# How to Sell a Small Business in California

> Selling a California business: the steps, asset vs. entity sale, CDTFA and EDD clearances, bulk sale notice, the seller non-compete, and who does what.

Source: https://ridleylawoffices.com/how-to-sell-a-business-california/

**Short answer:** You sell a California business in a set order. You price it, choose between an asset sale and a sale of the entity, sign a letter of intent, give the buyer time for due diligence, sign a purchase agreement, and close through escrow. California adds state tax and payroll clearances, a bulk sale notice for many inventory and restaurant sales, and a narrow rule letting the seller agree not to compete.

- A buyer who doesn’t hold back enough of the price to cover the seller’s unpaid sales tax becomes personally liable for it, up to the purchase price (Rev. & Tax. Code § 6812).
- The same holdback rule covers unpaid EDD payroll taxes (Unemp. Ins. Code §§ 1731 and 1733).
- When the bulk sale law applies, the notice must be recorded, published, and sent to the county tax collector at least 12 business days before the sale (Com. Code § 6105).
- A seller of goodwill or of all of an ownership interest may agree not to compete in the area where the business operated (Bus. & Prof. Code § 16601).
- California has no lower rate for capital gains, so the state taxes your gain as ordinary income (Franchise Tax Board).

Most owners sell a business once. The buyer, the broker, and the escrow officer have usually done it many times. This guide walks through the whole sale from the seller’s side, with the California rules that out-of-state checklists skip, and it links to the detailed guide for each stage.

## What are the steps to sell a business in California?

Work through them in this order. Signing a letter of intent before you know whether you’re selling assets or the entity usually costs money later.

1. **Assemble the team.** A CPA for tax planning, often a business broker, and an attorney for the documents. A valuation firm if price is contested or a formal appraisal is needed.
2. **Clean up the records.** Three years of tax returns and financial statements that match each other, current contracts, the lease, an equipment list, and the entity’s own records in order.
3. **Find out what it’s worth.** See [how to value a small business in California](https://ridleylawoffices.com/how-to-value-a-small-business-california/).
4. **Choose the structure.** Asset sale or entity sale, covered below.
5. **Sign a nondisclosure agreement** with each serious buyer before you share numbers. See [NDAs for California businesses](https://ridleylawoffices.com/nda-california/).
6. **Negotiate and sign a letter of intent.** See [the letter of intent to buy a California business](https://ridleylawoffices.com/letter-of-intent-buy-business-california/).
7. **Let the buyer do due diligence.** See the [due diligence checklist for buying a California business](https://ridleylawoffices.com/due-diligence-checklist-buying-business-california/), which tells you what the buyer will ask for.
8. **Sign the purchase agreement** and the side documents: bill of sale or assignment of interests, lease assignment, non-compete, transition or consulting agreement, and a promissory note if you’re carrying part of the price.
9. **Open escrow and handle the California clearances and notices.** CDTFA, EDD, and the bulk sale notice if it applies.
10. **Close, then wind down.** Final payroll, final returns, closing accounts, and dissolving the old entity if nothing is left in it.

## Who does what in a California business sale?

Each professional has a lane, and the sale goes better when nobody drifts out of theirs. I draft and review the legal documents. I don’t value the business, prepare tax returns, or market it.

| Role | What they handle |
| --- | --- |
| Business broker | Pricing opinion, marketing, screening buyers, keeping the sale quiet from employees and customers |
| CPA | Tax projection, purchase price allocation, final returns, installment and entity tax questions |
| Valuation firm | A formal appraisal when price is disputed, when a partner or an ESOP is involved, or when a lender or the IRS needs one |
| Escrow holder | Holds the money, requests tax clearances, handles bulk sale claims, disburses at closing |
| Attorney (my role) | Letter of intent, purchase agreement, non-compete, lease assignment, promissory note and security agreement, entity approvals, closing documents |
| Litigation counsel | Any lawsuit, whether it comes before or after closing. I don’t litigate, and I refer those matters out. |

