Selling a business is one of the most significant financial decisions you will ever make. For California business owners, the process carries unique complexities — from the state’s rigorous escrow requirements to its aggressive tax treatment of capital gains. After brokering hundreds of business transactions across Southern California, I have seen sellers leave enormous value on the table simply because they did not understand the process before they started it.
This guide walks you through every stage of selling a business in California, from deciding whether the timing is right all the way through closing escrow. Whether you are selling a restaurant, a franchise, a retail operation, or a service business, the fundamentals apply. My goal is to give you the same advice I give my clients when they sit across the table from me and ask, “Where do I start?”
When Is the Right Time to Sell Your Business?
Timing is one of the most underestimated factors in a successful business sale. Too many owners wait until they are burned out, facing a lease expiration, or dealing with declining revenue before they start thinking about an exit. By that point, the window for maximizing value has often narrowed considerably.
Market Conditions Matter
The best time to sell is when your business is performing well and the broader market favors sellers. Buyer demand, interest rates, and SBA lending availability all affect how many qualified buyers are actively looking and how much they are willing to pay. When SBA 7(a) loan rates are favorable, more buyers can qualify for financing, which increases competition for well-priced businesses.
Keep an eye on your industry’s trajectory as well. Selling a restaurant when the local dining scene is booming is a fundamentally different experience than selling during a downturn. Industry data from the National Restaurant Association and the International Business Brokers Association (IBBA) can help you gauge market conditions.
Personal Readiness
Beyond market conditions, honest self-assessment matters. Are you still energized by the business, or has it become a burden? There are many reasons owners decide to sell, from retirement planning to burnout to pursuing a new venture. The important thing is to start the process while you still have the energy and motivation to present the business at its best.
If you are selling to fund your retirement, the timeline becomes even more critical. You need to work backward from your target retirement date, leaving enough runway for preparation, marketing, due diligence, and escrow.
The Business Performance Cycle
Ideally, you want to sell when your trailing twelve months of revenue and earnings show a positive trend. Buyers and their lenders look at two to three years of tax returns, but the most recent performance carries the most weight. If you just had your best year, the market will reward you with a higher multiple. If you are on a downward trend, buyers will discount accordingly — or walk away entirely.
The single best piece of advice I give sellers: start planning your exit 12 to 24 months before you actually want to close. That gives you time to clean up financials, address any operational weaknesses, and negotiate favorable lease terms — all of which directly increase your sale price.
How Much Is My Business Worth?
Valuation is where most sellers either get it right or go off the rails. Overpricing leads to stale listings that languish on the market. Underpricing means you leave money on the table. An accurate valuation, grounded in real market data, is the foundation of a successful sale.
Seller’s Discretionary Earnings (SDE) Method
For most small businesses in California with annual revenue under $5 million, the primary valuation method is based on Seller’s Discretionary Earnings (SDE). SDE represents the total financial benefit to one working owner, calculated by adding the owner’s salary, perks, and non-recurring expenses back to the pre-tax net income.
The formula is straightforward:
SDE = Pre-Tax Net Income + Owner’s Salary + Owner’s Benefits + Interest + Depreciation + Non-Recurring Expenses
Once you know your SDE, you apply an industry-specific multiple. Most small businesses sell for 1.5x to 3.5x SDE. The exact multiple depends on several factors, which we cover in detail in our guide on what factors determine how much you can sell your business for.
You can estimate your business’s value right now using our free SDE Valuation Calculator. It walks you through the recasting process and applies industry-appropriate multiples to give you a defensible value range.
EBITDA for Larger Businesses
For businesses generating over $1 million in earnings, buyers and lenders typically shift to EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) multiples. EBITDA multiples tend to be higher than SDE multiples — typically 3x to 5x or more — because these businesses often have management in place and are less dependent on a single owner.
The key difference is that EBITDA does not add back the owner’s salary, reflecting the assumption that a professional manager will need to be compensated at market rates. If your business falls in this transition zone, understanding fair market value and how it differs from other valuation methods is essential.
