Determining the Business’s Value
Verifying and determining the value of your business is a crucial first step when you are preparing to sell a business. Various factors are considered to determine the value of your California business, including:
- The business’s goodwill
- The value of the business’s fixed assets
- The value of the business’s accounts receivable and other intangible assets
- The business’s outstanding debts and liabilities
- The business’s financial statements
- The market conditions
- The business’s customer base
- The business’s growth potential
A professional business appraiser or a certified public accountant can assist you with obtaining an accurate assessment of your business’s value. They can analyze your financial records, assess market trends and assess industry-specific factors to provide you with a precise, estimated value range. Recognizing the worth of your business allows you to set a realistic asking price and effectively negotiate during the sale.
An Asset Sale vs. a Stock Sale
There are two main types of transactions when it comes to buying or selling a business: asset sales and stock sales. Understanding the differences between these two methods is vital for both buyers and sellers.
In an asset sale, the seller retains ownership of the company, while the buyer purchases specific assets of the company. These specific assets could include equipment, fixtures, leaseholds, licenses, goodwill, trade secrets, trade names, telephone numbers and inventory. The seller typically retains long-term debt obligations. It should also be noted that asset sales may come with challenges related to transferring certain assets, such as intellectual property, contracts, leases and permits. Challenges surrounding the transfer of these types of property include issues of assignability, legal ownership and third-party consent.
However, in a stock sale, the buyer directly purchases the ownership interest of the sellers and acquires ownership of the entire legal entity. A stock sale involves the transfer of the ownership interests that comprise the corporation. Generally, sellers prefer stock sales because the entire business is sold including its current and future liabilities. Buyers may object to stock sales for the same reason, as they do not want to accept liability.
California Bulk Sales Law
Whichever sale method you choose, it is imperative to know whether California’s Bulk Sales Law will apply to the business transaction. The Bulk Sales Law requires creditors to receive advance notice of a bulk sale. The purpose of the Bulk Sales Law is to prevent sellers from selling the business or its assets to good-faith buyers, and then not using the proceeds to first pay any creditors, or to prevent sellers from selling under market value to avoid paying creditors the full amount owed. The law also protects buyers from being liable to creditors for the seller’s debts.
In California, a bulk sale occurs when there is:
(1) a sale of more than half of the seller’s inventory or equipment;
(2) the sale is outside the ordinary course of business for the seller;
(3) the Seller’s principal business is the sale of inventory from stock; and
(4) the seller’s business is located in California.
If this applies to your sale, it’s important to speak to a California attorney.
Due Diligence
When buying a business in California, it is critical that prospective buyers do their due diligence in order to ensure they have a thorough overview and understanding of the business’s operations, finances and potential liability. By being well-prepared for such due diligence, a seller can streamline the sales process and increase the likelihood of a lucrative sale.
Financial due diligence includes examining the business’s financial statements, cash flow, assets, liabilities and tax records. Legal due diligence mandates the sharing of such documents as:
- corporate documents;
- intellectual property certificates and registrations;
- contracts;
- zoning information, permits and licenses; and
- disclosure of any pending or potential disputes or investigations.
Letters of Intent
To buy or sell a business, there are certain procedures that buyers and sellers often follow to ensure a successful transaction. Although not a legal requirement in California, most parties start the process with a Letter of Intent (“LOI”, also known as a term sheet). An LOI outlines the key terms of the prospective business deal and is used at a later time to help formalize and create a purchase agreement.
Purchase Agreement Provisions
Business purchase agreements commonly contain provisions such as:
- Assets/stocks to be sold/bought;
- Purchase price and method of payment;
- Closing terms or conditions that must be met;
- Representations and warranties;
- Limits on liabilities assumed by the buyer; and
- Restrictive covenants (such as non-competition, non-solicitation, confidentiality/non-disclosure).
By including these types of provisions in the purchase agreements, both the buyer and seller can ensure that the material terms of the business transaction are mutually agreed upon and enforceable if one party breaches the agreement.
Conclusion
Buying or selling a business in California is a complex process that requires precise planning, in-depth analysis and expert guidance. Having an experienced business attorney by your side to help you through the process can ensure an efficient and beneficial transaction. Contact a member of the Romano Law team today.
