California's Bulk Sales Law - A Possible Trap For The Unwary Buyer
If you’re buying or selling a business in California, you need to be aware of the Bulk Sales Law. The main purpose of the law is to protect a business’ creditors by giving them notice of a bulk sale. This prevents a situation where a business or its assets are sold and the seller walks away with the proceeds, leaving creditors unpaid. Under California law, a bulk sale is defined as a sale of more than half of a business’ inventory and equipment, as measured by fair market value, that is not part of the seller’s ordinary course of business. In order for the law to apply, the seller has to be physically located in California. Also, its principal business must be from the sale of inventory from stock, including those who manufacture what they sell, or a restaurant owner. That means, for instance, a service business is not subject to the Bulk Sales Law. Also, if the value of the assets to be sold is less than $10,000 or more than $5 million, the sale is exempt from the Bulk Sales Law.
When a proposed sale does fall under the law, buyers must obtain a complete list of business names and addresses used by the seller in the past three years and give notice to creditors of the plan to make a bulk sale. The notice, which must be given at least 12 business days before the date of the sale, must include the following information:
- A statement that a bulk sale is about to be made;
- The location and date of the sale;
- The names and addresses that have been used by both the buyer and seller for the past three years;
- The location of the assets that are being sold and a description of those assets; and
- Whether the sale is a small cash sale (meaning the sale is valued between $10,000 and $2 million).
If the sale is a small cash sale, the notice must also include the name and address of the person with whom claims may be filed, as well as the last date to file claims (which is the last business day before bulk sale). These notices have to be published in a newspaper of general circulation in the area where the sale is to take place. They must also be recorded with the county tax collector’s office and the county clerk or recorder’s office.
Creditors will have a set period of time to submit claims, which the buyer (or in some cases an escrow agent) must submit to the seller to approve or reject. Valid claims must be paid before the seller can be paid. There are also other considerations with the Bulk Sales Law, such as special requirements for certain types of tax considerations. Among other things, the buyer must place in escrow enough money to cover any tax liability owed to the California State Board of Equalization.
Generally speaking, a purchaser of assets or a buyer of a business is not liable for a seller’s obligations, unless the buyer specifically agrees to assume them. But there are laws that create successor liability for the buyer and the Bulk Sales Law is one of them. So, if the law is not complied with, you as the buyer could end up being held liable for the seller’s debts.