Every day in California, people sell their business.
Typically, one concern of most buyers is the concern about becoming liable for debts or taxes of the seller.
In fact, most asset sale agreements even provide that the seller is representing and warranting that everything being sold has been paid in full by the seller. Unfortunately, by the time the buyer finds out that the property is not owned free and clear, the seller is most likely long gone, refuses to satisfy the debt owed, or has no assets upon which the debt may be satisfied.
In California, there is a statutory procedure that buyers can avail themselves of to lessen potential liability.
One way to protect the assets being purchased from these claims is for the buyer to comply with the provisions of the California Commercial Code – Bulk Sales (Division 6, Sections 6101 – 6011). In California, the Bulk Sales Notice (“Notice”) should be filed when the value of the assets being sold is more than $10,000 but less than $5 million and outside the ordinary course of business. For sales between $10,000 and $2 million in value of the assets (“Small Cash Sale”), there are some additional requirements to comply with the law. (Sales between $2 million dollars and $5 million are outside of the scope of this article.)
If the buyer fails to comply with the statute, the transaction is still valid, but there are some consequences.
First, the buyer may be liable to a creditor of the seller for the damages equal to the difference of the creditor’s claim and the amount the creditor could have recovered had the buyer complied with the statute.
Second, failing to comply with the statute may also result in making the buyer liable for any personal property tax associated with the assets if the seller fails to pay it. The same buyer liability may result for sales-tax and use-tax payments due to the Board of Equalization if the statute is not followed.
Unfortunately, many buyers do not seek legal advice before buying business assets — and if they do so, it is often at their peril.
Claudia McDowell is a Partner in the law firm of Poole & Shaffery, LLP. Ms. McDowell practices corporate, securities and commercial law and is highly skilled in mergers and acquisitions and transactional negotiations