Buying or selling a business is usually the largest transaction a business owner ever undertakes. Unlike a real estate deal, where the asset is relatively transparent and heavily regulated, a business acquisition layers financial, legal, and operational risk on top of one another. California adds its own statutes governing how these deals must be structured and approved. Getting the details right at the front end is the difference between a clean exit and years of post-closing disputes.
Deal Structure: Asset Sale vs. Stock Sale
The first major decision in any acquisition is how the deal will be structured. In California, the two primary options are an asset purchase and a stock purchase (or membership interest purchase for LLCs). The consequences for both sides are dramatically different.
In an asset purchase, the buyer selects which assets to acquire (equipment, inventory, intellectual property, customer contracts, and goodwill) and generally does not assume liabilities that have not been specifically negotiated. That makes asset deals attractive to buyers because they can leave behind unknown or contingent liabilities, environmental exposure, and employment claims. The tradeoff is administrative complexity. Each significant asset may need to be separately assigned or retitled, and third-party consents are often required for contract assignments.
In a stock purchase, the buyer purchases the ownership interests of the entity itself. The legal entity continues unchanged, with the same contracts, licenses, and regulatory approvals, just under new ownership. That continuity matters when the business holds licenses, permits, or contracts that would be difficult to transfer in an asset deal. The downside is that the buyer steps fully into the seller’s shoes and inherits all liabilities, both known and unknown. Stock deals therefore tend to require deeper diligence and heavier representations and warranties from the seller.
For California corporations, selling substantially all assets outside the ordinary course of business requires board approval and, in most cases, shareholder approval under California Corporations Code § 1001.
Due Diligence: Don’t Skip It
Due diligence is the process of confirming that what you think you are buying is what you are actually getting. For buyers, it is not optional. It is the primary mechanism for identifying risks that can be addressed through price negotiation, deal structure, or representations and indemnities in the purchase agreement.
Key areas of diligence in a California business acquisition include financial statements and tax returns (typically three years), material contracts (leases, customer agreements, supplier agreements, and employee agreements), intellectual property ownership and any pending disputes, employment matters including misclassification exposure and pending claims, regulatory compliance and licensing, and pending or threatened litigation.
For sellers, preparing for diligence in advance, organizing records, resolving known issues, and understanding what a buyer will find, almost always produces a smoother process and a better price.
The Letter of Intent
Most acquisitions begin with a Letter of Intent, a document that outlines the basic deal terms the parties have agreed to in principle. LOIs typically cover purchase price and structure, what assets or interests are being acquired, key conditions, an exclusivity period during which the seller agrees not to negotiate with other buyers, and an expected timeline.
Most LOI provisions are non-binding, but the exclusivity and confidentiality provisions usually are binding. Signing an LOI without fully understanding its terms, and without legal review, is a common and avoidable mistake that creates real obligations.
Why Legal Counsel Matters
Business acquisitions involve a purchase agreement, representations and warranties, indemnification provisions, a bill of sale or stock assignment, various consents and notices, and often new employment or consulting agreements for key personnel staying on. These documents are complex, heavily negotiated, and the place where post-closing disputes most often originate. The allocation of risk in the reps, warranties, and indemnification structure is where careful drafting earns its keep.
Whether you are on the buy side or the sell side, having an attorney who handles California business transactions review and negotiate your deal documents is an investment that protects you well past closing day.
Bayside Counsel advises San Diego business owners on mergers, acquisitions, and business sales. Contact us before you sign anything.