19 Feb Ways Selling a Business in California is Different and Why it Matters to Business Brokers
As business brokers, we all know that selling a business is tough. It takes time, energy, and if the owner of the business is not motivated and organized, it can be even harder. Finding the right qualified buyer at the right time takes a lot of work.
Selling a business is different in each state in the US as well, and that is why we must be familiar with local regulations, legal differences between states, and even the local economy. In the state of California, where Rogerson Business Services is located, selling a business can be even more complex.
That is in large part because California leads the nation in many areas of regulation and environmental and consumer protection. Here are some ways that progressive mindset affects selling a business, and the job of a business broker in California.
Licensing, Certifications, and a Qualified Buyer
California does a lot to protect consumers, and what that means is that contractors and other types of businesses have strict licensing and certification requirements. Every contractor must be certified by the California Contractors State Licensing Board, and they not only need the right kind of insurance, but they also must pass industry tests.
While it is easier for someone who already has a license in one area to get one in another, there are still fees, tests, and often it involves both time and uncertainty.
Because the Medical Board of California also differs from other states, just because a doctor carries a qualification from another state, it does not mean they will meet more stringent California requirements.
For a business in general, there are often local and county licenses or permits they need as well. This means that for a buyer to qualify to buy the business, they should ideally know all the licenses and permits they need so they have a plan to obtain them at the close of escrow. This ‘barrier to entry’ can lower the number of buyers that qualify to buy a healthcare business, business services company, and other contracting businesses.
State and Local Taxes
You can’t talk about business in California without talking about state and local taxes, and how that impacts various businesses. While Federally, pass through income is not taxed, the way the California system is set up, buyers must carefully consider how they set up their company organization.
The reason is that LLC and S-Corp income can be double taxed, incurring both corporate taxes and individual income taxes. A good accountant, structuring the business properly, and utilizing deductions properly is vital.
This also affects how a business sale is structured. The buyer wants to have the minimum liability and be able to take depreciation on all assets they purchase. However, in this case the seller needs to be able to avoid taxation on all the assets sold as well. This is where a business broker comes in, who can help both parties structure the sale for the maximum tax benefit for each party.
Taxes are a big concern, and many have to do with the business location and what local taxes will affect operational costs. Buyers want to understand this as completely as possible, and it is up to sellers to be forthright from the start. Otherwise a deal can fall apart quickly if the buyer gets a “tax surprise” when the deal is further along.
Legal Requirements for Escrow
While escrow is often requested by the buyer or seller in certain states as a means of protection in certain types of business transaction, it the state of California, escrow is mandatory for the sale of a business. This adds one extra step and expense at the time of closing.
Overall this is a good thing, and buyers and sellers should both understand the protections it offers and why those protections are important. As this does make the sale of a business more complex, it can put off buyers if they don’t fully understand it.
Buyers want things to be simple, and the process to move as quickly as possible so they can recoup their investment quickly. Sellers often want out of the business quickly as well, so they can move on to whatever is next for them. It is vital that both parties understand the process, the time it will take, and how that affects their buying decisions.
Increased Labor Costs
While California does not have the nation’s highest minimum wage, it is higher than neighboring states. This often affects the profitability of companies who offer services like janitorial, landscaping, restaurants and others where minimum wage workers are often hired. While this is a great protection for workers, it is something that new business buyers, especially those relocating to California, need to be aware of.
This can be difficult for some business owners to swallow, and they need to be reassured by sellers and brokers that the strong economy will offset this and still allow them to make a reasonable profit.
A Strong but Changing Economy
Unemployment is low in California, and the economy is strong in many sectors. From high-tech manufacturing in Silicon Valley to agriculture in the Central Valley, many industries are thriving. Those people who work for those businesses also need services, and those businesses are strong as well.
That means even though buying and selling a business in California is complex, it’s a great time for sellers to cash in on their investment, and for buyers to purchase the business they are looking for in one of the best places in the world to live.
Are there things unique to your state when someone is buying and selling a business?
I’d love to hear your thoughts, and how we as business brokers can help each other be successful.
Andrew Rogerson is a Certified Mergers and Acquisition Professional (CM&AP) and Mergers & Acquisition Master Intermediary (M&AMI) from the M&A Source; their two highest designations. He’s also a Certified Business Intermediary (CBI) with the International Business Brokers Association and a Certified Business Broker (CBB) with the California Association of Business Brokers. This means he helps entrepreneurs with a business value, sell a business or sell a medical practice located in California with a value over $500,000 and buy a business or buy a franchise. For more information visit Rogerson Business Services.