Buying or selling a business is one of the most consequential transactions an owner will ever undertake. In California, the deal involves far more than agreeing on a price: the parties must choose a structure, perform due diligence, navigate the state's bulk sales rules, handle escrow and tax clearances, and decide whether the seller will agree not to compete. This guide walks through how business sales work under California law, with the key statutes and the practical steps from letter of intent to closing.

This guide provides general information about California law and is not legal or tax advice. Business sales are complex and fact-specific, and the right structure depends on tax, liability, and contract details unique to each deal. For advice you can rely on, consult an attorney licensed by the State Bar of California and a qualified tax professional.

Asset sale vs. stock (or membership-interest) sale

The threshold decision is deal structure. In an asset sale, the buyer purchases specific assets — equipment, inventory, intellectual property, goodwill, contracts — and typically assumes only the liabilities it agrees to take on. The selling entity survives and keeps the liabilities the buyer leaves behind. In a stock sale (for a corporation) or membership-interest sale (for an LLC), the buyer acquires ownership of the entity itself, inheriting all of its assets and liabilities, known and unknown.

Buyers often prefer asset sales because they can leave unwanted liabilities behind and obtain a "stepped-up" tax basis in the purchased assets. Sellers frequently prefer entity sales for cleaner exits and potentially better tax treatment of capital gains. The choice has major tax, liability, and contract-assignment consequences and should be made with professional advice.

Contract assignment is a practical wrinkle that often drives the structure. In a stock or membership-interest sale, the entity keeps its contracts, leases, and licenses because the entity itself does not change — only its ownership does. In an asset sale, by contrast, each key contract, lease, and permit may have to be individually assigned to the buyer, and many agreements require the other party's consent to assign. A business with a valuable long-term lease, important customer contracts, or hard-to-transfer licenses may be far easier to buy as an entity than as a pile of assets. Weighing the liability benefits of an asset sale against the transfer friction it creates is a central part of structuring the deal.

The letter of intent

Most California business sales begin with a letter of intent (LOI) or term sheet that captures the key economic terms before the parties spend heavily on diligence and definitive agreements. A typical LOI states the proposed purchase price and structure (asset or entity sale), the major assumptions behind the price, and the expected timeline to closing. Most LOIs are intended to be mostly non-binding on the deal itself — the real obligations come later in the definitive purchase agreement — but they usually contain a few provisions the parties do intend to bind, such as confidentiality and an exclusivity or "no-shop" period during which the seller agrees not to negotiate with other buyers. Getting the binding-versus-nonbinding line right matters: careless wording can accidentally create an enforceable obligation to sell, or fail to protect confidential information the buyer is about to receive. Even though the LOI is not the final contract, it sets expectations and anchors the negotiation, so it is worth involving counsel before signing one.

Due diligence

Before closing, the buyer investigates the business to confirm what it is actually buying. A thorough California due-diligence review typically covers:

  • Financial statements, tax returns, and accounts receivable and payable.
  • Corporate or LLC records, ownership, and good standing with the Secretary of State and FTB.
  • Material contracts, including whether they can be assigned to the buyer.
  • Real-estate leases and any required landlord consents.
  • Employment matters, benefit plans, and outstanding wage liabilities.
  • Litigation, judgments, liens (including UCC filings), and regulatory or licensing issues.
  • Intellectual property ownership and any trade-secret protections.

Findings from due diligence shape the purchase price, the representations and warranties, indemnities, and any escrow holdback.

California's bulk sales law

California's bulk sales law, found in Commercial Code § 6101 and following, protects a seller's creditors when a business sells a large part of its inventory and equipment outside the ordinary course of business. It applies primarily to sellers whose principal business is selling inventory from stock — including manufacturers and restaurant owners. When it applies, the buyer must give advance public notice of the sale so creditors can act before assets change hands.

Under § 6105, the notice must identify the seller and buyer, describe the assets and their location, and state the anticipated sale date. The notice generally must be recorded with the county recorder and published in a newspaper of general circulation at least 12 business days before the sale. The law contains thresholds and special procedures: sales of assets worth less than $10,000 (net of liens) fall outside the rules, and there are streamlined procedures for sales of $2,000,000 or less paid substantially in cash. A buyer who ignores applicable bulk sales requirements can face liability to the seller's creditors, so compliance matters.

Escrow, tax clearance, and successor liability

Most California business sales close through an escrow, where a neutral escrow holder receives the funds, confirms that conditions are met, handles required notices, and disburses proceeds. Escrow is also where several California tax issues are resolved:

  • Sales-and-use tax clearance. The buyer should obtain a certificate from the California Department of Tax and Fee Administration (CDTFA). Under Rev. & Tax. Code § 6811-6812, a buyer who does not withhold enough of the purchase price to cover the seller's unpaid sales tax can become personally liable for it — a classic example of successor liability.
  • FTB clearance. The buyer or escrow can request a tax-clearance or withholding certificate from the Franchise Tax Board to confirm the seller does not owe state income or withholding taxes tied to the sale.
  • Employment tax. Where employees transfer, the parties should address payroll-tax accounts with the Employment Development Department (EDD).