Comparable Sales
No valuation exists in a vacuum. Your business is worth what a qualified buyer will actually pay, and that is influenced by what similar businesses have recently sold for in your market. A broker with access to transaction databases like BizComps, DealStats (formerly Pratt’s Stats), and the IBBA’s Market Pulse can provide comparable sale data that validates or adjusts your valuation.
In California’s major markets — Los Angeles, San Diego, the Bay Area, Sacramento — there is enough transaction volume to establish meaningful benchmarks for most business categories. Smaller markets or niche industries may require a broader geographic comparison.
Asset-Based Valuation
Some businesses, particularly those with significant equipment, real property, or inventory, warrant an asset-based approach. This is common in manufacturing, auto repair, and certain restaurant categories (especially those with extensive liquor licenses and custom buildouts).
Even when the primary valuation method is earnings-based, the underlying asset value establishes a floor price. No rational seller should accept less than what the tangible assets would fetch in a liquidation scenario, and buyers know this.
How to Prepare Your Business for Sale
Preparation is where sellers create the most value. The work you do in the three to twelve months before listing directly affects your sale price, timeline, and likelihood of closing. I have seen thorough preparation add 20% or more to a final sale price compared to similar businesses that went to market unprepared.
Clean Up Your Financials
Buyers and their lenders will scrutinize your financial records. Ensure that your tax returns, profit and loss statements, and balance sheets are accurate, up to date, and tell a consistent story. This is where financial performance becomes a critical factor in selling your business.
Common financial cleanup tasks include:
- Separate personal and business expenses. If you are running personal car payments, family cell phone plans, or vacation travel through the business, document these clearly as add-backs. They increase your SDE, but only if they are identifiable and defensible.
- Resolve discrepancies between tax returns and internal books. If your P&L says one thing and your tax return says another, buyers will assume the worst. Get your CPA to reconcile any differences before you go to market.
- Prepare a detailed SDE recasting. This document walks buyers through every add-back line by line. The more transparent and well-documented your recasting, the more credibility your valuation carries.
- Collect three years of bank statements. Many buyers and SBA lenders now request bank statements in addition to tax returns to verify reported revenue. Having these organized and ready signals professionalism.
Secure a Favorable Lease
The lease is often the single most important factor in a California business sale after the financials themselves. A short remaining term, above-market rent, or restrictive assignment clause can kill a deal or dramatically reduce your sale price.
Before listing, review your lease with an attorney and consider these questions:
- How many years remain, including options? Buyers and SBA lenders generally want to see at least five years of remaining term. If your lease is expiring soon, negotiate a renewal or extension before going to market.
- Is the rent at or below market? If your rent-to-revenue ratio exceeds 8-10%, buyers will view it as a red flag. Renegotiating to a more favorable rate before listing can directly increase your sale price.
- Does the lease allow assignment? Most commercial leases require landlord approval for assignment to a new tenant. Understanding your landlord’s likely response — and any conditions they may impose — is critical information to have before a buyer enters the picture.
Reduce Owner Dependency
The more your business depends on you personally, the less it is worth to a buyer. If you are the head chef, the primary customer relationship, and the person who opens and closes every day, buyers will rightfully worry about what happens when you leave.
In the months before listing, work on transitioning key responsibilities to employees. Cross-train your team. Document your processes and recipes. Create an operations manual. The goal is to demonstrate that the business can run profitably without you — even if you are still present during the sale process.
Address Deferred Maintenance
Walk through your business with fresh eyes and fix anything that would concern a buyer during a walkthrough. Broken equipment, peeling paint, outdated signage, and cluttered storage areas all create a negative impression that translates into lower offers. This applies equally to restaurants, retail stores, and service businesses.
Think of it as staging a home for sale. The cost of cosmetic improvements is almost always recovered in a higher sale price.
Should I Sell My Business Myself or Use a Broker?
This is one of the first questions every seller asks, and the answer depends on your experience, the size and complexity of your business, and how much you value your time and confidentiality.
