Searching in California - Difficulties...

April 21, 2024

by a searcher from University of Texas at Austin in Austin, TX, USA

I keep hearing that California is a difficult state to buy and run a small business. Can anyone please help me understand why this is the case?

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Reply by a searcher
from Yale University in San Francisco, CA, USA

I’ve spent 20 years running a business in San Francisco, California. If California is difficult compared to other states, San Francisco is difficult compared to California. It very much depends on what kind of business you are operating what your challenges will be, but you will have regulatory/compliance issues that manifest themselves in negative and sometimes not obvious ways. For example, the California Environmental Quality Act (CEQA) requires local governments and public agencies to evaluate and disclose the environmental impacts of development projects and other “major” land use decisions. We were redoing a physical storefront and entryway in a 1930s building. We wanted to remove an interior platform to allow patients to sit. Simple, right? Well, the City said that we were harming the “historical character” of the building (remember this was inside the building), but the Americans with Disabilities Act (ADA) requires that there is sufficient space for a wheelchair to turn around. One city department said we needed to comply with ADA (ie tear down the platforms) while the other dept said we couldn’t due to historical preservation. Immovable object meets irresistible force. We spent 3 years and tens of thousands of dollars, including hiring experts and permit expeditors, to resolve the issue. It delayed our expansion for 2 years. From a labor perspective, there is a thicket of laws for PTO, including its accrual and usage, parental leave, lactation requirements and spaces, timeclocks, breaks, overtime, limits on amounts of hours worked, both consecutively and weekly, etc etc. Get a good PEO with an HR attorney and consult with them frequently over even the most minor issues. Document poor employee performance like you a building evidence for a legal trial, because you might be. I could go on and on. Finally, if you are buying a business where what you are doing can be done from someplace else and/or you are a “price taker” in a national marketplace, be prepared to work harder and smarter to have that rate cover your higher labor and other costs.

Reply by an investor
from Stanford University in Pleasanton, CA, USA

Thanks for the tag, ^redacted‌ It depends on the type and location of business. If it is a tech business located in or near South Bay or San Francisco and needs local (not remote) tech talent, the business will be competing for tech talent against GOOG, Meta, NVDA, AI startups etc.. That will make it very expensive to hire and retain talent. But if it is not located in those specific areas, there are attractive labor markets for tech talent in the greater bay area including North Bay, Santa Cruz etc.. If it is a non-tech service business, then CA may look attractive due to size of population and higher, disposable income. CA has stricter labor related regulations. But if the business has been around for a while, they probably have figured how to comply with the regulatons. You may still want to test that and should dig deep into this compliance aspects during DD with an expert/lawyer. I know an acquirer who acquired a construction material business and then moved HQ and production to Nevada. The business retained almost all of its CA customers while hugely cutting back on costs. You may want to see if that is possible with your acquisition.

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