What is a bulk sale when selling a business?
The bulk sale process applies when a seller and buyer have an initial agreement on the sale of the business. To complete the selling process, these assets must transfer from the seller to the buyer. In California, the sale of a business from one party to another is legally the sale or transfer of personal property.
The laws governing this type of transaction are part of the Uniform Commercial Code of California (UCC.). If the business for sale requires the transfer of a liquor license, the Business and Professions Code (B&P) governs the process. This is in conjunction with the Department of Alcoholic Beverage Control.
Although the UCC is not a federal law, it applies differently in each state. To further complicate matters, each state government has its own interpretations and requirements.
Bulk sale key requirements.
A key requirement of these codes is that all assets in a bulk sale agreement, including the sales price and inventory, must transfer through an escrow process. No funds or money can be transferred to the seller before the close of escrow.
Some other points to note include:
- The bulk sale process in California applies when a business proposes to sell more than half of its inventory and equipment.
- Notification to the market is made through a record of notice at the county recorder’s office. This is typically located in the same place as the assets. For example, if the location of the business for sale is in Sacramento County, then that’s the county where the recording is made with the county recorder.
- In addition to notifying the county recorder, a notice must be published at least once in a newspaper with general circulation in the county where the assets are located.
- The law requires these notifications to be made a minimum number of days before the close of escrow. The amount of time varies with each county, but can range from 12 business days to 20 or more. The keyword here is business days. Suppose you want to close an escrow by December 31, and the recording or notification is not complete until December 19 or later. In that case, the escrow won’t close until the following year, as public holidays such as Christmas Day and New Year’s Day will prevent this from happening.
The bulk sale process is to protect creditors.
At a simple level, the bulk sale process is primarily designed to protect creditors who are owed money for inventory or equipment. For example, if a photocopier company sells a new machine to a business, and a bank or third-party lender provides financing, the lender wants to be paid. They also want to receive a notification if the business owner decides to sell the equipment. Similarly, if a manufacturer sells a batch of parts or goods to a retail business to sell to its customers, the manufacturer wants to know if the business is about to change hands.
The bulk sale process also protects creditors.
The escrow process also offers a buyer some protection. This protection requires that any deposit or earnest money not be sent directly to the seller. It should instead be sent to a third party or an escrow company. This company holds all the money until all contingencies and third-party actions are complete. In a business transaction, third-party actions may arise from a landlord if it involves a lease. There can also be actions taken by a lender, like a bank, if an SBA loan is part of the transaction. Other examples include clearance from the franchisor. This applies if the business is a franchise. There is also approval from the buyer for any special type of license or permit that may be required.
Often, a seller feels at a disadvantage because they cannot access any money until the escrow process concludes. However, if the buyer cannot remove one or more essential contingencies or conditions, they may waste a significant amount of time. Worse yet, it may become very frustrating as it drags on. This can reduce the income or gross sales that the business was able to generate under the new ownership of the buyer.
Learn more about escrow service.
Early possession of a business is not advisable.
Just as the buyer receives this bulk sale protection, I see anxious sellers trying to encourage a buyer to purchase the business. They do this by allowing them to work in the business before escrow closes. I don’t know how often this happens. Still, I know it happens too often. Effectively, the seller agrees to let the buyer ‘test drive’ the business by working in it for a specified period. Typically, this occurs one to two weeks before the close of escrow. The buyer may then use a condition in their purchase agreement. They can state that they can no longer obtain approval to buy the business.
Early possession may help the buyer but not the seller.
Allowing the buyer to work in the business before escrow closes is not advisable. The practice is known as allowing early possession.
The reason you say no is that there are too many ways it can hurt the business. Employees will become aware. Customers will learn, and suppliers will find out. And so on.
Any of these events, and more, could create a follow-on situation. It distracts the seller, whose primary focus should be on continuing to run the business as usual.
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Learn more about the legal intricacies of buying and selling a business in California.