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Buying or Selling San Diego Business Assets? California’s Bulk Sales Act

If you are planning on selling your San Diego business or if you are in the market to purchase one, you should be aware of the California Bulk Sales Act (hereinafter “CBSA”). See Cal. Comm. Code, §6101(a)(3). The CBSA is implicated if you are making a “…. sale not in the ordinary course of the seller’s business of more than half the seller’s inventory and equipment, as measured by value on the date of the bulk-sale agreement.” If you are making such a sale, then you must comply with various requirements of the CBSA. You need to consult with a San Diego corporate lawyer with extensive experience with asset purchases. Here is what you need to know.

San Diego Corporate Law: What is the CBSA?

The intent of the CBSA is to protect creditors of the business being sold and to protect the buyers of the business. Imagine if a business had $1 million in outstanding debts and obligations and had an inventory of various assets worth $1 million. If the seller sold the business for $1 million and then took the sales proceeds to, say, the Bahamas without paying the creditors, you can imagine that the creditors would be very unhappy. The creditors might look to the buyer to satisfy the debts, or maybe try to seize the assets. If that happened, you can imagine that the buyer would be unhappy.

San Diego Corporate Law: Exemptions From the CBSA?

The CBSA does not apply to a sale of assets having a value of less than $10,000 or to a sale involving assets valued at more than $5 million on the date of the bulk sale agreement. “Value” is calculated based on asset valuation – that is, assets minus debts, liens and collaterizations. If the value falls between those extremes, then the CBSA applies. Note that there is a “small cash sales” version for sales with values from $10,000 to $2 million. From $2 million to $5 million, the standard CBSA rules apply.

The CBSA also does not apply to the stock sales/purchase or to the sale of interests in an LLC. This makes sense, of course, since the corporation owning the assets continues to exist and continues to own the assets/inventory, and importantly, continues to be responsible for its debts, obligations, and liabilities. Likewise, under most circumstances, the CBSA will not apply to mergers of corporations and/or LLCs, since, again, under most conditions, the new corporation takes on the responsibility for the debts and obligations of the acquired and/or merged company.

San Diego Corporate Law: How to Comply With the CBSA

In general, to comply with the CBSA, a seller must prepare a Notice of Bulk Sale, publish the Notice in a local newspaper, record the Notice, and send a copy to the county tax collector. In general, the Bulk Sales Notice must contain the following:

  • Identifying information for the seller and buyer
  • A statement that a bulk sale is being made
  • A listing of the assets being sold including location of assets
  • The anticipated place and date
  • Whether the sale is a small cash sale or a standard bulk asset sale
  • The person to whom claims may be filed and the address
  • And similar information

As explained above, the purpose of the Notice is to put creditors, including governmental agencies and taxing authorities, on notice that a bulk sale is contemplated. The Notice must be published 12 business days prior to the anticipated closing.

San Diego Corporate Law: Failure to Comply With the CBSA? Buyer at Risk

The CBSA creates a risk to the BUYER if there is a failure to comply. If the CBSA applies, the seller is generally required to prepare the Notice of Bulk Sale and have it published, recorded, and delivered. The BUYER is at risk, since, in general, if the requirements of the CBSA are not met, the BUYER might be obligated to pay the seller’s creditors. Generally, where there are concerns about bulk sales compliance or failure to comply prior to the closing, the parties agree to escrow a certain amount of the seller’s proceeds with a third party escrow agent to cover any post-closing claims.

Contact San Diego Corporate Law

For more information, contact Michael Leonard, Esq. of San Diego Corporate Law. Mr. Leonard has the experience to provide all the legal services needed for any sale or purchase of a San Diego business including compliance with the CBSA. Contact Mr. Leonard via email or by calling (858) 483-9200.

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Schedule a Consultation: 858.483.9200