## Should I sell the assets or the company itself?

Most small California businesses sell as asset sales. The buyer picks the assets and liabilities it’s taking, and the seller keeps the entity and everything left in it. In an entity sale, the buyer buys your shares or your LLC membership interest and gets the company with its whole history.

| | Asset sale | Stock or membership interest sale |
| --- | --- | --- |
| What transfers | Listed assets and only the liabilities the buyer agrees to take | The entire entity, including unknown liabilities |
| Contracts, permits, lease | Each must be assigned, often with consent | Usually stay in place, unless a change-of-control clause says otherwise |
| Federal tax (ask your CPA) | Price is allocated asset by asset, which can create ordinary income | Usually capital gain on the shares or interest |
| Who usually prefers it | Buyers | Sellers |

The IRS treats a lump-sum sale of a business as a sale of each separate asset. Both sides use the residual method to allocate the price and report it on Form 8594 (IRC § 1060). How that allocation is split between equipment, inventory, a non-compete, and goodwill changes the tax for both of you, so it belongs in the purchase agreement and in front of your CPA before you sign.

If the company owns California real estate, an entity sale has a property tax catch. A purchase of more than 50 percent of a corporation’s voting stock, or of a majority interest in an LLC or partnership, is a change in ownership of the real property the entity owns ([Rev. & Tax. Code § 64(c)](https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=RTC&sectionNum=64)). The person acquiring control then has to file a signed change in ownership statement with the Board of Equalization within 90 days from the date of the change in control ([Rev. & Tax. Code § 480.1](https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=RTC&sectionNum=480.1)). Missing the filing carries a penalty of 10 percent of the taxes on the new base year value, according to the notice that same section requires.

## How do CDTFA successor liability and tax clearance work?

When a seller who owes sales tax sells out the business, the buyer has to withhold enough of the purchase price to cover that amount until the seller produces a receipt showing it has been paid or a certificate stating that no amount is due ([Rev. & Tax. Code § 6811](https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=RTC&sectionNum=6811)). A buyer who fails to hold it back becomes personally liable for the amount, up to the purchase price ([Rev. & Tax. Code § 6812](https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=RTC&sectionNum=6812)). The rule is called successor liability, and it’s why a competent escrow holder won’t release your money until the clearance comes back.

The agency is now the California Department of Tax and Fee Administration (CDTFA). The certificate is what the CDTFA calls a Certificate of Payment. The buyer, or escrow on the buyer’s behalf, requests a tax and fee clearance online or in writing with a copy of the purchase agreement.

Timing runs off the buyer’s request. The agency must issue the certificate or mail notice of the amount due within 60 days after the latest of the written request, the date of sale, or the date the seller’s records are made available for audit (Rev. & Tax. Code § 6812). If the agency misses that deadline, the buyer is released from the duty to withhold. The CDTFA’s own guidance warns that a clearance can take 60 days or more, especially when an audit is needed and the seller’s records aren’t ready.

The agency has up to three years after it’s notified of the purchase to serve a notice of successor liability on a buyer who didn’t withhold ([Rev. & Tax. Code § 6814](https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=RTC&sectionNum=6814)). For a seller, the practical lesson is simple. Get your sales tax filings current before you list, because every unpaid dollar will come out of escrow anyway, and an audit started at closing can hold up your money for months. The CDTFA also tells escrow to withhold sales tax due on the furniture, fixtures, and equipment in the sale.

## What does EDD require when a business with employees is sold?

The Employment Development Department has its own successor rule for unpaid payroll taxes. A buyer of a business, or of substantially all its assets, must withhold enough of the price to cover the seller’s unpaid contributions, interest, and penalties until the seller produces a certificate from EDD (Unemp. Ins. Code § 1731). A buyer who doesn’t withhold is personally liable up to the purchase price (Unemp. Ins. Code § 1733).

