Understanding California Business Purchase Agreements
If you’re buying or selling a business in California, state laws on bulk sales, taxes, and employee rights can impact your transaction. A clear, well-structured business purchase agreement protects both parties and ensures a smooth transfer that complies with California’s regulations. Here are the legal and financial considerations you need to consider.
Asset vs. Entity Sales in California
When you buy or sell a business, you can do an asset or entity sale.
- Asset Sale: Buyers choose specific assets (e.g., equipment, inventory) and leave liabilities behind.
- Entity Sale: The whole business, including its debts and liabilities, is transferred to the buyer.
Buyers often prefer asset sales since they can pick out what they want to buy and exclude liabilities. In an entity sale, everything transfers, so due diligence is essential. Before closing, you can check the business’s status with the California Secretary of State.
Under California’s Bulk Sale Law (Ca. Com. Code § 6103), buyers purchasing a business’s inventory as part of an asset sale must publish a notice in a county newspaper at least 12 days before closing. This rule applies to transactions between $10,000 and $5 million as long as the sale is outside the company’s ordinary course of business. These requirements help protect creditors from sellers who might try to offload inventory and walk away with the proceeds.
Legal Regulations for Business Transfers
When buying or selling a business in California, state laws dictate how ownership is transferred, how employees are handled, and whether additional compliance steps are required. Here is what to think about.
California Uniform Commercial Code (UCC) & Corporations Code
The California UCC establishes the legal framework for business ownership transfers so that the transactions are binding and enforceable. If securities are involved, buyers and sellers must comply with California’s Corporations Code to meet state regulatory requirements.
Employment & Labor Laws
If you’re taking over a business with employees, California has strict labor laws to consider:
- California Labor Code: Buyers and sellers must comply with wage and hour regulations, including paying final wages on time and honoring existing employment contracts.
- California WARN Act: If a business sale results in mass layoffs, closures, or relocations affecting 50 or more employees, the seller (or buyer, depending on the agreement) must provide at least 60 days’ notice. This notice must be given to affected employees, the Employment Development Department (EDD), the Local Workforce Development Area (Local Area), and the chief elected official of the affected local government. Non-compliance can lead to penalties, including back pay for impacted employees.
Tax Considerations for Business Purchases
Understanding state tax laws can help you avoid unexpected costs and compliance issues when buying a business in California.
Sales Tax on Tangible Assets
If the sale includes tangible assets, such as equipment or inventory, sales tax may apply. The California Department of Tax and Fee Administration (CDTFA) has guidance on when tax is due.
Property Tax on Real Estate & Proposition 13
If you’re buying a business with real estate, Proposition 13 protects against drastic property tax increases. However, a change in ownership can trigger a property reassessment, increasing your tax rate.
In addition, the state imposes a base transfer tax of $1.10 per $1,000 of the property’s sale price, but many counties and cities add their own taxes. For example, San Francisco charges an additional transfer tax ranging from $2.50 to $30 per $1,000, depending on the property’s value.
Since the responsibility for transfer tax is negotiable, buyers should confirm local tax rates before closing and look for possible exemptions, such as transfers between business entities or family members.
Franchise Tax for LLCs or Corporations
If you’re buying an LLC or corporation in California, you must pay a yearly franchise tax, which is usually a minimum of $800. It applies even if the business is not a franchise and regardless of profitability, meaning it must be paid even if the company operates at a loss. It comes as a cost of doing business in the state.
Use Tax for Out-of-State Business Assets
If you buy equipment, furniture, or inventory from out-of-state, California Use Tax may apply if sales tax wasn’t collected at the point of sale. Buyers should check if they need to self-report and pay use tax to the California Department of Tax and Fee Administration (CDTFA).
Capital Gains Tax
Unlike federal tax law, which applies lower rates to long-term capital gains, California taxes all capital gains as ordinary income. As a result, business sale profits are subject to state income tax rates (anywhere between 1% and 13.3%), depending on the seller’s total taxable income.
For buyers, capital gains tax can impact deal structuring and negotiations. Sellers may prefer installment sales to spread tax liability over multiple years or adjust the purchase price allocation to lower their tax burden. Buyers should work with a tax professional to understand how the seller’s tax strategy might affect the sale terms and financing options.
Commercial Leases
If a California business operates from a leased space, the lease terms can affect the sale. Sellers should check whether their lease allows transfers (assignments) and if landlord consent is required. Some leases include restrictions on subleasing or lease assignment, which may limit the buyer’s ability to take over the space.
In California, a landlord can issue a three-day notice to perform covenant or quit if a party (in this case, the seller) assigns a lease without permission (Cal. Code Civ. Proc. § 1161). So, buyers should confirm lease transferability before finalizing the purchase.
If the lease can’t be assigned, they may need to negotiate a new commercial lease with different rent terms or deposit requirements. Additionally, some landlords may require a new personal guarantee, shifting financial liability to the new owner. Both parties should work with the landlord early in the process to avoid delays or unexpected costs.
Other Necessary Documents
Depending on your agreement’s terms, you may need additional documents to close the business purchase, such as:
- Bill of Sale: Confirms the transfer of business assets from the seller to the buyer.
- Promissory Note: Outlines the repayment terms if the purchase involves seller financing.
- Non-Compete Agreement: Prevents the seller from starting a competing business within a specified time and location.
California Business Purchase Agreement Sample
Review the sample California business purchase agreement below to see how key terms and clauses are structured. When you’re ready, use our document builder to create a state-specific agreement tailored to your business transaction.