Beyond taxes, a buyer can inherit liabilities through legal doctrines — for example, when the buyer is a mere continuation of the seller, when the deal is a fraudulent attempt to escape debts, or when liabilities are expressly assumed. Careful structuring and indemnities help manage this risk.

Representations, warranties, indemnities, and earn-outs

The heart of a definitive purchase agreement is a set of representations and warranties — statements of fact about the business that the seller makes and the buyer relies on. A seller typically represents, for example, that the financial statements are accurate, that the company owns its assets free of undisclosed liens, that it is current on taxes, that there is no undisclosed litigation, and that its material contracts are valid and assignable. If a representation turns out to be false, the buyer has a contractual claim. The agreement allocates that risk through indemnification provisions, which say who pays for breaches and undisclosed liabilities, often subject to a deductible (or "basket"), a cap, and a survival period during which claims can be brought.

To secure those obligations, buyers frequently insist on an escrow holdback — a portion of the purchase price held back for a period after closing to cover indemnity claims — or, in larger deals, representations-and-warranties insurance. Where buyer and seller disagree about the future of the business, an earn-out can bridge the gap: part of the price is paid over time and contingent on the business hitting agreed financial targets after closing. Earn-outs align the parties' interests but are a common source of later disputes, because the seller and the new owner may clash over how the business is run during the earn-out period. A well-drafted earn-out defines the targets precisely, specifies how they are measured, and addresses how the buyer must operate the business while the earn-out is pending.

Employing or retaining the seller. Buyers often want the seller to stay involved after closing to transfer relationships and know-how. This is commonly handled through a short-term employment or consulting agreement and a transition-services arrangement. Because California voids most employment non-competes, a buyer generally cannot lock up the seller through an ordinary employment non-compete; instead, the buyer relies on the sale-of-business non-compete under Bus. & Prof. Code § 16601 (discussed below), tied to the goodwill being purchased, together with confidentiality and non-solicitation terms drafted to fit California law. Structuring the seller's post-closing role carefully protects the value the buyer is paying for.

Purchase-price allocation

In an asset sale, the parties allocate the purchase price among asset classes — equipment, inventory, goodwill, covenants not to compete, and so on. The allocation drives the tax consequences for both sides, because different assets are taxed differently (for example, goodwill generally receives capital-gains treatment while certain equipment may trigger depreciation recapture). The IRS requires the parties to report a consistent allocation on Form 8594, and California generally follows the federal characterization. Because allocation can shift real money between buyer and seller, it is usually negotiated and reviewed by tax advisors.

The sale-of-business non-compete exception (§ 16601)

California voids most non-compete agreements under Bus. & Prof. Code § 16600, but it makes an important exception for the sale of a business. Under § 16601, a person who sells the goodwill of a business, or an owner who sells all of their ownership interest, or a business that sells all or substantially all of its operating assets together with the goodwill, may agree with the buyer not to carry on a similar business within a specified geographic area where the sold business operated, so long as the buyer keeps running a like business there.

Courts read § 16601 narrowly, so the agreement must genuinely involve the sale of goodwill or ownership and must be reasonably limited in geography. A non-compete that exceeds these bounds risks being struck down under the general § 16600 ban. For more on California's non-compete framework, see our guide to California business contracts.

This matters a great deal to buyers. If you pay for a business in part because of its goodwill — its reputation, customer relationships, and going-concern value — you generally do not want the seller to open a competing shop across the street the next day. The § 16601 exception is what lets the deal include an enforceable promise by the seller not to do that, within the area where the business operated and for a reasonable period. Because the covenant must be carefully tied to the statutory requirements, buyers should have the non-compete drafted by a California attorney rather than copied from a generic template, which may not survive scrutiny. A non-compete that falls outside § 16601 reverts to the general § 16600 rule and is likely void.

Steps in a California business sale

  1. Letter of intent. The parties outline price, structure, and key terms, usually with confidentiality and exclusivity provisions.
  2. Due diligence. The buyer investigates the business and the seller gathers and discloses records.
  3. Negotiate the definitive agreement. An asset purchase agreement or stock/interest purchase agreement sets out price, representations, warranties, indemnities, and any § 16601 non-compete.
  4. Open escrow and give required notices. If the bulk sales law applies, record and publish notice on the required timeline.
  5. Obtain tax clearances. Request CDTFA and FTB clearances and arrange any required withholding.
  6. Secure consents. Obtain landlord, lender, and contract-counterparty consents needed to assign agreements.
  7. Close. Sign closing documents, fund the purchase price, transfer title, and update Secretary of State and licensing records.
  8. Post-closing. Handle final tax filings, the seller's wind-down or continued obligations, and any transition services.

