Due Diligence in a California Business Sale

What buyers actually review, what kills deals, and how California sellers prepare for clean diligence.

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Due diligence is where deals fall apart. Buyer findings during diligence drive renegotiations, retrades, and dropped LOIs. California sellers who prepare in advance close materially faster and at higher final pricing. This guide walks through what buyers actually review.

Financial diligence

Three years of tax returns and financial statements, monthly P&L for the past 24 months, accounts receivable aging, accounts payable aging, owner add-back schedule with documentation, customer concentration analysis, and revenue recognition policies. Buyers cross-reference tax returns to financials and to bank statements — discrepancies kill deals.

Operational diligence

Customer contracts and pricing, vendor contracts and terms, lease agreements and assignment provisions, equipment list and condition, IT/software stack, employee roster and retention metrics, organizational chart, standard operating procedures, and key-person dependencies.

Legal diligence

Corporate organizational documents, ownership records, intellectual property registrations, litigation history (active, pending, recent), regulatory licensure, contracts with change-of-control provisions, and any contingent liabilities.

Tax diligence

Federal and California income tax returns and notices, sales and use tax returns and audits, employment tax compliance, property tax compliance, and any open tax notices or audits. CA Franchise Tax Board and CDTFA history is heavily scrutinized.

California-specific diligence focus

Employee classification (post-Dynamex/AB-5), PAGA exposure (Private Attorneys General Act class action history), wage-hour compliance (meal/rest break documentation), Cal/OSHA citation history, ABC license standing (for hospitality), CSLB license standing (for trades), and Prop 65 compliance (for any consumer product).

How to pre-empt problems

Conduct a seller-side audit 6–12 months before listing. Address PAGA and wage-hour exposure. Confirm all licenses are in good standing. Document add-backs with receipts. Get attorney review of contracts for assignment provisions. Resolve any open tax notices.

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Frequently Asked Questions

Yes. Every Exit Clue engagement starts with a free, confidential consultation that addresses your specific situation, including due diligence considerations relevant to your business and timing.

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