Business Lawyer – California Bulk Sales Law

If you are in the market to buy the assets of a small business corporation either to start a new business of your own or add to a small corporation that you currently run, you need to be familiar with California’s Bulk Sales Law.

What is the purpose of California’s Bulk Sales Law?

The whole purpose of the law is to notify creditors of the selling business that it intends to sell all or if the substantially all of the assets of the company. The notice is given to the creditor in order to protect the creditor from a debtor who might transfer business assets to avoid paying debts. The notice gives the creditor time to make a claim for the money generated from the sale of the business assets.

The idea behind the Bulk Sales Law is the state wants to prevent unusual sales or transfers of assets by a seller in order to avoid paying creditors. It can make it difficult for a seller to get rid of assets without first settling the prior claims of creditors. The law applies to businesses physically located in California. It applies to those businesses that maintain inventories of goods for sale. It also applies to manufacturers that sell their own products and restaurants.

In most cases, the buyer of the assets of a small business corporation is not obligated to pay the business debts of the seller. Of course, this could be specifically negotiated between the buyer and the seller who would then make it a part of the sales purchase agreement.

Is this a good thing for the buyer of a business?

If you follow the Bulk Sales Law, it can allow the buyer to know that any future potential liabilities for unpaid creditors are taxes are limited or banned by adherence to the law.

What if I provide a service?

It does not apply to businesses that provide services rather than goods.

What happens if we fail to comply with the Bulk Sales Law?

The good news is that the sale is still valid. However, there may also be some bad news. If a buyer and the seller fail to comply with the Bulk Sales Law, the failure could result in the buyer being liable for the seller’s debts. The silver lining to this dark cloud is that the law is explicit about the buyer’s right to obtain reimbursement from the seller for any amounts paid to a creditor in satisfaction of the seller’s liability unless the buyer and seller agree otherwise.

So what exactly is a “Bulk Sale”?

Under California law, a “bulk sale” is a sale of more than half of the assets of a business to a buyer in a situation where the sale of the assets is not part of the seller’s ordinary course of business.

Is every sale of assets included in the Bulk Sales Law?

No, not everybody is included. If the value of the assets to be sold have a total value of less than $10,000, or a total value of more than $5 million, then the sale of assets is exempt from the Bulk Sales Law.

The law imposes several specific requirements on buyers. These specific obligations could include notice requirements and a requirement to keep an escrow for creditors.

What is an Asset?

Assets mean the inventory and equipment that is the subject of a bulk sale and any tangible and intangible personal property used or held for use primarily in, or arising from, the seller’s business and sold in connection with that inventory and equipment, but the term does not include any of the following:

– Fixtures other than readily removable factory and office machines.
– The lessee’s interest in a lease of real property.
– Property to the extent it is generally exempt from creditor process under nonbankruptcy law.

What are the required notices for a Bulk Sale?

The first thing that a buyer must do is prepare a notice regarding the plan to make the bulk sale. The notice must contain certain specific information which would include:

– A statement that a bulk sale is about to be made;
– The names and addresses of the buyer and seller;
– Other business or trade names used by the seller in the three-year period prior to the notice date;
– A description of the assets included in the sale and their physical location;
– The planned date and location of the bulk sale; and
– Information regarding the escrow requirements of the bulk sales law, including instructions for making a claim.

If the bulk sale is for less than $2,000,000.00, then the notice must additionally state:

– The name and address of the person with whom claims may be filed; and,
– The last date to file claims which shall be the business day before the date stated in the notices; and

Are we going to have to publish and record this notice in more than one place?

The buyer is going to have to publish and record the notice in more than one location:

The buyer must publish or record this notice in three locations in the county where the sale is to take place.

The notice must be recorded at least twelve business days before the closing date in these places:

• a local newspaper of general circulation;

• the county clerk’s or recorder’s office; and, last but not,

• the county tax collector’s office.

One of the problems for business owners who are well down the sales path is that the notice requirement may have the effect of delaying the close of the business sale. Timing and planning are key here.

Is escrow required?

No, but escrow is a really good idea. The buyer should consider depositing the full cash portion of the sale into escrow, if:

the purchase price for a business is $2 million or less;
the consideration for the sale is cash or a promissory note for cash; and,
the transaction is covered by the Bulk Sales Law.

Is there an obligation for the creditor to act within any specified time period?

Creditors will have a set period of time to submit claims to the escrow agent. The time will be identified in the buyer’s notice of bulk sale. The seller may dispute these claims. The escrow agent must withhold certain amounts from funds distributed to the seller until such disputes are resolved.

If the total amount of creditors’ claims exceeds the amount in escrow, the closing of the sale will be delayed.

Summary

The California Bulk Sales Law is one of many traps they can catch an unwary buyer who is not using the services of a trusted legal advisor to guide them through the process. Legal advice is necessary to apply these legal concepts to your particular situation. This article is meant only as a general description of this area of the law.

At the law offices of Gale and Vallance, we strongly advise all of our clients to consult with us at the beginning of the process of buying or selling assets of the business so we can save them money and make for a smooth business transaction. If you would like us to guide you through the process, please do not hesitate to contact us at IncorporationAttorney.com or contact us directly at the Law Offices of Gale and Vallance at 714-634-4838.