Either side can ask EDD for the certificate. EDD must answer within 30 days, and if it doesn’t, that silence counts as a certificate that nothing is due (Unemp. Ins. Code § 1732). EDD calls the document a Certificate of Release of Buyer, form DE 2220, and says escrow funds shouldn’t be disbursed until it’s issued.

Employees also raise a timing issue for the seller. If you end their employment at closing, the wages earned and unpaid are due immediately ([Lab. Code § 201](https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=LAB&sectionNum=201)). Plan the final payroll with your payroll provider before the closing date, not after. Whether workers were properly classified in the first place is a separate question the buyer will ask about, covered in [employee or independent contractor in California](https://ridleylawoffices.com/employee-vs-independent-contractor-california/).

## Does California’s bulk sale law apply to my sale?

It applies to a narrower group than most people think. The bulk sale law in Com. Code § 6101 and following covers a seller whose principal business is selling inventory from stock, including those who make what they sell, or a restaurant owner (Com. Code § 6103). A bulk sale is a sale outside the ordinary course of more than half the seller’s inventory and equipment, measured by value (Com. Code § 6102).

Some sales are outside the law entirely. A sale of assets worth less than $10,000 net of liens, or more than $5,000,000, is exempt (Com. Code § 6103). A consulting firm, a medical practice, or a software company usually isn’t selling inventory from stock, so the notice rules often don’t reach it. The CDTFA and EDD successor rules above apply either way.

When the law does apply, the buyer carries the duties. The buyer must get from the seller a list of every business name and address the seller used in the past three years and give notice of the bulk sale (Com. Code § 6104). The notice has to be recorded with the county recorder, published in a newspaper of general circulation, and delivered or mailed to the county tax collector, all at least 12 business days before the sale (Com. Code § 6105).

For a sale of $2,000,000 or less that is substantially all cash or a promise to pay cash, a further rule applies (Com. Code § 6106.2). The buyer or the escrow holder must use the cash to pay the seller’s debts that are due by the sale date and that creditors file in writing by the deadline in the notice. In practice, this is why many California business sales close through an escrow company that does this work every week.

A buyer who ignores the law is exposed to the seller’s creditors, capped in most sales at twice the net contract price (Com. Code § 6107). One detail matters for sellers who lease their space. The law’s definition of “assets” leaves out the tenant’s interest in a real property lease (Com. Code § 6102), so the lease still needs its own assignment and consent.

## What about the Franchise Tax Board?

Start with your own tax bill. California doesn’t have a lower rate for capital gains and taxes all capital gains as ordinary income, according to the FTB. A seller in a high bracket should model the state tax with a CPA before agreeing to a price, and should ask whether spreading payments helps (see [installment sales of a California business](https://ridleylawoffices.com/installment-sale-of-business-california/)).

Real estate is next. If the sale includes California real property, escrow generally withholds 3 1/3 percent of the sales price for the FTB, unless an exemption applies or the seller elects the alternative calculation on Form 593. FTB instructions say withholding isn’t required when the sales price is $100,000 or less. That withholding is a credit against the seller’s tax, not an extra tax.

Then there’s the entity itself. The FTB can suspend the powers, rights, and privileges of a corporation or LLC that doesn’t pay its tax on time ([Rev. & Tax. Code § 23301](https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=RTC&sectionNum=23301)). A suspended seller should be revived before it signs anything, and a buyer’s diligence will catch the problem if you don’t. See [suspended LLC or corporation in California](https://ridleylawoffices.com/suspended-llc-corporation-california/). After an asset sale, the entity still has to file final returns and cancel if nothing is left in it. See [how to dissolve an LLC in California](https://ridleylawoffices.com/how-to-dissolve-llc-california/) and [closing a California business: the full checklist](https://ridleylawoffices.com/how-to-close-business-california/).

## Can I agree not to compete after I sell?

Yes, and the buyer will usually insist on it. California voids most contracts that restrain anyone from a lawful trade or business ([Bus. & Prof. Code § 16600](https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=BPC&sectionNum=16600)). The sale-of-business exception is the main way around that rule.

