Business & Contract Law ✦ Buying or Selling a Business
From Letter of Intent to Closing, With the Numbers Checked at Every Step.
Buying or selling a California business is a legal transaction built on a financial one: the letter of intent, the due diligence, the purchase agreement, the California clearances, and the closing. North Star Law Firm handles the deal documents and the due diligence from one desk, with the tax structure decided before the price is. Attorney-CPA. Flat fee for the scoped work. Statewide.
The Short Answer
The deal is decided in the letter of intent. Get advice before you sign it.
Most business sales follow the same path: a non-binding letter of intent that sets price and structure, a due diligence period in which the buyer examines the books, a definitive purchase agreement with representations, warranties, and indemnities, and a closing with the state clearances and the transfer of licenses, leases, and accounts. The letter of intent is labeled non-binding, but it fixes the two things that matter most, price and whether the deal is an asset sale or a stock sale, and everything afterward is negotiated within those terms. Sellers who sign a letter of intent without advice routinely give away the structure; buyers who skip due diligence routinely inherit the seller’s sales tax. We handle both sides of the table, in different deals, and we know what each side is looking for.
- Letters of intent and term sheets, with structure and tax consequences decided first
- Buyer-side and seller-side due diligence performed by a CPA
- Asset purchase agreements and stock or membership interest purchase agreements
- Purchase price allocation, seller financing, earnouts, and escrow holdbacks
- California closing items: CDTFA and EDD clearances, bulk sale notices, license and lease transfers
- Post-closing: transition agreements, non-competes under Bus. & Prof. Code § 16601, and the first tax returns
The Path
What happens between the handshake and the closing
A typical small-business sale in California runs 60 to 120 days from letter of intent to closing. These are the stages and what each side should be doing at each one.
| Stage | Seller | Buyer | What we do |
|---|---|---|---|
| Preparation | Clean up the books, file everything, fix the entity, document the customers and contracts | Define what you are buying and what you can finance | Sell-side pre-diligence a year out; buy-side financing and structure analysis |
| Letter of intent | Price, structure, exclusivity period, deposit | Same, plus a diligence period and financing contingency | Structure and tax modeled before signing; LOI drafted or marked up |
| Due diligence | Data room: financials, tax returns, payroll, contracts, leases, licenses, litigation | Review everything; verify revenue to bank records; identify liabilities that follow the assets | CPA-led diligence: quality of earnings, tax exposure, sales tax and payroll compliance, contractor classification |
| Purchase agreement | Limit representations, cap indemnity, shorten survival periods | Broad representations, escrow holdback, indemnity for pre-closing liabilities | Drafted or negotiated with the allocation schedule and tax terms built in |
| Clearances and notices | Request CDTFA tax clearance and EDD clearance; bulk sale notice if required | Insist on them; without a CDTFA clearance the buyer is liable for the seller’s sales tax up to the price | Filed at signing; escrow holdback until received |
| Closing | Deliver assets, assignments, and consents; receive price | Fund, assume assigned contracts, transfer licenses and permits | Closing checklist, escrow instructions, and the Form 8594 allocation both sides will file |
| After closing | Report the sale; observe the non-compete; consult if agreed | Register new seller’s permit and EDD account; onboard employees; file the first returns | Tax returns for the year of sale, and the transition |
Asset sale or stock sale, and who pays for the difference
Buyers prefer to buy assets: they get a stepped-up basis to depreciate and leave the seller’s liabilities behind. Sellers of corporations prefer to sell stock: one level of capital gain on the whole price, no liabilities carried forward, and no need to assign every contract and license individually. The gap between those preferences is bridged with price, with structure (a Section 338(h)(10) election or an F reorganization that lets a stock sale be taxed like an asset sale), and with the purchase price allocation, which decides how much of the price is goodwill taxed as capital gain to the seller versus equipment and inventory recovered quickly by the buyer. Every dollar of that allocation moves tax from one side to the other, both sides report it on Form 8594, and it is negotiated, not assigned. The tax structuring is its own discipline, and it is done here before the letter of intent is signed.
The California closing items that trip up out-of-state forms
California imposes successor liability for unpaid sales and use tax on a buyer of a business or its stock of goods, up to the purchase price, unless the buyer obtains a tax clearance certificate from the CDTFA (R&TC §§ 6811 to 6814). The EDD has a parallel rule for unpaid employment taxes (Unemp. Ins. Code § 1731). Both certificates are requested by the buyer, take weeks, and are the reason for an escrow holdback. Separately, California’s bulk sale law (Com. Code § 6101 et seq.) applies when the seller’s principal business is selling inventory from stock, including restaurants, and requires published and recorded notice at least twelve business days before the sale; for sales under $2 million, it also requires an escrow. Skipping it exposes the buyer to the seller’s creditors. And licenses do not transfer automatically: an ABC liquor license is its own application, a seller’s permit is not assignable, and city business licenses and health permits are reissued to the buyer.
What CPA-led due diligence finds that a document review does not
Financial statements are the seller’s assertion. Due diligence tests it. We tie reported revenue to bank deposits and card processor statements, compare the tax returns to the financials (and ask why they differ), test the payroll records against the workforce, check whether the 1099 contractors would survive the ABC test, confirm the sales tax filings against the revenue, and read the customer contracts for change-of-control clauses that let the best customers walk at closing. On the sell side, the same review done a year before marketing the business fixes the problems that would otherwise become a price reduction or an indemnity claim, and it produces the clean data room that shortens diligence and keeps buyers from renegotiating.
The Attorney-CPA Difference
One office for the deal documents and the diligence. No translation gap.
- Structure and tax decided before the letter of intent, and documented in it
- Due diligence performed by a CPA who reads financial statements for a living
- Purchase agreements drafted and negotiated with the allocation and indemnity terms in view
- CDTFA and EDD clearances, bulk sale notices, and license transfers handled at closing
- Flat fee for the scoped work, quoted in writing
Questions & Answers
Business purchase and sale questions we hear most
How is a small business valued?
Most small businesses trade at a multiple of seller’s discretionary earnings or EBITDA, adjusted for the industry, the owner’s involvement, the customer concentration, and the quality of the books. A broker’s opinion or a formal valuation sets the starting point; due diligence adjusts it. We review the valuation as part of the deal analysis.
Do I need a business broker and a lawyer?
A broker finds the counterparty and manages the process; a lawyer drafts and negotiates the agreement and handles the closing; an accountant does the diligence and the tax structuring. Here the last two are the same person, which is one fewer handoff and one fewer fee.
Can the seller sign a non-compete in California?
Yes. Bus. & Prof. Code § 16601 permits a reasonable non-compete when a person sells the goodwill of a business or their entire ownership interest, and a properly drafted one is enforceable. It has to be tied to the sale and limited to the business’s geographic footprint.
What is an earnout and should I agree to one?
A portion of the price paid later, contingent on the business hitting revenue or profit targets. Buyers use it to shift risk; sellers accept it when the price is otherwise unavailable. The terms that matter are how the target is measured, who controls the business during the earnout period, and how the payments are taxed, which depends on drafting.
The deal you sign is the deal you get. Sign a good one.
A free deal review with an attorney-CPA, and a flat fee in writing for the transaction.