How to Successfully Grow and Sell Your Business in California
To give context to how growing and selling a business could play out in real life, we want you to imagine a small-business story with us for a moment.
One day, a woman named Scarlett notices a hideous stain on her favorite shag rug. She conducts research, collects a series of brushes and cleaning solutions, and miraculously removes the stain herself. Compelled by her solution, she ponders opening a rug and carpet cleaning business called Spot Off.
After getting approved for a loan, renting a storefront and a mobile van, picking out industrial cleaners, and training a small staff, Spot Off is open for business. And soon, Scarlett is making good money cleaning enormous cut pile carpets and Persian rugs of silk and wool.
So, she opens a second location one town over and replicates her process. Ten years go by and Spot Off has earned a sterling reputation within the community. Then one day, Scarlett decides she wants to sell her business and use the funds to go back to school to learn software engineering and completely reinvent her career.
How will Scarlett evaluate and sell her business to another party?
What contracts and agreements will she need?
How will she determine the worth of two locations, ten employees, industrial-grade equipment, and the intangible reputation she’s built for a decade?
Today, we’ll discuss a few of the key legal requirements involved in evaluating and selling a small business.
“There’s over 3 million small businesses in California, and the Central Coast boasts its own rich network of local entrepreneurs. At Figueroa Law, we help people set up and structure their businesses for the future.” - James Scafide
Legal Documents Needed to Sell a Business
Suppose Scarlett meets an entrepreneurial husband and wife team who express interest in purchasing Spot Off, including both locations.
There are a number of possible documents needed to sell something as complex and valuable as a business. Here are six of the most crucial documents necessary for the buying and selling of a business:
A non-disclosure confidentiality agreement may need to be put in place before a potential buyer examines the inner workings of a business to assure the buyer doesn’t run off with confidential strategies, secret formulas, or other proprietary information owned by the business.
Financial statements for the previous operating years of the business are usually presented so a buyer can assess the revenues of the business and determine if the purchase price is justified.
A letter of intent is an overview document that lays out the conditions, terms, and general details of the agreement such as the deposit amount. This will also include the buyer’s due diligence, which states that the buyer will examine all aspects of the business to verify whether or not they wish to purchase it.
A purchase agreement is a binding contract that cements the price and terms between the buyer and the seller.
Method of payment must be written out and agreed upon. This will detail whether the buyer is paying in cash or financed purchasing options.
Transfer of ownership occurs in the final phase of the transaction when all necessary preceding documents have been signed and agreed to. This officially signifies the transfer of the business from the seller to the buyer.
What Else to Consider
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Local and State Laws
Local and state laws need to be taken into account for the sale of a business. If a local law is broken, this will add burdensome fees, delays, and penalties to an otherwise smooth transaction.
Team Up With Local Attorneys
Work with a local law firm that understands the local laws and politics. This will make your transaction bulletproof and agreeable by all parties and local governing entities.
Beyond the strictly legal procedures, stellar local attorneys can link you up with local funding groups, investors, business consultants, and tax professionals. Bringing the right people in will allow you to leverage your business, make the most of what you have built, and sell to a capable buyer who can take the reins and help the business thrive long after you’ve stepped away.
Do you own a business on California’s Central Coast and think you might need a local law firm down the road? Don’t hesitate to reach out to us, we know everything about Central Coast business and we’re here to serve you.
Evaluating Your Business
Your business is a living, breathing thing and you’ve spent incalculable hours building it to where it is today. Putting a dollar amount on its worth might make you slightly uneasy. Luckily, there are business consultants who can accurately determine the total value of your business. To save time, start by considering these factors in evaluating your business:
Gather all financial statements such as income statements, cash flow statements, and balance sheets.
Figure out the asset value of your business. This will include tangible assets such as equipment and inventory, and intangible assets like brand credibility, current contracts or clients, and intellectual property.
Use price multiples to roughly gauge the value of your business. Price multiples call for evaluating your business based on its earning potential. Calculating what a business earns in a year, and what it could earn in coming years, helps the seller put a price tag on the business and helps the buyer determine how long it will take to generate a return on their investment.
