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Bulk Sale

Tags: escrow bulk sales

Comments & Replies: 4     Views:     Post ID:     Comments About This Glossary Term

The term Bulk Sale is a legal transfer of a majority of inventory and other assets of a business to a single person or entity, where giving notice to creditors (via public announcement) is required. This is especially important when transferring businesses that have several Trade Creditors. The act of notification can protect the business Buyer from the responsibility of unpaid trade debts of the Seller. Note that some businesses that have minimum trade relative to the operation are exempt from this requirement. However, it is still considered good practice.

Contributor: Transactional Attorney
When a Buyer purchases all (or most) of a business' assets, and the sale is not in the ordinary course of that business' operations, the sale may be considered a "bulk sale". To prevent Sellers from transferring assets to Buyers and leaving their creditors unpaid, Bulk Sale laws require that certain transactions abide by specific requirements. The law is one of the exceptions to the general rule that the Buyer in an asset sale is not liable for a seller's obligations, and a buyer who purchases business assets in a transaction that falls under the bulk sales law must comply with the law to avoid successor liability.

Only certain business sales are subject to the law. In particular, it applies when the assets sold are owned by a business is primarily engaged in the sale of inventory from their stock. It includes among other categories manufacturers as well as restaurants and bars. If a business is primarily engaged in the provision of services it would not be subject to the Bulk Sale act.

Additionally, the law only applies if the sale is not "in the ordinary course" of the business being sold (which is met by virtually all business purchase asset sales), and the sale must be for more than 50% of the value of the inventory and equipment of the business.

If a business falls under the act the Buyer must do all of the following:

1) Create a Bulk Sale notice with specific provisions called for under the law

2) Record the notice of sale with the County Recorder, publish the notice in a local newspaper of general circulation, and provide the County tax collector with notice of the sale-- all of which must take place no less than twelve business days prior to the sale.

If the value of the assets in a bulk sale transaction is $2,000,000 or less and payment will be in cash and/or a promissory note for cash, the transaction must go through escrow. Sales of assets worth more than $5,000,000 on the day of transfer or sales of assets with a net value of less than $10,000 are exempt from the law.

Bulk Sale laws vary from state to state so it is important to check the law in your state. Failure to follow the provisions of your state's Bulk Sale law can be costly, and it is important for both Buyers and Sellers to ensure that their transaction complies with law to avoid future disputes and unexpected obligations.

Most small business sales are a bulk sale also called a "bulk transfer" or a "bulk sale transfer." A bulk sale is the sale (or transfer) by a business of all or substantially all of its goods (merchandise, inventory, furniture, fixtures, and equipment) to a single buyer. In order to protect both purchasers of the business and creditors of the business most states have bulk sale act or bulk sale law requiring certain notices and affidavits to published and filed and specific procedures to be followed. In the usual transaction, the escrow agent is the professional expert assuring compliance with the law.

Every state has a bulk sale provision in its application of the Uniform Commercial Code, used nationally so there is some uniformity of state laws regulating aspects of commerce. The UCC definition of bulk sale is: "transfer of substantially all of the products or inventory of a business to a new owner." Its key function is to protect business buyers and creditors against the actions of an individual who sells a business and collects the proceeds without settling the business' obligations

In addition to transfer of business assets, both tangible and intangible, there might be real estate included as part of the bulk sale if the purchaser will take ownership of any buildings and associated property where the business operates. At the time of sale state taxes ordinarily are assessed on certain assets, such as equipment, furniture and fixtures; the amount calculated on the values placed on those assets in the buy/sell contract. This is similar to a sales tax paid by purchasers of items at retail. Inventory of merchandise held by the business for resale might be included in the transfer but not subject to taxation in the bulk sale, because sales tax will be collected in, what usually is defined as 'the ordinary course of business.'

The bulk sale usually is accomplished through an escrow with an attorney or licensed escrow officer conducting the process. Ordinarily the buyer and seller are present. The buyer turns over the cash down payment specified in the buy/sell agreement, pays any use taxes due to the state, and some of the costs associated with the escrow. Additionally, the buyer signs promissory notes and other documents related to any obligations he or she is assuming. The seller is there to collect the funds as well as the buyer's promissory note if that will comprise part of the payment of purchase price. The seller also will be required to pay or to dispute any claims received by the escrow in connection with the transaction. That often includes a fee due to the business broker or other professional whom the seller hired to find a buyer and effect a transaction

In most states the buyer and seller are required by bulk sale law to make a public announcement of the intended sale. This is to be accomplished several days before the closing date, giving creditors time to submit their claims.

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