California bulk sales law when selling a business or franchise

Division 6 of the California Commercial Code adds a closing requirement that many other states no longer have. The parties need to address it when they sign the deal document because the notice period can affect the closing date.

Calling a transaction a “bulk sale” is not enough. The seller and the transaction must fall within the statute's defined scope.

1. Why California is different

The Uniform Commercial Code originally included Article 6 for bulk sales. In 1989, the Uniform Law Commission withdrew the original article and offered states two choices: enact a revised Article 6 or repeal it. The Commission now describes Article 6 as a subject many states consider obsolete. California chose to retain a revised version in Commercial Code sections 6101 through 6111.

A checklist from a repeal state is therefore incomplete for a California closing. California counsel must determine whether Division 6 applies to the particular seller, assets, and transaction.

2. Which sales are generally within Division 6

Section 6103 generally applies when the seller is located in California and its principal business is selling inventory from stock, operating a restaurant, or manufacturing and selling what it makes. Section 6102 defines a bulk sale, outside auction or liquidation settings, as a sale outside the ordinary course of business of more than half of the seller's inventory and equipment, measured by value on the date of the agreement.

That definition is narrower than “sale of a business.” A professional-service firm with little inventory may present a different analysis from a restaurant, retailer, or manufacturer. The statute also contains exclusions, including specified judicial and insolvency transfers and transactions below or above statutory asset-value thresholds. Applicability should be decided from the seller's actual business, assets, location, consideration, and transaction structure.

3. What the notice process requires

For a covered non-auction sale, section 6104 requires the buyer to obtain the seller's recent business names and addresses, give the statutory notice, and comply with the creditor-payment provisions when applicable.

Under section 6105, the notice identifies the buyer and seller, the assets, and the place and anticipated date of the sale. At least 12 business days before the bulk-sale date, the notice generally must be recorded with the appropriate county recorder, published in the required newspaper, and delivered or sent by registered or certified mail to the county tax collector. The details depend on where the seller and tangible assets are located.

The 12-business-day period is a real calendar constraint. Weekends and state holidays are excluded. Recording, publication scheduling, and proof of mailing should be built backward from the intended closing date.

4. Creditor claims can affect disbursement

The statute also governs creditor claims. For a covered transaction within section 6106.2, generally one with consideration of $2 million or less that is substantially cash or a future cash obligation, the buyer or escrow agent may have duties concerning timely claims. The statute directs cash consideration to debts supported by qualifying claims, provides rules for disputed claims, and addresses a shortage of available cash.

The agreement and escrow instructions therefore need to address who receives claims, how claims are reviewed, what documentation supports payment or dispute, and what funds must remain unavailable for seller distribution.

5. Bulk-sale compliance is not CDTFA clearance

The Commercial Code process protects business creditors. CDTFA clearance addresses tax successor liability. A California closing may require both.

Other closing tasks may include lien searches and releases, county personal-property tax issues, franchisor and lender conditions, lease transfer, and a supportable purchase-price allocation. Each task has its own legal effect and deadline.

6. California closing checklist

1. Classify the seller's principal business and the assets being transferred.
2. Test the transaction against sections 6102 and 6103, including exclusions.
3. If covered, calculate the notice date before fixing the disbursement date.
4. Prepare recording, publication, and county-tax-collector delivery.
5. Identify the creditor-claim procedure and the person designated to receive claims.
6. Run CDTFA clearance, lien, payoff, license, lease, lender, and franchisor work as separate tracks.

Official sources

• California Commercial Code §§6101–6111
• Uniform Law Commission, Uniform Commercial Code Article 6
• CDTFA Publication 74, Closing Out Your Account