Breach of a Business Purchase Agreement in California: Earnouts, Reps, and Warranties

Last updated: November 2026

A breach of a business purchase agreement in California is litigated as a breach of contract, with the asset purchase or stock purchase agreement and its disclosure schedules as the governing text. The common claims are an unpaid earnout, a representation that turned out to be false, an indemnity demand the other side refuses, and a seller who competes after promising not to. Fraud claims often travel alongside. Kolmogorov Law, P.C. handles post-closing disputes for buyers and sellers in Orange County, Los Angeles, and across California.

Call (909) 235-6116 or contact us online to discuss a business sale that has gone wrong after closing.

The documents that control

Post-closing disputes are decided by the deal documents. The first task is to assemble them: the purchase agreement, the disclosure schedules, the note and security agreement if the seller financed part of the price, the non-compete, and the closing statement. Our guide to buying or selling a small business describes how these pieces fit together before closing.

Representation and warranty claims

A representation is a statement of fact about the business as of signing or closing: the financial statements are accurate, there is no undisclosed litigation, the customer contracts are assignable. When one is false, the buyer's remedy is usually an indemnity claim under the agreement rather than a freestanding suit.

The indemnity article is where the negotiated limits live. A survival period cuts off claims made after a set number of months. A basket requires losses to exceed a threshold before any recovery. A cap limits total recovery, often to an escrow. An exclusive remedy clause says indemnity is the buyer's only recourse. Courts generally enforce these limits as written. A buyer who misses the survival deadline or the notice procedure can lose an otherwise strong claim. Our indemnification clause page covers the mechanics of tender and refusal.

The limits have an edge. A contract cannot exempt a party from responsibility for its own fraud. (Civ. Code, § 1668.) Most purchase agreements carve fraud out of the cap for that reason.

Earnout disputes

An earnout defers part of the price and ties it to the business's performance after closing. The seller wants the target hit. The buyer now runs the business. The fights are predictable: how the metric is calculated, whether the buyer's decisions were permitted, and whether the buyer ran the business to miss the target.

The agreement's words matter most. Some earnouts give the buyer sole discretion over operations and disclaim any duty to maximize the payment. Others impose operating covenants. The implied covenant of good faith and fair dealing bars the buyer from acting to deprive the seller of the benefit of the bargain. It cannot, however, override an express grant of discretion.

How these disputes come up for business owners

A buyer of a distribution company discovers after closing that the largest customer had given notice of termination before signing. The seller's representation that no customer had indicated an intent to terminate was false. The buyer gives notice under the indemnity article. The seller says the notice came after the survival period expired.

A seller agrees to an earnout based on gross revenue over two years. Eight months in, the buyer merges the acquired product into its existing line and stops tracking its revenue separately.

Fraud alongside the contract

When the seller knew a representation was false, the buyer may plead fraud in addition to breach. California defines deceit to include a false statement by one who does not believe it true and an assertion made without reasonable ground for believing it. It also includes concealment of a fact one is bound to disclose, and a promise made without intent to perform. (Civ. Code, § 1710.) Fraud opens the door to punitive damages on clear and convincing proof of oppression, fraud, or malice. (Civ. Code, § 3294, subd. (a).)

The sophisticated-party defenses are real. Due diligence, a non-reliance clause, and the integration clause are all argued against fraud claims, though the parol evidence rule does not bar evidence of fraud. See our pages on fraud claims in business disputes and integration clauses.

The seller's non-compete

California voids most non-competes. The seller of a business is the main exception. A seller of the goodwill of a business, or an owner selling all of its interest in the entity, may agree not to carry on a similar business within a specified geographic area where the business operated. The restraint lasts as long as the buyer carries on a like business there. (Bus. & Prof. Code, § 16601.) A seller who violates one faces an injunction and damages.

Seller financing and the promissory note

When the seller carried a note, the two sides' claims collide. The buyer stops paying, citing breached representations; the seller sues on the note and the security agreement. Whether the buyer may set off indemnity claims against note payments depends on whether the agreement allows it. Our promissory note page covers the collection side.

Deadlines for a breach of purchase agreement claim, and where cases are heard

A claim on the written agreement must be brought within four years. (Code Civ. Proc., § 337, subd. (a).) A fraud claim must be brought within three years, running from discovery of the facts constituting the fraud. (Code Civ. Proc., § 338, subd. (d).) The contract's survival periods run much sooner.

These cases are heard in the Superior Court, in Orange County at the Central Justice Center in Santa Ana and in Los Angeles at the Stanley Mosk Courthouse. Where the parties are from different states, the case may proceed in the Central District of California. Many purchase agreements send the dispute to arbitration, and earnout calculations frequently go to an accountant first.

We read the deal documents for the limits, deadlines, and carve-outs, then match the facts to the strongest claim available. For sellers, we hold buyers to the survival periods and pursue unpaid earnouts and notes. For buyers, we build the proof that the representations were false when made.

What to bring to the first meeting

Bring the complete purchase agreement with every schedule and exhibit, the note and security documents, the non-compete, and the closing statement. Add the financial statements and due diligence materials the seller provided, the post-closing financial reports, and all correspondence about the dispute.

Frequently asked questions

What happens if a seller breaches a business purchase agreement?

The buyer typically makes an indemnity claim under the agreement, subject to its survival period, basket, and cap, and may sue for breach of contract or fraud where the facts support it. A contract cannot shield the seller from liability for its own fraud. (Civ. Code, § 1668.)

How are earnout disputes resolved?

By the agreement's own terms first. Most define the metric, give audit rights, and send calculation disputes to an independent accountant. Claims that the buyer ran the business to defeat the earnout are litigated or arbitrated under the covenants and the implied duty of good faith.

Can a buyer sue for fraud after signing an agreement with a non-reliance clause?

Often, yes, though the clause is a serious obstacle. California's parol evidence rule does not exclude evidence offered to prove fraud, and contracts exempting a party from its own fraud are against policy. (Civ. Code, § 1668.) Justifiable reliance is usually the contested issue.

Is a seller non-compete enforceable in California?

Yes, within limits. A person who sells the goodwill of a business or all of its ownership interest may agree to refrain from a similar business in a specified geographic area where the business operated. The buyer must carry on a like business there. (Bus. & Prof. Code, § 16601.) Clauses that exceed those limits are vulnerable.

How long do I have to sue over a breach of a purchase agreement?

Four years on the written contract and three years for fraud, the latter running from discovery. (Code Civ. Proc., §§ 337, subd. (a), 338, subd. (d).) The agreement's survival and notice provisions usually impose much shorter contractual deadlines for indemnity claims.

Talk to a California breach of contract attorney

If a business sale has produced a dispute over an earnout, a representation, an indemnity claim, or a note, call (909) 235-6116 or contact us online. Kolmogorov Law, P.C. is located at 327 Magnet, Irvine, CA 92618, and represents businesses in Orange County, Los Angeles, and throughout California.

This page provides general information about California law and is not legal advice. Outcomes depend on the purchase agreement, the disclosure schedules, and the court.