Bulk Sale Escrows California
Over the years they have been called Bulk Sale Escrow, Asset Sale, Business Opportunity Sale Escrow. California Law states, 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).
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, business law attorneys suggest strict compliance with California Bulk Sales Law by buyers to prevent such liability from being imposed as matter of law.
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;
- 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 small cash sale, with additional requirements detailed below. See generally California Commercial Code §§a 6101-6111.
The sale of a business is different from the sale of real estate because a business is defined as personal property. The Bulk Sale Code contained in the Uniform Commercial Code of California governs the bulk sale business escrow process.
The Bulk Sale Code requires the publication of a required Notice to Creditors for a mandatory minimum publication period. The close of escrow usually takes place on the day the Buyer takes possession.
The escrow instructions and all necessary documents, including the Notice to Creditors, are all prepared at the beginning of the bulk sale business escrow. These documents must be signed by all parties and delivered into escrow along with the escrow fees and funds for payment of up front expenses for publication and filing fees, etc., in order to enable the recording and publication of Notice to Creditors.
The uniform Commercial Code of California requires that all monies in a bulk sale, including sales price and inventory of stock in trade, must pass through escrow and requires that no funds are released to the seller prior to the close of escrow. The close of escrow on a Bulk Transfer Escrow is usually the date Buyer takes possession.
Checklist for Buyers
The following is a suggested list of issues to address for the escrow buyer. This checklist is for informational purposes only, and may or may not be complete. Escrow instructions will take priority over this list.
- Agree on the terms of the transaction – sales price, down payment, financing, initial deposit, etc.
- Record inventory of all furniture, fixtures and equipment at the premises being conveyed in the sale, including any vehicles. Identify any equipment that is leased, and any outstanding loans.
- Obtain the name, address, telephone number, and corresponding account numbers of the landlord and other relevant parties.
- Open Escrow – sign escrow instructions and preliminary documents for filing/publication.
- If a liquor license in involved, make application to the Department of Alcoholic Beverage Control for transfer of the liquor license. The ABC will require a certified copy of the Recorded Notice to Creditors of Bulk Sale and the Intention to Transfer liquor license AND a certified copy of the Escrow Instructions.
- File Fictitious Business Name Statement to open business account with the bank. Filing may be done by escrow.
- Prepare and submit financial statement to the landlord for a new lease or lease assignment, if required by the landlord.
- Contact lenders about necessary financing if needed, and get a tentative commitment.
- Obtain a city business license.
- Contact the Fire Department and Health Department in order to obtain permits for subject premises.
- Obtain an application from the Department of Benefit Payments for registration number to pay unemployment insurance, State Disability Insurance and State Income Tax withholding, if applicable.
- Contact the State Board of Equalization to ascertain amount of deposit needed for sales tax account.
- At the time possession date has been established, contact utility companies to transfer utilities from Seller’s Name into Buyer’s Name. Contact the telephone company for a “Request for Supersedure” which allows the buyer to retain the same phone number. Seller and buyer both must sign.
Checklist for Sellers
The list below is a list of issues to address for the escrow seller. This checklist is for informational purposes only, and may or may not be complete. Escrow instructions will take priority over this list.
- Agree on the terms of the transaction – sales price, down payment, financing, initial deposit, etc.
- Record inventory of all furniture, fixtures and equipment at the premises being conveyed in the sale, including any vehicles. Identify any equipment that is leased, and any outstanding loans. Approve the list and submit when opening escrow.
- Obtain the name, address, telephone number, and corresponding account numbers of the landlord and other relevant parties.
- Open Escrow – sign escrow instructions and preliminary documents for filing/publication.
- If a liquor license in involved, make application to the Department of Alcoholic Beverage Control for transfer of the liquor license. The ABC will require a certified copy of the Recorded Notice to Creditors of Bulk Sale and the Intention to Transfer liquor license AND a certified copy of the Escrow Instructions.
- Contact the California State Board of Equalization regarding the close out of escrow on the location being sold and obtain escrow tax release, prior to closing out escrow. This release will show: proof of having paid sales tax on fixtures and equipment conveyed in the sale; proof of paid sales tax on goods sold up to date of possession.
- Provide to the buyer copies of any equipment lease contracts, name and address of insurance carriers.
- If you are a corporation, obtain corporate resolution authorizing the sale of the corporate assets and designate authorized signature(s).
- Contact the telephone company for a “Request for Supersedure” which allows the buyer to retain the same phone number. Seller and buyer both
Happy Closings
The information in this article is not, nor is it intended to be, legal advice. This article is for informational purposes only and may or may not apply to you. You should consult an attorney for advice regarding your particular circumstances must sign. We invite you to contact us is you have any questions about bulk sale escrows:
Heritage Escrow Company
San Diego – Barbara Curry – (619) 234-2010
Orange County – Jeni Harrigan – (949) 651-9000
Los Angeles – Charity Skore – (818) 922-1449
