You just bought a business.
But a moment that should be filled with excitement can quickly shift into overwhelming dread as phone calls from creditors begin filling your voicemail, eager to recoup the debts owed on the business by the previous owner.
Not your problem? Think again!
About the California Bulk Sales Law
If you have failed to comply with the California’s Bulk Sales Law, any debt incurred by the business you just purchased may now be yours.
Fortunately, you can avoid this difficult predicament with some simple education.
So, what even qualifies as a Bulk Sale? We thought you may be wondering by now.
A “Bulk Sale” is defined as any sale outside the ordinary course of the seller’s business and of more than half the seller’s inventory and equipment as measured by the fair market value on the date of the Bulk Sale Agreement.
According to California’s Bulk Sales Act, the buyer of a “Bulk Sale” is required to post official notice at least 12 days prior to the sale/purchase for any potential creditor’s review. This notice must include:
- A statement verifying that a bulk sale is taking place.
- The location and description of any assets included in the sale
- Where and when the sale took place
- The name and addresses of both the seller and buyer
- Is the “Bulk Sale” a “Small Cash Sale”? (This will place the entire sales price into escrow)
This process ensures that any creditors are paid debts owed directly from escrow, which is essentially the seller’s profits. It guarantees that the new business owner will not be liable for any of the previous owner’s debts, and, most importantly, that their initial excitement isn’t spoiled with a collector’s phone call.
Exemptions from California’s Bulk Sales Law
A bulk sale in California is exempt from the Uniform Commercial Code if the net value of the assets is either less than $10,000 or more than $5,000,000 on the date of purchase.
Additional Requirements for Small Cash Sales
Specifically, bulk sales that are valued within the $10,000-$2,000,000 range are considered ‘Small Cash Sales’ that require additional claims and information for approval, including:
- the name and address of the person(s) with whom claims may be filed,
- the last date for filing claims. This date must be at least one business day prior to the agreed upon date of the bulk sale referenced in the notice.
A Simple Overview of California’s Statues on Bulk Sale Agreements
- Bulk sales of $0-$9,999 are exempt from the Bulk Sales Law.
- Bulk sales of $10,000-$2,000,000 are considered Small Cash Sales in which the Buyer must pay the Creditors prior to purchasing from the Seller. Furthermore, the Buyer is also expected to submit Creditor claims to the Seller for either their approval or rejection within a Small Cash Sale.
- Bulk sales of over $2,000,000 and up to $5,000,000 fall under California’s “Standard” Bulk Sales regulations.
- Bulk sales over $5,000,000 are exempt from the Bulk Sales Law.
Things to Keep in Mind about California’s Bulk Sales Act
As per California Uniform Commerical Code §6105, a published notice in a generally circulated newspaper is required 12 days prior to the date of the bulk sale, along with a delivered notice to the county tax collector.
Why you need a business lawyer with Experience in Asset Purchases
Based in Irvine, Peter Wittlin has been serving Southern California for over 30 years in all forms of business and real estate law including asset protection and purchasing. In most cases, purchasing an asset isn’t as simple as agreeing to a price and taking ownership from there. Certain questions need to be asked of the seller concerning the asset’s true value and whether or not any future complications should arise that haven’t been previously stated. This is where California’s Buyer Beware Law comes into effect concerning bulk sale agreements. Without the proper legal advice, Buyers are putting themselves at risk for purchasing an asset well above its true market value, or worse, one that comes with financial strings still attached.
So, buyers beware: buying a business can be complicated, but with the right help the only thing you’ll need to focus on is how to make it successful.