While many states have repealed their bulk sales laws, California’s Bulk Sales Law remains in full force and effect. The primary stated purpose of this law is to protect buyers and creditors following the purchase of more than half of a business’s assets. If a buyer makes a bulk sale purchase but does not adhere to the requirements set out in the bulk sales law, the buyer will typically remain liable to the seller’s creditors. Even though a business attorney may draft a purchase or sales agreement requiring the seller to indemnify the buyer for any costs incurred by the buyer on pre-existing debts of the seller, if the seller has not paid its debts, chances are the seller is a deadbeat and the buyer may not recover such costs. Therefore, our business law attorneys suggest strict compliance with California Bulk Sales Law by buyers to prevent such liability from being imposed as matter of law.
A bulk sale is defined in the statute as any sale outside the ordinary course of the seller’s business of more than half of the seller’s inventory and equipment as measured by the fair market value on the date of the bulk sale agreement. California Commercial Code §6101(a)(3).
Generally, the California Bulk Sales Law requirements apply to sales of assets where the following two conditions are met:
- The seller’s principal business is the sale of inventory from stock, including those who manufacture what they sell, or a restaurant owner; and,
- The seller is located in California.
However, there are some exemptions to these conditions. The Bulk Sales Law requirements do not apply to sales of assets with a net value (post-lien and security interest calculations) of less than $10,000 or more than $5 million on the date of the bulk sale agreement. In addition, if the net value of the purchased assets is equal to or greater than $10,000 but less than $2 million, the bulk sale is considered a small cash sale, with additional requirements detailed below. See generally California Commercial Code §§ 6101-6111.
Here is a summary of how the statute is applied based on the net value of assets on date of the bulk sale agreement:
Net Asset Value Application
$0 – $9,999 Exempt from California Bulk Sales Law
$10,000 – $2M Small Cash Sales with additional requirements, below
$2M – $5M “Standard” Bulk Sales requirements apply
over $5M Exempt from California Bulk Sales Law
Bulk Sales Requirements
To comply with the law, there are two steps that are essential. First, the buyer prepares a notice of bulk sale that provides the following information:
- A statement that a bulk sale is about to be made;
- The buyer’s name and business address;
- The seller’s name and business address;
- A list of any other business names and addresses used by the seller during the three years prior to the sale;
- A description of the assets and their physical location;
- The place of the bulk sale;
- The anticipated date of the bulk sale;
- A statement whether the bulk sale is a Small Cash Sale, and if so:
- the name and address of the person with whom claims may be filed; and,
- the last date for filing claims, which must be one business day before the anticipated date of the bulk sale set forth in the notice.
Second, at least twelve business days before the sale takes place, the buyer must:
- Record the notice of bulk sale in the county recorder’s office;
- Publish the notice in a local newspaper of general circulation; and,
- Deliver the notice of bulk sale to the county tax collector.
Why Use an Escrow Agent and Business Attorney?
If a purchase of assets is subject to the small cash sale requirements set out above, hiring an experienced escrow agent to handle many of the bulk sale requirements is highly recommended. In addition to accepting creditor claims as required in a small cash sale of assets, tax liabilities are also typically handled through an escrow agent in any bulk sale of assets.
For example, bulk sales are an opportunity for the California State Board of Equalization (BOE) to audit the seller’s sales and use tax payments for previous years. So the buyer must place in escrow an amount sufficient to cover any tax liability owed to the BOE until the seller produces a receipt from the BOE indicating that all taxes have been paid or until the BOE issues a “Certificate of Tax Clearance” indicating that no amount is due. If the buyer purchases a business with employees, the buyer must also place in escrow an amount sufficient to pay contributions, interest and/or penalties due or owing by seller for unemployment compensation insurance benefits or disability insurance. Failure to withhold sufficient funds may result in the buyer’s personal liability for the above payments.
Therefore, hiring an expert escrow agent, along with a business lawyer to draft provisions protecting the buyer against such liabilities and requiring certain warranties by the seller, can avoid significant exposure to liability following the bulk sale of assets. If you are in the market to purchase a business or assets, contact our experienced business law attorneys today for a free evaluation or browse our website for more information.