What a Business Broker Actually Does
A good business broker is not just a listing agent. The broker’s role encompasses the entire transaction lifecycle:
- Valuation and pricing strategy. Setting the right asking price based on market data, comparable sales, and financial analysis.
- Confidential marketing. Creating blind profiles, listing on business-for-sale platforms, and reaching out to the broker’s network of qualified buyers — all without revealing your identity.
- Buyer screening and qualification. Verifying that buyers have the financial capacity (liquid capital, net worth, credit score) and relevant experience to close the deal. This alone saves sellers enormous amounts of wasted time.
- Negotiation. Serving as an intermediary to manage the back-and-forth on price, terms, training period, non-compete agreements, and other deal points.
- Transaction management. Coordinating with the escrow company, attorneys, CPAs, lenders, and landlords to move the deal from accepted offer to closed escrow.
The FSBO (For Sale By Owner) Risk
Selling a business without a broker is possible, but the risks are significant. The biggest challenge is confidentiality. Once employees, customers, competitors, or vendors learn your business is for sale, the consequences can be severe — key employees leave, customers go elsewhere, and competitors capitalize on the uncertainty.
Beyond confidentiality, FSBO sellers frequently underprice their business because they lack access to comparable sale data. They also spend months dealing with unqualified “tire kickers” who have no ability to close a transaction.
Commission Structure
Most business brokers in California charge a commission of 8-12% of the final sale price, with a minimum fee for smaller transactions. While that may seem like a significant cost, consider this: if a broker helps you sell for even 15% more than you would have achieved on your own, the commission pays for itself and then some.
At Smith Allen Group, we earn our commission by maximizing your sale price and protecting your interests from the first conversation through the final closing. If you are considering selling a restaurant specifically, our comprehensive guide to selling a restaurant covers the category-specific considerations in detail.
How to Market Your Business Confidentially
Confidentiality is not optional — it is essential. A premature leak that your business is for sale can cause lasting damage. Employees start looking for new jobs. Customers question the business’s stability. Competitors approach your staff and your accounts. Vendors may tighten credit terms.
The Blind Profile
The cornerstone of confidential business marketing is the blind profile (sometimes called a “teaser” or “confidential summary”). This one-page document describes the business opportunity in enough detail to attract qualified buyers without revealing the business name, exact location, or any identifying details.
A well-crafted blind profile includes:
- General location (e.g., “San Diego County” or “East Bay, CA”)
- Business category (e.g., “Full-service restaurant with bar” or “Quick-service franchise”)
- Annual revenue and SDE ranges
- Key highlights (years in business, lease terms, staffing, reason for sale)
- Asking price
The NDA Process
Before any buyer receives the full confidential business review (CBR), they must sign a non-disclosure agreement (NDA). The NDA legally obligates the buyer to keep all information about the business confidential and not to approach employees, customers, or vendors directly.
At Smith Allen Group, we also require buyers to submit a personal financial statement and proof of funds before releasing the CBR. This ensures that only serious, financially capable buyers gain access to your sensitive business information.
Qualified Buyer Screening
Not every interested party is a qualified buyer. A qualified buyer has:
- Sufficient liquid capital. For SBA-financed acquisitions, buyers typically need 10-20% of the purchase price in liquid, unencumbered funds plus reserves.
- Adequate net worth. The SBA and conventional lenders look at total net worth as an indicator of financial stability.
- Relevant experience or transferable skills. A first-time buyer with restaurant management experience is very different from someone with no food service background.
- Realistic expectations. Buyers who understand that owning a business is work — not a passive investment — are far more likely to close.
Screening buyers before they tour your business or review your financials protects your confidentiality and saves you from wasting weeks with people who cannot or will not close.
What Happens When You Get an Offer?
Receiving an offer is exciting, but it is the beginning of a negotiation, not the end. How you handle the offer stage often determines whether you close at a strong price with favorable terms or watch the deal unravel.
The Letter of Intent (LOI)
Most business acquisitions begin with a Letter of Intent, which outlines the proposed purchase price, deal structure, contingencies, timeline, and key terms. The LOI is generally non-binding (except for confidentiality and exclusivity provisions), but it sets the framework for the transaction.
