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Bulk Sales Act

DEFINITION

State law that requires sellers to record and publish a notice of the sale.

EXPLANATION

A bulk sale is the transfer or sale of most, or all, of a business’s assets. Such assets include properties, materials, supplies, products, and other inventory vital to the operations of the business.

The Bulk Sales Act was created to protect the interests of lenders when a bulk sale occurs.

A sale is subject to the Bulk Sales Act if a business’s primary activity is the sale of stock and/or more than 50% of the business is being transferred. Certain sales are exempt from the Bulk Sales Act, however, including:

service-based businesses whose primary purpose is the sale of stock

minority position sales

business sales with assets exceeding $5,000,000

a business valued at less than $10,000

The Bulk Sales Act requires a seller to inform lenders of an impending sale prior to the finalization of the sale. The purpose of this provision is to allow a lender the opportunity to recoup its investment. This is done through a formal notice of sale.

A proper notice of sale includes the following:

Statement indicating that a bulk sale is set to transpire

Names and addresses of all associated parties

Transaction date

Property address

General description of the property being sold or transferred, including assets, properties, inventory, and equipment

List of all businesses names associated with the company or entity being purchased

Statement indicating escrow terms

A notice of sale must be recorded by the county recorder’s office and delivered to the county tax collector’s office twelve days before the sale. The notice must also be published in the local market (i.e. newspapers, magazines, bulletin boards).

The Bulk Sales Act also requires an escrow account to be created to ensure that funds from a sale are diverted to a lender. This prevents a business owner from avoiding paying off a debt. Any business sales that are over $2 million, or that transfer stock or otherwise intangible items of value, are exempt from this provision.

California law does not require a buyer of a business opportunity to take on a seller’s debt, unless the buyer agreed to purchase the business with its outstanding debt.

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