Bulk Sale Selling or Buying A Business
What is bulk sale selling or buying a business?
The bulk sale process applies when a business is being sold and the assets move from the owner or seller to a new owner or buyer. In California, the sale of a business from one party to another is considered a personal property transfer or transaction. This type of transaction is governed or proceeds if it is a general business under the Uniform Commercial Code of California or UCC or if the business being sold includes the transfer of a liquor license under the Business and Professions Code or B & P with the Department of Alcoholic Beverage Control.
Although the UCC is not a federal law it applies in different ways in each state and each state government has their own interpretations and requirements.
A key requirement of these codes is that all monies in a bulk sale including sales price and inventory must be transferred through an escrow process and additionally, no funds or money can be released to the seller prior to 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 takes place through a record of notice at the county recorders office where the assets are located.
- For example, if the business being sold is located in Sacramento County then that’s the county where the recording is made with the county recorder.
- In addition, as well as notifying the county recorder, a notice must be published once in a newspaper with general circulation where the assets are sold.
- 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 key word here is business days. If you want to close an escrow by say December 31 and the recording or notification is not thought of until December 19 or later then the escrow won’t close until the next year as public holidays such as Christmas Day and New Year’s Day will prevent this happening.
At a simple level, the bulk sale process is primarily designed to protect the creditors who are owed money for inventory or equipment. For example, if a photocopier company sold a new machine to a business and the purchase is being financed by a bank or third party lender, the lender obviously wants to be paid and receive notification if the owner of the equipment decides to sell the business. Similarly, if a manufacturer sells a bunch of parts or goods to a retail business so they can sell to their customers, the manufacturer wants to know if the business is about to change hands.
The escrow process also offers a buyer of a business some protection. Their protection comes in that any deposit or earnest money deposit should not go directly to the seller but to a third party or escrow company who holds all the money until all the contingencies and third party actions are complete so the business and its assets can safely move from the seller to the buyer. In a business transaction there can be third party actions from a landlord if a lease is involved, a lender such as a bank if an SBA loan is part of the transaction, clearance from the franchisor if the business is a franchise, approval of the buyer for any special type of license or permit if the business and therefore the buyer requires it and more.
Often a seller feels disadvantaged that they can’t get access to any money until the escrow process concludes. This makes perfect sense but if the buyer cannot get one or more important contingency, condition or requirement removed, the buyer could waste a lot of time waiting for the issue to resolve or more frustratingly, it may never resolve reducing the income or gross sales the business was able to generate under the new ownership of the buyer.
Just as the buyer gets this bulk sale protection, a place where I see anxious sellers trying to encourage a buyer to buy the business is by allowing them to work in the business before escrow closes. I don’t know how often this happens but I do know it happens too many times where the seller agrees to let the buyer ‘test drive” the business by working in it for a month or week prior to close of escrow and then the buyer uses a clause in their purchase to say they can no longer get an approval they were sure they had and can therefore no longer buy the business.
Allowing the buyer to work in the business before escrow closes is called allowing early possession. If you own a business and the buyer asks if they can do this I would every time say no, that this is not an option. The reason you say no is that there are too many ways it can have a negative impact on the business. If the buyer starts working in the business the employees will find out, customers will now know, suppliers will hear and so the list goes on. Any of these events and more could create a follow on situation that distracts the seller whose primary focus should be to run the business in the same way as it has been run.
If you would like more information about buying a business please visit my webpage Buy a business or buy a copy of my book Successfully buy your business. If you would like more immediate help with buying a business you are welcome to send an email to Andrew Rogerson or give me a call on 916 570-2674.