Last updated: October 2026
Every business sale turns on one early decision: whether the buyer is purchasing the assets or the entity itself. That choice determines which liabilities transfer, how both sides are taxed, whether contracts and leases move automatically or need third-party consent, and what happens to the employees. Buyers generally want assets; sellers generally want equity; the price usually reflects who prevails. Bay Legal, P.C. represents buyers and sellers in California business transactions from letter of intent through closing.
Definition: A business sale is the transfer of a commercial enterprise, structured either as a purchase of its assets or as a purchase of the ownership interests in the entity that holds them.
Asset purchase or equity purchase?
| Asset purchase | Equity purchase | |
|---|---|---|
| What the buyer acquires | Selected assets and specified liabilities | The entity, with everything in it |
| Unknown liabilities | Generally stay with the seller, subject to successor liability rules | Transfer to the buyer with the entity |
| Contracts and leases | Usually need assignment and third-party consent | Generally continue, unless a change-of-control clause applies |
| Employees | Terminated and rehired by the buyer | Continue employment |
| Licences and permits | Often must be reapplied for | May continue, depending on the licence |
| Typical preference | Buyer | Seller |
The tax consequences run in the same direction and are usually the reason the negotiation is difficult. In an asset deal the purchase price is allocated across asset classes, which affects the seller’s tax treatment and the buyer’s future depreciation; the allocation is agreed in the contract and reported by both sides. In an equity deal the seller generally has a single capital gain. That difference is worth modelling with a CPA before the letter of intent, not after.
What does due diligence actually cover?
- Financial. Three years of statements and returns, reconciled to bank records, plus accounts receivable ageing and any customer concentration.
- Contracts. Customer and supplier agreements, the lease, equipment financing, and every change-of-control or anti-assignment clause in them.
- Corporate. Formation documents, the ownership record, minutes, and confirmation the entity is in good standing rather than suspended with the Secretary of State.
- Employment. Classification of every worker under Labor Code section 2775, wage and hour exposure, and any outstanding claims. Misclassified contractors are among the most common hidden liabilities in a small business.
- Tax. Federal, state, payroll, and sales and use tax, including any open audits or unpaid assessments.
- Licences and property. Whether each licence transfers, and whether the landlord will consent to assignment. A lease the landlord will not assign can end a deal late.
Diligence rarely kills a transaction outright. What it does is reprice it, or shift risk into the indemnity provisions — which is why findings are more useful early than late.
What California-specific requirements apply?
Bulk sales notice. Where a sale involves a substantial part of the inventory and equipment of certain California businesses, the bulk sales provisions at Commercial Code section 6101 and following require advance notice to be recorded and published, and in defined cases an escrow. The purpose is to alert the seller’s creditors. Failing to comply can leave the buyer exposed to those creditors.
Sales and use tax successor liability. A buyer can become liable for a seller’s unpaid sales and use tax up to the purchase price. The protection is to withhold sufficient funds until the seller produces a certificate of tax clearance from the California Department of Tax and Fee Administration. Buyers who skip this step and pay in full sometimes inherit a liability the seller never disclosed.
Licence transfers. Regulated businesses carry their own rules. An alcoholic beverage licence transfers only with Department of Alcoholic Beverage Control approval and a statutory escrow, professional practices are constrained by ownership rules, and contractor and health-related licences generally do not transfer at all.
Can the seller be stopped from competing afterwards?
Only within narrow limits, and this is where California differs sharply from most states. Business and Professions Code section 16600 voids contracts restraining a person from engaging in a lawful profession, trade, or business. The exception at section 16601 permits a non-compete from someone selling the goodwill of a business or all of their ownership interest, limited to a geographic area where the business was carried on.
The exception is real but it is not generous. It protects the buyer against the selling owner, not against every employee who happens to leave, and a covenant drafted more broadly than § 16601 permits can be struck out. California has also moved against void non-competes directly, making it unlawful to include or seek to enforce one and imposing notice obligations on employers.
What does work reliably is a confidentiality agreement protecting trade secrets, a non-solicitation of customers drafted within permitted bounds, and a properly scoped § 16601 covenant from the selling owner. A generic non-compete lifted from another state’s template is the version that fails.