Key elements to evaluate in an LOI:
- Purchase price. Is it at, above, or below your asking price? Is it justified by the buyer’s analysis?
- Deal structure. Is it an all-cash offer, or does it include seller financing, an earnout, or a consulting agreement? Each structure has different risk and tax implications.
- Contingencies. What conditions must be satisfied before the deal closes? Common contingencies include due diligence, lease assignment, landlord approval, license transfers, and financing approval.
- Timeline. How long does the buyer need for due diligence and closing? A typical timeline is 60 to 90 days from accepted LOI to closing, though complex transactions can take longer.
- Training and transition. Most buyers will request a training period (typically 2 to 4 weeks) where the seller remains on-site to introduce the buyer to employees, vendors, and customers.
Price vs. Terms
One of the most important lessons in deal-making is that price is only half the equation. The terms of the deal can dramatically affect your actual net proceeds and your post-sale obligations.
For example, a $1 million all-cash offer may be more attractive than a $1.1 million offer that requires you to carry $200,000 in seller financing over five years. The seller-financed deal exposes you to the risk that the buyer defaults, ties up your capital, and keeps you connected to the business long after you wanted to move on.
Conversely, seller financing can be a powerful negotiating tool. Offering reasonable seller financing (typically 10-20% of the purchase price) can expand your buyer pool, demonstrate confidence in the business, and sometimes result in a higher total purchase price.
Handling Multiple Offers
If your business is well-priced and well-presented, you may receive multiple offers. While this is a strong position to be in, it requires careful management. Your broker can help you compare offers not just on price but on the overall quality of the buyer, the certainty of closing, and the favorability of the terms.
The Due Diligence Process from the Seller’s Side
Due diligence is the buyer’s opportunity to verify everything you have represented about the business. For sellers, this is often the most stressful phase of the transaction because it feels invasive — someone is looking under every rock. But thorough preparation makes this stage manageable and dramatically increases your chances of closing.
What Buyers Will Request
Expect buyers (and their lenders, accountants, and attorneys) to request:
- Three years of federal and state tax returns (both personal and business)
- Year-to-date profit and loss statement and balance sheet
- Bank statements (12-24 months, sometimes more)
- Lease agreement (and any amendments or addenda)
- Equipment list with estimated values
- Employee roster with positions, tenure, and compensation
- Vendor and supplier agreements
- Franchise agreement (if applicable)
- Licenses and permits (business license, health permits, liquor license, etc.)
- Insurance policies
- Any pending or past litigation
- Customer or revenue concentration data
How to Prepare
Create a due diligence “data room” — a secure, organized folder (physical or digital) containing all of these documents before you even accept an offer. When a buyer requests information and you can provide it within hours rather than weeks, it builds confidence and maintains deal momentum.
Your broker should provide you with a due diligence checklist tailored to your business type and transaction size. At Smith Allen Group, we prepare sellers for this process from the first meeting so there are no surprises.
Common Deal-Killers
After brokering hundreds of transactions, I can tell you that deals most commonly fall apart during due diligence for these reasons:
- Undisclosed liabilities. Tax liens, outstanding judgments, or unreported debts that surface during the buyer’s investigation.
- Financial inconsistencies. When the numbers on the tax returns do not match what was represented in the marketing materials. This is why accurate recasting is so critical.
- Lease problems. The landlord refuses to assign the lease, demands above-market rent from the new tenant, or imposes unreasonable conditions.
- Regulatory issues. Expired permits, health code violations, or zoning non-compliance that the seller failed to disclose.
- Key employee departures. If a critical employee leaves or signals they will leave during the transition, it can shake buyer confidence.
The best defense against these deal-killers is proactive disclosure. If there is an issue, bring it to the surface early. Buyers can often work around known problems. It is the surprises that destroy trust and kill deals.
Understanding the California Escrow Process
California business sales close through a formal escrow process, which is more structured than in many other states. Understanding this process and its timeline is essential for setting realistic expectations.
