October 22, 2014

The California Bulk Sales Law

Under California law, there is a bulk sales act which protects the business? creditors by giving them notice of a bulk sale (also known as a bulk transfer). If you are a California business owner considering selling your business, you need to be aware of this law–even more so if you are buying a business in California.

The purpose of the bulk sales law is to help prevent situations where a business is sold and then the seller of the business simply takes the proceeds from the sale and keeps it–instead of paying creditors for those goods. If a bulk sale occurs in California, the law requires that the creditors be given notice of the transaction. In some cases, the bulk sales law requires the purchase price of the business to be put into an escrow account so that the seller?s creditors can submit claims into the escrow and be paid before escrow is closed.

Notice under the bulk sales law must be given to the creditors of the business as follows:

  1. The buyer must get a complete list of business names and addresses used by business for the past three years.
  2. The buyer has to give notice of the sale (bulk sale).

Under California commercial laws, the notice must contain the following:

  • A statement that a sale of the business is pending.
  • The location and date of the sale.
  • All business names and addresses used by the parties to the sale (buyer and seller) for the past 3 years preceding the sale.
  • Whether the sale is a small cash sale (the sale is valued between $10,000 and $2,000,000).
  • The location of the business assets and description of the business assets that are being sold.

According to California law, a bulk sale occurs when:

  • There is any sale outside the ordinary course of the seller?s business of more than half the business?s inventory and equipment as measured by the fair market value on the date of the sale.

However, even if the above requirements are met, the bulk sales law may not apply. It only applies in the following situations:

  1. The seller?s principal business is the sale of inventory from stock, including those who manufacture what they sell, or a restaurant owner.
  2. The seller is located in California.

If the seller of a California business fails to comply with the bulk sales act, the buyer of the business may be held liable for the debts that were owed by the business before the buyer purchased the business. Thus, it is in the best interests of both a buyer and seller to comply with the California bulk sales law.

Generally, a purchaser of assets or a buyer of a business is not liable for a seller?s debts unless the buyer specifically agrees to assume them. If the bulk sales law is not complied with, you as the buyer may be held liable for the debts of the business. There are additional considerations with the bulk sales law in California as well, such as special requirements for certain types of sales and tax considerations.

We at Beverly Hills Law Corp., PC can assist you whether you are buying or selling a business in California. We serve all of California, in addition to Los Angeles and Orange Counties. Contact us for a free consultation.

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