Q: In California is there a law that a seller must provide to buyer a disclosure during purchase agreement for business ?

A: California doesn’t impose a single, blanket requirement for sellers to issue a formal disclosure statement in every business sale. However, depending on the nature of the deal, various state laws may require certain disclosures:

Real Property Involvement:

If the sale includes real estate, the seller often must comply with the Transfer Disclosure requirements (Code Civ. Proc, §§ 1102–1102.17.) These sections require certain disclosures about the property’s condition and known defects.

Franchise Transactions:

For franchise sales, the California Franchise Investment Law (California Corporations Code § 31000 et seq.) requires the franchisor to provide prospective franchisees with a Franchise Disclosure Document (FDD). This document includes detailed information on fees, obligations, and financial performance representations.

Securities Transactions:

If the deal is structured as a stock sale, it may fall under the California Corporate Securities Law of 1968 (California Corporations Code § 25000 et seq.). This law obligates sellers to disclose material information about the securities being offered.

Bulk Sales (Inventory/Equipment):

When a sale involves a significant portion of the seller’s inventory or equipment, the Uniform Commercial Code’s Bulk Sales Act (California Commercial Code §§ 6101–6111) may apply, requiring notifications to creditors and possibly certain disclosures to the buyer.

General Fraud and Misrepresentation Law:

Even if no specific statute applies, sellers remain subject to common-law rules prohibiting fraud and material misrepresentations. Under Civil Code § 1710(2), withholding material facts can amount to deceit if there’s a legal duty to disclose. Case law such as LiMandri v. Judkins elaborates on situations where a duty to disclose arises. (LiMandri v. Judkins (1997) 52 Cal.App.4th 326)

If you want to discuss your specific situation, please feel free to reach out.

A: Yes, in California, sellers must provide specific disclosures when selling a business under the California Corporate Securities Law of 1968 and related regulations.

The disclosure requirements typically include providing buyers with detailed information about the business's financial statements, assets, liabilities, operational history, and any potential risks or material facts that could affect the buyer's decision. This documentation is often referred to as "due diligence materials" and should be provided during the negotiation phase, before finalizing the purchase agreement.

Failing to provide required disclosures can result in serious legal consequences for the seller, including potential liability for fraud or misrepresentation. The seller might face financial penalties or even contract rescission if they withhold material information. For your protection as either a buyer or seller, working with qualified legal counsel to ensure all necessary disclosures are properly documented and exchanged during the business sale process is highly recommended.