A person who sells the goodwill of a business, or an owner who sells all of an ownership interest in the entity, may agree with the buyer not to carry on a similar business within a specified geographic area where the business was carried on ([Bus. & Prof. Code § 16601](https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=BPC&sectionNum=16601)). The same section limits it to as long as the buyer carries on a like business there.

Drafting matters here. The area should match where the business operated, not the whole state by default. A minority owner who keeps some of the interest doesn’t fit the ownership-interest part of the exception. And your employees who stay on can’t be bound to non-competes at all, because the exception is for sellers. More in [non-competes in California](https://ridleylawoffices.com/non-compete-california/).

## What happens to my lease?

Your lease usually needs the landlord’s consent to assign, and the landlord often has more say over your sale than you’d like. If the lease requires consent but gives no standard, California reads in a standard that the landlord may not unreasonably withhold it ([Civ. Code § 1995.260](https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=CIV&sectionNum=1995.260)). Many commercial leases do state a standard, and many make the original tenant stay liable after the assignment.

Read the lease before you sign a letter of intent. If you signed a personal guarantee, find out whether the landlord will release it once the buyer takes over. See [personal guarantees on California commercial leases](https://ridleylawoffices.com/personal-guarantee-commercial-lease-california/) and [commercial lease review for California tenants](https://ridleylawoffices.com/commercial-lease-review-california/).

## A worked example: selling a Ventura cafe

Maria owns a cafe in Ventura through a single-member LLC. She agrees to an asset sale for $450,000: $50,000 for furniture, fixtures, and equipment, $15,000 for inventory, $10,000 for a non-compete, and $375,000 for goodwill. The buyer pays $360,000 cash at closing and signs a five-year note for $90,000.

- **Bulk sale law applies.** She runs a restaurant, the sale is more than half her inventory and equipment, and it’s between $10,000 and $5,000,000 (Com. Code § 6103). Escrow records and publishes the notice at least 12 business days before closing and mails it to the Ventura County tax collector.
- **The cash-sale rule applies too.** The price is under $2,000,000 and all cash or a promise to pay cash (Com. Code § 6106.2), so escrow pays her filed creditor claims from the cash.
- **Clearances.** Escrow requests the CDTFA Certificate of Payment and the EDD DE 2220, and CDTFA may have escrow collect sales tax on the $50,000 of furniture, fixtures, and equipment.
- **Non-compete.** She agrees not to open a cafe within the area where hers operated, which fits Bus. & Prof. Code § 16601 because she’s selling the goodwill.
- **Lease.** The landlord consents to the assignment and, after some back and forth, releases her guarantee in exchange for the buyer’s.
- **Taxes.** Her CPA allocates the price on Form 8594, reports the note under the installment method, and plans for California taxing her gain at ordinary rates.
- **After closing.** She pays final wages on her last day as the employer, files the final LLC return, and cancels the LLC.

The numbers are illustrative. The steps are what a real Ventura County cafe sale looks like.

## What if the business is part of my estate plan?

Check how you hold the business before you sell it. If your LLC interest or shares are in your living trust, you sign as trustee, and the sale proceeds and any seller note belong to the trust. A seller note that runs five years is an asset your successor trustee may have to collect, so the trust should say who can manage it if you can’t. See [business succession planning in California](https://ridleylawoffices.com/business-succession-planning-california/) and [family business succession](https://ridleylawoffices.com/family-business-succession-california/) for owners who’d rather pass the business to family than sell it.

## Other ways out

A sale to an outside buyer isn’t the only exit. Owners also sell to a partner under a [buy-sell agreement](https://ridleylawoffices.com/buy-sell-agreement-california/), sell to employees through an [ESOP](https://ridleylawoffices.com/esop-california/), or close and liquidate. If your co-owner is the buyer and the two of you don’t agree on terms, see [business divorce and partner buyouts](https://ridleylawoffices.com/business-divorce-partner-buyout-california/).