Who handles business sales at Bay Legal?
Managing attorney Jayson R. Elliott leads the firm’s business practice and handles purchase and sale transactions, diligence, and the closing documents. Where a transaction gives rise to a dispute, it moves to the litigation group under lead litigation attorney Evan Livingstone.
Scope. Bay Legal, P.C. represents buyers and sellers in California business transactions. The firm does not perform business valuations or provide accounting or tax filing services, and works alongside the client’s CPA and valuation professional — particularly on the purchase price allocation, which should be modelled before the letter of intent.
A transfer of ownership within a family, or from one partner to another on retirement, death, or incapacity, is succession planning rather than a sale, and is handled under business succession planning. Bay Legal, P.C. serves businesses statewide from offices in Palo Alto and Los Angeles.
Frequently Asked Questions
Should I structure the deal as an asset sale or an equity sale?
Buyers generally prefer assets, because unknown liabilities largely stay with the seller and the purchase price allocation improves future depreciation. Sellers generally prefer equity, because it usually produces a single capital gain and leaves liabilities behind. The price often reflects who prevails, so model both with a CPA before the letter of intent.
What liabilities does a buyer inherit?
In an equity purchase, everything in the entity, disclosed or not. In an asset purchase, only what the contract assumes — subject to successor liability rules, including sales and use tax, where a buyer can be liable up to the purchase price unless a certificate of tax clearance is obtained from the CDTFA.
What are bulk sales requirements in California?
Where a sale involves a substantial part of the inventory and equipment of certain businesses, Commercial Code section 6101 and following requires advance notice to be recorded and published, and in defined cases an escrow, so the seller’s creditors are alerted. Non-compliance can leave the buyer exposed to those creditors.
Can I stop the seller from opening a competing business?
Within limits. California voids most non-competes under Business and Professions Code section 16600, but section 16601 permits one from a person selling the goodwill of a business or all their ownership interest, confined to the area where the business operated. Drafted more broadly than that, it can be struck out entirely.
Will my lease transfer to the buyer?
Not automatically in an asset purchase — most commercial leases require the landlord’s consent to assignment, and the landlord may use that leverage to renegotiate. In an equity purchase the lease usually continues, unless it contains a change-of-control provision. Check this early, because an unassignable lease can end a deal late.
How long does a small business sale take?
Commonly two to four months from letter of intent to closing, depending on diligence, third-party consents, licence transfers, and financing. Regulated businesses take longer — an alcoholic beverage licence transfer requires ABC approval and a statutory escrow that has its own timetable.
Related Questions
What is a letter of intent, and is it binding?
A document setting out the principal terms before definitive agreements are drafted. Most terms are non-binding, but confidentiality, exclusivity, and expense provisions usually are — which is more than people expect from a document described as preliminary.
What is an earn-out?
Part of the price paid later, contingent on the business hitting agreed targets. It bridges a valuation gap and is a common source of post-closing disputes, so the measurement terms deserve as much attention as the headline number.
Do I need to tell employees before the sale?
Timing is a judgment call, but in an asset purchase employees are terminated and rehired, which brings final pay obligations and potentially notice requirements for larger workforces. Plan it rather than improvise it.
What is an indemnity cap?
A ceiling on what the seller must pay if a representation turns out to be wrong. The cap, the survival period, and the basket work together and are usually negotiated as a package rather than individually.
Talk to a California business transaction attorney
The structure decision is made early and everything else follows from it. To discuss buying or selling a business with a Bay Legal attorney, call the office nearest you or email intake.
Bay Legal, P.C. — serving California statewide
Northern California office
667 Lytton Ave Ste 3, Palo Alto, CA 94301
(650) 668-8000
Southern California office
3211 Cahuenga Blvd W Ste 212, Los Angeles, CA 90068
(213) 668-8000
Intake: intake@baylegal.com
Fax: (650) 963-0041
Website: https://baylegal.com
This page is general information about California law and does not constitute legal advice or create an attorney-client relationship. Bay Legal, P.C. does not provide tax advice or business valuation services. For advice on your specific situation, contact a licensed California attorney and a qualified tax professional.