When you are selling a business in California, it can be a somewhat complex but still rewarding process that requires an exit strategy to realize the gains from building and operating a successful business. The number of moving parts when selling a business makes documentation of the terms of a sale critical, and there will generally be four stages to follow.
You are going to want to make sure that you have legal counsel when you are negotiating the sale of your business. A California business attorney with Structure Law Group, LLP, can walk you through the entire process.
Preparing to Sell the Business
What follows are some of the questions you will need to ask yourself before you prepare to sell your business.
Are You Selling the Company’s Assets or the Entire Company?
Are you going to sell the entire business entity or just the business assets by themselves? This is a crucial question because it will dictate the type of document you will need as well as change what representations and potential disclosures you will have to make. Most buyers prefer asset sales because it allows them to pick and choose the assets they want without assuming unknown liabilities, but sellers generally prefer entity sales because they are much simpler processes that allow owners to unload entire companies along with all of the associated liabilities. Because the type of sale may affect future liability for the buyer, make sure to get advice from a California business law attorney before buying or selling a business.
What is Your Valuation?
You will need to have a solid understanding of what your business is worth before you can sell it. There are several ways to determine what a business valuation is, but without consulting an accounting expert the valuation will likely be an estimate. Determining the value of a company, depending on the size, is a complex process that requires an analysis of cash on hand, assets, intellectual property, accounts receivable, current contracts, liabilities, and debts. Although some smaller business can simply just look at a few of the above to determine value, you will still need to get an accountant’s opinion.
Do You Have All Company Resolutions, Documents, and Agreements Available?
Preparing to sell your business will make it important to organize every aspect of the business, including making sure that your relationship with vendors, customers, distributors, and other parties is well-documented. Doing so means reviewing internal company documents, resolutions, and agreements to ensure they all provide a clear picture of how you have been operating the business. All of these concerns are especially important when you try to make an entity sale. You can obtain annual information statements you file with the California Secretary of State for a small fee by filing a Business Entities Records Order Form at the Secretary of State Information Requests.
Do You Have a Selling Memorandum?
One standard kind of advertisement for selling a business is the selling memorandum, which markets a business by presenting accurate information about company operations, including employees, financial health, products and services, management, and the purchase price. You should prepare a selling memorandum so potential buyers can review it, and the document typically contains sensitive information you will not want to distribute to others. Make sure to limit views to only the serious buyers who agree to sign a confidentiality agreement.
Negotiating the Terms of Purchase
After preparing your business for sale, you will list it with a broker or use another form of advertisement to let potential buyers know the company is for sale. What follows are things you will have to negotiate with potential buyers.
Always a major sticking point, prepare for all potential buyers to want to negotiate a lower price from the price you advertise. An asking price needs to be flexible enough to accommodate a healthy negotiation process, and getting an appraisal can give credibility and context to your original asking price.
Terms of Financing and Interest
A purchase price may be paid in one lump-sum cash payment, or in a more likely scenario, it may be stretched out over time. Some small business owners will need to finance a portion of the purchase price, and financing a purchase price can require a promissory note, as well as some form of a security agreement with collateral pledged against the future payment of the note. California will regulate how much interest you can charge a buyer, so get a California Transactional Attorney to help you review the California usury laws provided by the California Attorney General.
Representations and Warranties
Buyers and sellers alike both need to make certain representations and warranties to the other parties. A representation will be a presentation of facts, while a warranty is a promise that all facts you are presenting are true. A seller customarily represents and warrants that they are the legal owner of a business and have the authority to sell it, while the buyer represents and warrants that they are authorized to enter into the transaction and that any agreement will be enforceable.
When you maintain a lease on an office space, the buyer will probably have to take over the lease. You will need arrange a sublease agreement or negotiate a new lease with the landlord.
Documenting Your Transaction
To ensure a smooth transition for a new buyer, you will want to ensure you disclose everything upfront. Items you should probably prepare and make available to any serious buyer will include contracts with suppliers, vendors, customers, clients, distributors, or any other ongoing business relationship that is a major part of your business; company books such as company resolutions, corporate records of organization, certificates of good standing, meeting minutes, ownership certificates, and records of company structure; financial records and tax returns including balances sheets and profit and loss statements; accounts receivable reports detailing future payments the company expects to receive from transactions closing prior to the sale of the business; and a certified public accountant (CPA) or business appraiser prepare a valuation report justifying your asking price for the business and giving context to the buyer for understanding how the price was determined.
A purchase agreement will be the primary legal document used for the acquisition of a business and outlines all of the details of a sale while mirroring the letter of intent. A purchase agreement will likely include a clear statement of who is buying the business and who is selling it, the closing date, whether the sale is a sale of business assets or an entity sale, future covenants against competition and confidentiality, the purchase price and method of payment, representations and warranties of the seller, actions that the buyer and seller must take prior to closing, representations and warranties of the buyer, default provisions for sales involving seller financing, exhibits of other relevant documents such as a bill of sale or promissory note, and some boilerplate legal provisions.
After you close the sale of your business, you will still need to close all of your business bank accounts as soon as you process all accounts receivables, and there will be no more money processing through the business account. Your bank will close the account and issue a final check or cash payment for any remaining funds from the account.
You also need to cancel general liability insurance after discussing with your insurance broker whether you need to have a form of tail insurance to cover liabilities that may arise after the transfer of the business. Finally, California will require you to file certain forms with the Secretary of State and Employment Development Department to terminate a business entity, and the forms are available at the California Secretary of State and the Employment Development Department.
Call Us Today to Schedule a Consultation With a California Business Attorney
Are you currently in the process of or debating selling your business? You will want to have Structure Law Group, LLP on your side for help making sure that your process can operate as smoothly as possible.
Our firm regularly assists clients with business sales of all sizes, so we can make sure to safeguard all of your assets and protect all of your interests. You can call (408) 441-7500 in Silicon Valley or (310) 818-7500 in Los Angeles, or contact us online to set up an initial consultation so we can review your case and discuss what your next steps should be.