## Guides in this series

- [How to value a small business in California](https://ridleylawoffices.com/how-to-value-a-small-business-california/)
- [The letter of intent to buy a California business](https://ridleylawoffices.com/letter-of-intent-buy-business-california/)
- [Due diligence checklist for buying a California business](https://ridleylawoffices.com/due-diligence-checklist-buying-business-california/)
- [ESOPs for California business owners](https://ridleylawoffices.com/esop-california/)
- [Installment sales of a California business](https://ridleylawoffices.com/installment-sale-of-business-california/)

## Frequently asked questions

### Do I need a lawyer to sell a small business in California?

The law doesn’t require one, but the documents carry the risk. The purchase agreement decides what you’re still liable for after closing, how much of your price is at risk in indemnity claims, and whether your non-compete fits the sale-of-business exception. A broker’s form agreement is written to close the deal, not to protect you.

### Do I need a business broker?

Not always. Owners who already have a buyer, such as a key employee, a competitor, or a partner, often sell without one. A broker earns the fee when you need buyers found and screened quietly, or when you don’t know what the market will pay.

### How long does CDTFA tax clearance take?

The statute gives the CDTFA 60 days from the latest of the buyer’s written request, the sale date, or the date the seller’s records are made available for audit (Rev. & Tax. Code § 6812). The CDTFA’s own guidance says it can take 60 days or more when an audit is needed. Current sales tax filings are the best way to shorten it.

### How is the sale of a business taxed in California?

California taxes capital gains as ordinary income, with no lower rate, according to the FTB. Federal tax depends on how the price is allocated among the assets under IRC § 1060, and some pieces, like inventory and depreciation recapture, are taxed as ordinary income. Take the allocation to your CPA before the purchase agreement is final.

### Can I sell a business that still has debt?

Yes. Secured debt is usually paid off from escrow so the buyer takes the assets free of liens, and unsecured creditors may file claims in escrow if the bulk sale law applies. In an entity sale, the debt stays with the company, and the price is adjusted for it.

### What happens to my employees when I sell?

In an asset sale, you’re the employer until closing, and you owe final wages immediately when their employment with you ends under Lab. Code § 201. The buyer decides whom to hire. In an entity sale, the employer doesn’t change, so employment usually continues without a break.

### What if the buyer stops paying me after closing?

Your rights depend on the note, the security agreement, and any guarantee you negotiated before closing. Collecting on a default is a lawsuit or a foreclosure on collateral, and that’s work for litigation counsel. I can refer you.

More in this series

- [How to sell a small business in California](https://ridleylawoffices.com/how-to-sell-a-business-california/)
- [How to value a small business in California](https://ridleylawoffices.com/how-to-value-a-small-business-california/)
- [The letter of intent to buy a California business](https://ridleylawoffices.com/letter-of-intent-buy-business-california/)
- [Due diligence checklist for buying a California business](https://ridleylawoffices.com/due-diligence-checklist-buying-business-california/)
- [ESOPs for California business owners](https://ridleylawoffices.com/esop-california/)
- [Installment sales of a California business](https://ridleylawoffices.com/installment-sale-of-business-california/)
- [All business owner guides](https://ridleylawoffices.com/business-guides/)

I draft and review the documents for a business sale, including the letter of intent, purchase agreement, non-compete, and seller note, at my hourly rate of $500. See [fees](https://ridleylawoffices.com/fees/) or my [business law](https://ridleylawoffices.com/business-law-attorney/) page for the rest of what I do for owners.

[Talk to Eric](https://ridley.click/eric-60)

Book a consultation at [ridley.click/eric-60](https://ridley.click/eric-60) or call 805-244-5291. I work with business owners in Ventura, Santa Barbara, and Los Angeles counties by Zoom or phone.

**Please read:** This page is general information about California law as of September 2026. It isn’t legal, tax, or financial advice, and reading it doesn’t make you my client. Tax treatment and the right structure depend on facts this page can’t see, so talk with your CPA as well. An attorney-client relationship starts only with a signed engagement agreement.