Buying an established business can bring revenue, customers, and trained employees on day one. Starting from scratch can give you more control over the operation you build. Neither route is automatically cheaper or legally simpler. To decide whether to buy a business or start one, compare not just the purchase price or startup budget, but also inherited obligations, contract restrictions, regulatory requirements, and the cost of correcting problems.
Buy a business or start one: compare obligations first
The practical question is what you are paying for—and what you must spend afterward. An acquisition price may include valuable customer relationships, equipment, inventory, intellectual property, and goodwill. It may also reflect earnings that depend heavily on the current owner staying involved.
A startup avoids purchasing someone else’s operating history, but it still needs legal infrastructure. California businesses may need entity formation, local permits, employment documents, customer contracts, insurance, and industry-specific approvals before opening.
Build two budgets using the same categories:
- Upfront spending: Purchase price or formation costs, deposits, equipment, professional fees, and permits.
- Operating cash: Payroll, rent, inventory, marketing, and reserves while revenue develops.
- Legal exposure: Existing disputes, compliance gaps, personal obligations, and the cost of negotiating essential agreements.
For either route, separate the business’s obligations from obligations you personally accept.
An acquisition’s structure changes the risk
An asset purchase usually involves selected property, such as equipment, inventory, trade names, and specified contracts. An equity purchase involves ownership interests in the existing entity. These structures can produce very different legal and tax consequences.
In an equity purchase, the entity generally remains responsible for its existing obligations, including problems that surface after closing. In an asset purchase, the agreement can identify which liabilities the buyer assumes. However, that allocation does not necessarily prevent a creditor, employee, or government agency from asserting a claim against the buyer under applicable law.
California successor-liability rules, tax requirements, and employment laws can matter even when the contract says the seller retains prior debts. For example, California Revenue and Taxation Code sections 6811 and 6812, together with California Code of Regulations, title 18, section 1702, require a buyer of a business or stock of goods from a seller liable for amounts under California’s Sales and Use Tax Law to withhold enough of the purchase price to cover those amounts until the seller produces the required receipt or tax-clearance certificate. Failure to comply can create buyer successor liability, generally up to the purchase price. Tax-clearance procedures deserve attention before funds are released.
Legal review of business acquisitions and transaction documents should address structure, assumed liabilities, required consents, and protections if the seller’s statements prove inaccurate.
Due diligence should test what makes the business valuable
Financial statements are only part of the review. Determine whether the assets and relationships supporting the asking price will actually be available after closing.
- Contracts and leases: Check assignment restrictions, change-of-control clauses, renewal rights, defaults, and landlord consent requirements.
- Assets and financing: Verify ownership, identify liens, and arrange releases where needed. Confirm whether equipment is owned or leased.
- Employees: Review wages, worker classifications, accrued benefits, employment claims, and any union obligations.
- Intellectual property: Confirm ownership of trademarks, software, websites, and work created by contractors.
- Permits and customer information: Determine whether licenses transfer and whether privacy obligations limit transferring or using customer data.
- Disputes and taxes: Investigate pending claims, threatened litigation, unpaid taxes, and regulatory notices.
Translate findings into closing conditions, price adjustments, indemnification provisions, or a holdback where appropriate. A seller’s promise to reimburse losses has limited practical value if the seller lacks funds when a claim arises.
If keeping the seller from competing is important, California requires careful drafting. Business and Professions Code section 16600 generally restricts noncompete agreements. Section 16601 creates a limited sale-of-business exception for specified transactions, including a sale of goodwill, an owner’s disposal of all ownership interests, or an entity’s sale of all or substantially all operating assets together with goodwill. A qualifying seller may agree to refrain from carrying on a similar business within a specified geographic area where the sold business was carried on, and only while the buyer or a successor to the goodwill or ownership interests carries on a like business there. A restraint must satisfy the statute’s requirements and is not automatically enforceable merely because a business was sold.
Starting fresh still requires legal groundwork
A new business can avoid many historical liabilities, but formation alone does not establish a complete legal foundation. An LLC or corporation generally provides liability separation; it does not eliminate liability for your own misconduct, certain statutory obligations, or debts you personally undertake.
Before opening, address these essentials:
- Ownership terms: Document contributions, voting rights, profit distributions, departures, and a process for resolving owner disputes.
- Operating permissions: Confirm zoning, local business requirements, and professional or industry licensing.
- Core agreements: Prepare suitable customer, vendor, contractor, employment, and lease documents.
- Financial separation: Maintain business accounts, accurate records, and appropriate insurance.
Landlords and lenders may request a personal guaranty from a founder or acquisition buyer. Review its scope, duration, release conditions, and whether the guarantor remains liable after a sale or ownership change. That obligation belongs in both budgets.
Make the decision using adjusted cost, not sticker price
Compare the total cash needed through a realistic operating period. For an acquisition, add the purchase price, transaction expenses, required upgrades, working capital, and a reserve for identified risks. For a startup, add formation expenses, launch spending, operating losses while customers develop, and compliance costs.
Also compare uncertainty. An existing business may offer records that help evaluate demand, but those records need verification. A startup offers more flexibility, yet future revenue may be harder to estimate.
Buying may make sense when the transferable assets and verified earnings justify the price. Starting may make sense when existing businesses carry excessive obligations or do not fit your plans. Coordinate legal, tax, and financial review before signing binding terms; some provisions in a letter of intent can be binding even when the proposed acquisition is not.
Talk to a California business attorney
Itkin Law offers a free consultation to discuss acquisition risks or the legal groundwork for a new business. Schedule a free consultation or call (424) 603-8888.
This article is attorney advertising and provides general information only. It is not legal advice and does not create an attorney–client relationship. The law changes, and this article reflects the law as of its publication date. Every situation is different — contact us to discuss how the law applies to your exact circumstances. See our full disclaimer.
