Bulk Sale California Agreement

When it comes to selling your business, you want to make sure to sign on all the dotted lines and address all the red tape. If you are planning to sell your manufacturing business in California in 2022, make sure you have a bulk sale agreement in place. This will help protect you as the seller and avoid running into financial trouble in the future. 

Bear in mind this article is not about providing legal advice but hopefully providing you some with some understanding about bulk sale agreement in California. To get legal advice, please consult your attorney.

Bulk sale meaning 

A bulk sale is when something is sold to a buyer and all or most of the business assets are outside the ordinary course of business. The goal is to ensure the seller won't leave with all the money acquired without paying creditors. In most cases of a bulk sale, it is required that creditors are notified about the transaction. Sometimes, bulk sales law requires that the purchase be put into escrow. That way, the creditors can submit a claim and get paid. 

As a general rule, the purchaser is not responsible for the seller's obligations, unless the buyer legally agrees to it. There are, however, several laws about successor liability or transferee liability for the purchaser. The bulk sales law is one such law. It does not create a liability for the seller, but the seller should speak with legal counsel to avoid any potential troubles they may run into during the closing transaction. In the end, however, it is more of a concern for the buyer than the seller. 

So, what happens if a transaction is subject to the bulk sales law and the buyer doesn’t make sure the buying process aligns with the law? The buyer may be required to pay back the creditors and debts of the seller.

In the United States, bulk sale law operations vary depending on the state. However, most states have repealed their bulk sales law simply because it does not do a lot to protect creditors. This law is still active in California, however. 

Why do you need a bulk sale agreement in California? It helps protect you as a buyer or as a seller! In California, this law only applies to sellers whose business’ primary purpose is to sell inventory from stock. This includes businesses that manufacture goods to sell and wholesale distribution business owners. A service business is not subject to the bulk sales law. 

A seller might own a business that has more than one location across the United States, with one or more locations in California. The company would only be considered located in California if its chief executive office is in California. You may not need to worry about the bulk sale law if it is not.

While writing this post, we came across an excellent business legal resource site in the state of California. You are welcome to check out Attorney Richard G. Burt who deeply cover this topic and other related business legal pain points that you might have.

Bulk sale vs. asset sale

A sale is only a bulk sale if more than half of the assets, inventory, or business are being sold in the deal. If other criteria are met for the bulk sale and this threshold is not, then it’s not considered a bulk sale. 

In comparison, an asset sale is when the seller keeps possession of the legal entity and the buyer gets individual assets from the company, such as equipment, trade names, trade secrets, goodwill, etc. The asset sale is known as a cash-free, debt-free transaction. The seller usually retains long-term debt obligations, and normalized net working capital is usually not included in the sale. This includes inventory, prepaid expenses, accounts payable, etc. 

Some of the pros of going through with an asset sale are: 

• You can pick and choose the assets you buy. If something is not profitable, you don’t have to buy it. 
• You can pick and choose liabilities. If something is going to cost you more money down the road, you don't need to take it.
• In this sale, a tax basis may be lowered. 

Some negative aspects of an asset sale are that you may spend more money, and the buyers have to set up the new business. The process can take longer to close. 

A bulk sale makes it a little easier because you can step into the already running business with fewer interruptions. You may also need less operating capital since you will start with valuable intellectual property and don’t need to apply for new business licenses and permits. 

Some negative aspects of a bulk sale are: 

• You may get assets that you do not want 
• You acquire all of the existing liabilities and assets 
• The tax benefits that apply to an asset sale are not the same for a bulk sale 

Bulk sale escrow in California 

A bulk escrow sale is a financial agreement in which revenues and inventories are held until creditor claims have been met. The assets are held in escrow by a third party until the transaction is complete. Under the Bulk Sale Code, a business is considered personal property. 

So, what does that process look like? Here are the steps: 

1. Relay terms of the sale and other required information to the escrow officer. 
2. The escrow officer will prepare the instructions and documents for signature. 
3. The directions and documents are completed and returned to escrow. A deposit from the buyer is also required. 
4. Next, a notice will be published and sent to creditors. 
5. The escrow officer files for releases and clearances from specific state agencies. 
6. The officer requests state and county lien searches. 
7. Agreements and claims are received and acknowledged by the appropriate parties. 
8. The escrow officer will prepare the final amendment and ask for the last deposit and documents. 
9. The claims period ends.
10. The business sale escrow closes. 

It can be a lengthy process, but by following these steps, you will be able to ensure a legal transaction. 

Conclusion

On paper, a bulk sale may seem like a pretty straightforward process, but there is a lot to do. Hiring a mergers and acquisitions advisor can be a wise decision to help you successfully value and sell your business in California quickly. They guide companies through the complicated world of mergers and sales. Their work can help ease your stress and help you through a complex process. 

If you are a retiring business owner looking to exit your lower middle market manufacturer in California, here are six tips to get you started:

1. Don't wait until the last minute to start planning your exit. The process of selling a lower middle market manufacturing business can take a long time, so it's important to start early.

2. Have a clear idea of what you want to get out of the sale. Know your goals and what you're willing to negotiate.

3. Know what's your company's worth. This is an essential step to take when planning to sell your manufacturing business in California.

4. Choose the right type of buyer. Not all buyers are created equal, so do your research and find the right one for your business.

5. Be prepared for a lot of due diligence. M&A buy-side due diligence is when buyers will want to know everything about your business, so be ready to provide documentation and answer questions.

6. Be flexible with the terms and conditions of the deal. It's important to be open to negotiation to get the best possible deal for your business.

Rogerson Business Services, also known as, California's lower middle market business broker is a sell-side M&A advisory firm that has closed hundreds of lower middle-market deals in California. We are dedicated to helping our clients maximize value and achieve their desired outcomes. 

We have a deep understanding of the Californian market and an extensive network of buyers, which allows us to get the best possible price for our clients. We also provide comprehensive support throughout the entire process, from initial valuation to post-closing integration. 

Our hands-on approach and commitment to our client's success set us apart from other firms in the industry. If you consider selling your lower middle market manufacturing business, we would be honored to help you navigate the process and realize your goals.

If you have decided to value and then sell your lower middle market manufacturing company or still not ready, get started here, or call toll-free  1-844-414-9600 and leave a voice message with your question and get it answered within 24 hours. The deal team is spearheaded by Andrew Rogerson, Certified M&A Advisor, he will personally review and understand your pain point/s and prioritize your inquiry with Rogerson Business Services, RBS Advisor.

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