through the best way to sell a business and answer any questions you may have about the sales process so that you feel secure in your business sale, whether you are looking to sell now or in five years. Adequate preparation will ensure that your business sales go smoothly.