Opening Escrow
Once the buyer and seller have an executed purchase agreement, escrow is opened with a licensed escrow company. The buyer deposits their earnest money (typically 3-5% of the purchase price) into the escrow account, and the escrow officer begins coordinating the closing.
In California, the Uniform Commercial Code (UCC) and the Bulk Sale Act govern the sale of business assets. Your escrow officer and attorney should be well-versed in both.
Bulk Sale Notice
California’s Bulk Sale Act (Commercial Code Sections 6101-6111) requires that when a business sells substantially all of its assets, the buyer must notify the seller’s creditors by publishing a notice in a local newspaper at least 12 business days before the closing. This protects creditors by giving them an opportunity to file claims against the sale proceeds before the money is distributed to the seller.
The bulk sale notice is a procedural requirement, but failing to comply can create serious problems. Buyers can be held liable for the seller’s unpaid debts if the notice is not properly published.
Alcohol Beverage Control (ABC) License Transfer
If your business holds a California liquor license, the transfer process involves the Department of Alcoholic Beverage Control (ABC). The ABC requires its own escrow, its own notice period (typically 30 days), and its own approval process.
ABC license transfers can take 45 to 90 days, so it is critical to initiate this process as early as possible. For restaurant and bar sales, the ABC timeline often dictates the overall closing timeline.
Lease Assignment
The landlord’s consent to assign the lease to the buyer is a condition of virtually every business sale. This is negotiated directly between the buyer and the landlord, often with the broker facilitating. Landlords may require the buyer to demonstrate financial capacity, sign a personal guarantee, or agree to updated lease terms.
Start this conversation with your landlord early. A landlord who is caught off guard at the last minute is more likely to create delays or impose unfavorable conditions.
License and Permit Transfers
Beyond the ABC license, California businesses may hold numerous other permits and licenses: health department permits, fire department permits, conditional use permits (CUPs), business licenses, seller’s permits, and industry-specific certifications. Each has its own transfer or re-application process.
Your broker and attorney should create a comprehensive list of all required transfers and their respective timelines. Missing a single permit can delay closing or create post-closing compliance issues.
Tax Implications of Selling a Business in California
Taxes are where California sellers face the most painful reality check. California is one of the most aggressive states in the nation when it comes to taxing business sale proceeds. Understanding the tax landscape before you accept an offer allows you to structure the deal in a way that minimizes your total tax burden.
Asset Sale vs. Stock Sale (Entity Sale)
The vast majority of small business sales in California are structured as asset sales, where the buyer purchases the business’s assets (equipment, inventory, goodwill, customer lists, etc.) rather than the legal entity itself. Asset sales offer advantages to buyers (stepped-up basis on assets, no assumption of unknown liabilities), which is why they are strongly preferred.
From the seller’s perspective, the structure of the sale and how the purchase price is allocated among different asset categories directly affects your tax bill. Here is why allocation matters:
- Goodwill and going-concern value are taxed as long-term capital gains at the federal level (0%, 15%, or 20% depending on income).
- Equipment and furniture may be subject to depreciation recapture, taxed as ordinary income on any amount exceeding the depreciated basis.
- Inventory is taxed as ordinary income.
- Real property has its own capital gains treatment.
- Consulting or non-compete agreements are taxed as ordinary income.
Allocating more of the purchase price to goodwill generally benefits the seller from a tax perspective. However, the allocation must be reasonable and consistent between buyer and seller (both parties report it on IRS Form 8594).
California’s Capital Gains Tax
Here is the part that surprises many sellers: California does not offer preferential tax rates for long-term capital gains. While the federal government taxes long-term capital gains at lower rates than ordinary income, California taxes all gains as ordinary income, with rates up to 13.3%.
This means a California business owner selling a business for a significant gain could face a combined federal and state tax rate of 30% or more. For a $1 million gain, that is $300,000 or more going to taxes.
Tax Planning Strategies
Given these realities, proactive tax planning is not optional — it is essential. Strategies to discuss with your CPA include:
- Installment sales. Spreading the gain over multiple tax years through seller financing can keep you in a lower tax bracket each year.