A California closing checklist

By the time a business sale reaches closing, a number of moving parts must come together at once. Buyers and sellers find it helpful to track them against a checklist so nothing is missed on the day funds change hands:

  • Signed definitive agreement — the asset purchase agreement or stock/interest purchase agreement, with all schedules and exhibits finalized.
  • Bulk sales notice complete — if the law applies, the notice was recorded and published on the required timeline before closing.
  • Tax clearances — CDTFA sales-tax clearance and any FTB clearance or withholding arrangements in hand to manage successor liability.
  • Third-party consents — landlord, lender, franchisor, and key contract counterparties have consented to any assignments.
  • Lien searches and payoffs — UCC and other lien searches done, with payoff letters for any liens being cleared at closing.
  • Transfer documents — bills of sale, assignment-and-assumption agreements, vehicle or equipment titles, and intellectual-property assignments prepared.
  • Non-compete and employment documents — any § 16601 non-compete, plus the seller's employment, consulting, or transition agreement.
  • Entity and license updates — Secretary of State filings and any required license or permit transfers identified and ready.
  • Escrow instructions and funding — the escrow holder has clear instructions, the purchase price is funded, and any holdback amounts are set aside.

Working through a checklist like this with an attorney and the escrow holder turns a stressful closing into a series of confirmable steps, and it surfaces problems — a missing landlord consent, an unpaid tax account — while there is still time to fix them.

Frequently asked questions

Is an asset sale or a stock sale better for me?

It depends on which side you are on and the tax and liability picture. Buyers often favor asset sales to avoid unknown liabilities and to step up the tax basis of assets; sellers often prefer entity sales for a cleaner exit and potential capital-gains treatment. The right choice requires legal and tax advice tailored to the specific business.

Does the California bulk sales law apply to my deal?

It applies mainly when the seller's principal business is selling inventory from stock (including manufacturers and restaurants) and the sale covers half or more of the seller's inventory and equipment by value outside the ordinary course. Sales of assets worth less than $10,000 net of liens are excluded, and streamlined procedures apply to certain cash deals of $2,000,000 or less. A California attorney can confirm whether notice is required.

Can I be stuck with the seller's unpaid taxes?

You can, through successor liability. If you do not withhold enough of the purchase price to cover the seller's unpaid California sales tax, the CDTFA can hold you liable (Rev. & Tax. Code §§ 6811-6812). Obtaining tax-clearance certificates from the CDTFA and the FTB through escrow is the standard way to protect against inheriting the seller's tax debts.

Can the seller agree not to compete with me after the sale?

Yes, within limits. Although California voids most non-competes (§ 16600), the sale-of-business-goodwill exception in § 16601 allows a reasonable, geographically limited non-compete tied to the sale of goodwill or ownership. Courts construe it narrowly, so the covenant must be carefully drafted to fit the statute.

Why does the purchase-price allocation matter to me?

Because it determines how much tax each side pays. Different categories of assets are taxed differently — for instance, goodwill generally gets capital-gains treatment while some equipment can trigger depreciation recapture — so buyer and seller often have opposing interests in how the price is divided. The parties must report a consistent allocation to the IRS on Form 8594, and California generally follows the federal treatment, so the allocation is usually negotiated with tax advisors involved.

Do I need an attorney and an escrow to buy a small business?

It is strongly advisable. Even a modest business sale can involve bulk sales notice, tax-clearance certificates, lease and contract assignments, and successor-liability exposure that a buyer may not see coming. An escrow holder manages the funds and required notices, and a California attorney can structure the deal, draft the purchase agreement, and help protect you from inheriting the seller's debts. The cost is usually small compared with the liabilities at stake.

What is a letter of intent, and is it binding?

A letter of intent (or term sheet) sets out the proposed price, structure, and timeline before the parties commit to full diligence and a definitive agreement. Most of it is intended to be non-binding on the sale itself, but certain provisions — commonly confidentiality and an exclusivity or "no-shop" period — are usually meant to bind. Because sloppy drafting can accidentally create an enforceable obligation, it is worth having counsel review an LOI before you sign it.

What are representations and warranties, and why do they matter?

They are the seller's statements of fact about the business — that the financials are accurate, the assets are owned free of undisclosed liens, taxes are paid, and there is no hidden litigation, for example. The buyer relies on them, and if one proves false, the indemnification provisions decide who pays. Buyers often back these protections with an escrow holdback, and the agreement typically sets a deductible, a cap, and a survival period for claims. They are a central way risk is allocated between buyer and seller.

Can the buyer keep the seller working in the business after the sale?

Often yes, through a short-term employment or consulting agreement and a transition-services arrangement, which help transfer customer relationships and know-how. Because California voids most employment non-competes, the buyer generally cannot restrain the seller through an ordinary employment non-compete; instead it relies on the sale-of-business non-compete under Bus. & Prof. Code § 16601, tied to the purchased goodwill, along with confidentiality and non-solicitation terms drafted to fit California law.

Find a California business attorney

A business sale brings together contract, tax, and liability questions that can cost the unwary dearly. For the broader context, see the business law hero guide, and for the agreements at the heart of the deal, read about California business contracts. When you are ready to move forward, our directory lists attorneys licensed by the State Bar of California across all 58 counties — free to search, with no obligation, so you can find a lawyer who handles business transactions like yours.