Bulk Sale Law, Escrow, and Tax Clearance: How a California Business Sale Closes

What the bulk sale law is

California Commercial Code Division 6 covers bulk sales. A bulk sale is a sale of more than half of a business's inventory and equipment, outside the ordinary course of business, by a seller whose principal business is the sale of inventory from stock, including restaurants, or manufacturing. In practice, most asset sales of retail, restaurant, wholesale, and manufacturing businesses qualify.

Pure service businesses that sell little or no inventory are often outside the statute, though many escrow companies run the process anyway because the tax clearance components apply regardless and buyers want the protection.

The law does not apply when the assets are worth less than $10,000 or more than $5 million. For sales of $2 million or less paid substantially in cash, the escrow holder runs the creditor claims procedure. Above $2 million, notice is still required up to the $5 million ceiling, but the escrow claims procedure does not apply.

The notice

The buyer, through the escrow holder, records a Notice to Creditors of Bulk Sale with the county recorder in the county where the assets are located, publishes it in a newspaper of general circulation in that county, and sends it to the county tax collector. The notice includes the names and addresses of the buyer and seller, all business names and addresses the seller has used in the last three years, the location and general description of the assets, the place and anticipated date of the sale, and whether claims may be filed with the escrow.

The notice must be recorded and published at least twelve business days before the sale closes. That waiting period is fixed and cannot be shortened, so the earliest a bulk sale escrow can close is about two and a half weeks after the notice goes out. Escrow companies open the file, gather the information, and get the notice out quickly when the parties are organized.

During the notice period, creditors of the seller can file claims with the escrow. Legitimate claims are paid from the seller's proceeds at closing. Disputed claims are handled according to the statute and the escrow instructions. A seller with unpaid vendors, equipment loans, or judgments will see them here.

Tax clearances

This is the part that catches sellers. The buyer of a California business can be held liable for the seller's unpaid sales and use tax, unpaid payroll taxes, and in some cases unpaid income and franchise tax, up to the purchase price, unless the buyer obtains clearance certificates from the relevant agencies. The escrow holder requests them and will not release funds to the seller until they issue or until an amount sufficient to cover any liability is withheld.

The California Department of Tax and Fee Administration issues a certificate of tax clearance for sales and use tax. The seller's sales tax returns must be filed and paid through the closing date, including the final return. Any balance due is paid from escrow.

The Employment Development Department issues a certificate of release for payroll taxes. Same requirement, all payroll tax returns filed and paid through closing.

The Franchise Tax Board can issue a certificate relating to the seller's income tax obligations. This is less commonly required by escrow but the buyer's attorney may ask for it.

Each agency has its own processing time, which can run several weeks. Requests go in at escrow opening, not at the end. A seller whose filings are current gets clearances without incident. A seller with an unfiled quarter, an open audit, or an unpaid balance holds up the closing until it is resolved or the escrow withholds enough to cover it.

What else runs through escrow

The escrow holder does more than the bulk sale notice. They hold the buyer's deposit and closing funds. They order a UCC search to identify liens on the business assets and get them released or paid. They prorate rent, utilities, and other expenses to the closing date. They handle the inventory count adjustment. They collect the lease assignment and landlord consent. They coordinate with the buyer's SBA lender, who will fund into escrow and require the lender's conditions to be met. For a business with a liquor license, they coordinate with the ABC transfer, which has its own escrow requirement and timeline. They prepare the closing statement showing every debit and credit for each side. They disburse.

Timeline

A bulk sale escrow can close in about three weeks from opening if everything is ready. It usually takes four to six weeks because of tax clearance processing, lender coordination, and landlord consent. A liquor license transfer adds time, often two to three months, because the ABC application and posting requirements run on their own schedule.

The seller's job is to have the filings current before the business goes to market. Sales tax, payroll tax, income tax, all filed and paid. Any liens identified and a plan to pay them from proceeds. Business names and addresses for the last three years listed accurately for the notice. Vendors paid current so there are no surprise claims.

Stock sales

A stock sale is not a bulk sale, since the entity is not selling its assets. The tax clearance issue is different too, because the entity's tax liabilities stay with the entity, which the buyer now owns. Buyers in stock sales protect themselves through representations, indemnities, and escrow holdbacks rather than through clearance certificates. Some still request the certificates as a diligence step.

A worked timeline

A retail business closes through a bulk sale escrow. The purchase agreement is signed on a Monday. Escrow opens Tuesday. The escrow officer collects the seller's business names and addresses for the last three years, the asset description, and the parties' information, and records and publishes the Notice to Creditors of Bulk Sale by Friday. Twelve business days from Friday is the following Monday two and a half weeks later, so the earliest possible closing is about three weeks after signing.

The same week, the escrow officer submits clearance requests to the CDTFA and EDD with the seller's account numbers and the sale information, and orders a UCC search. The search turns up a lien from an equipment loan paid off four years earlier that was never released. The seller contacts the lender for a release, which takes two weeks. The CDTFA clearance issues in three weeks. The EDD clearance issues in four. The buyer's SBA lender has its own closing conditions, which are met by week five. The landlord signs the assignment consent in week four after the buyer's financial package is reviewed.

Closing happens in week five, two weeks after the bulk sale waiting period ended, delayed by the EDD clearance and the lien release. Both were predictable. The lien would have been found by a UCC search during preparation. The EDD timing is what it is, and requesting the clearance at LOI rather than at signing would have moved it earlier.

What the seller signs and receives

At closing the seller signs the bill of sale, the assignment of the lease and of contracts, the assignment of intangibles including the business name, the non-compete, the transition or consulting agreement, the seller note documents if any, and the escrow's closing instructions. The seller receives the closing statement showing the purchase price, less the payoffs of liens, less prorations, less the escrow fee and any other charges, less any holdback, plus or minus the inventory adjustment, equaling the net wire. The seller should review the closing statement against the net sheet prepared during the offer stage, line by line, before signing off on disbursement.

Why it matters to plan for

A seller who learns at escrow opening that two quarters of sales tax were never filed is looking at a delay of several weeks and a withholding from proceeds. A seller who learns of an old equipment lien they thought was released is looking at the same. Preparation finds both before a buyer is involved.