- Opportunity Zone investments. Reinvesting capital gains into a Qualified Opportunity Zone fund can defer and potentially reduce your tax liability.
- Charitable remainder trusts. For larger transactions, a CRT can provide an income stream while reducing the immediate tax hit.
- Entity structure optimization. If your business is structured as a C-Corp, a stock sale may avoid the double-taxation issue. Discuss the implications with your CPA well before going to market.
- Timing the close. Closing in January vs. December can shift the gain into a different tax year, which may be beneficial depending on your other income sources.
The most important piece of tax advice I give sellers: consult your CPA before you accept an offer, not after. The deal structure has enormous tax implications, and restructuring after an agreement is signed is difficult or impossible.
Common Mistakes Sellers Make
After years of brokering business sales across California, I have seen the same mistakes repeated by sellers who did not have proper guidance. Avoiding these pitfalls will protect your sale price and your peace of mind.
Overpricing Based on Emotion
Your business is your life’s work, and it is natural to believe it is worth more than the market says. But the market does not care about your emotional attachment, the hours you invested, or what you need for retirement. Overpriced listings sit on the market, develop a stigma, and eventually sell for less than they would have if priced correctly from the start.
Neglecting Preparation
Going to market with messy financials, a short lease, deferred maintenance, or no documentation is like trying to sell a house without cleaning it first. Every deficiency gives buyers leverage to negotiate your price down.
Breaking Confidentiality
Telling friends, family, or — worst of all — employees that you are thinking about selling before a deal is secured is one of the most damaging mistakes a seller can make. Information travels fast, and the consequences of a premature leak are almost always negative.
Ignoring the Lease
The lease is often the most valuable intangible asset in a business sale. Sellers who do not address lease terms before listing frequently discover that their landlord holds all the leverage. Renew or extend your lease before going to market.
Failing to Maintain the Business During the Sale Process
Some sellers mentally check out once they decide to sell, letting performance slip while they wait for a buyer. This is counterproductive. Buyers are evaluating your current performance. A decline during the marketing period will reduce your sale price or cause buyers to walk away.
Not Getting Professional Tax Advice Early Enough
As discussed above, the tax implications of a business sale are significant and the deal structure matters enormously. Sellers who wait until after closing to consult a CPA often discover they could have saved tens of thousands of dollars with better planning.
Accepting the First Offer Without Negotiation
The first offer is rarely the best offer. Even if the price is close to your asking price, there are almost always terms that can be improved. A good broker knows how to negotiate effectively on your behalf without alienating the buyer.
Key Takeaways
Selling your business in California is a complex, multi-stage process that rewards preparation and punishes shortcuts. Here are the essential points to remember:
- Start planning 12-24 months before your target sale date. The preparation work you do during this window directly increases your sale price.
- Get an accurate valuation based on SDE or EBITDA. Use our SDE Valuation Calculator for a starting estimate, then work with a professional broker for a full broker price opinion.
- Clean up your financials, secure your lease, and reduce owner dependency before going to market. These are the three highest-impact preparation activities.
- Work with a business broker to maintain confidentiality, access qualified buyers, and navigate the complex transaction process. The process of selling a restaurant or any business in California involves too many moving parts for most owners to manage alone.
- Understand the escrow process. Bulk sale notices, ABC license transfers, and lease assignments all have specific timelines that can extend your closing date.
- Plan for taxes early. California’s treatment of capital gains as ordinary income (up to 13.3%) means your tax burden will be significant. Structure the deal before you accept an offer, not after.
- Avoid the common mistakes that cost sellers time, money, and peace of mind: overpricing, neglecting preparation, breaking confidentiality, and skipping professional advice.
Selling a business is not something you should do alone, and it is not something you should rush. The sellers who achieve the highest prices and smoothest closings are the ones who prepare thoroughly, price accurately, and work with experienced professionals throughout the process.
If you are considering selling your business in California, contact Smith Allen Group for a confidential consultation. We will help you understand what your business is worth, what steps you need to take to maximize that value, and how to navigate the sale process from start to finish.