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Business Escrow

Secured Trust Escrow

The sale of a business is known as a “Bulk Sale” or Business Opportunity transfer, which customarily consists of the sale of a business and its equipment, often including furniture, fixtures, goodwill, inventory, leasehold interest, licenses, and equipment.

Due to the complex nature of many of these transactions, it is important to select an Escrow Officer that is experienced with these types of sales. At Secured Trust Escrow, your Escrow Officer will carefully handle your business transaction and make sure all the conditions to the escrow agreement are met by both the Seller and the Buyer to the transaction. Contact us to get more information now.

About Business Escrows

Bulk Sale rules are governed by the Commercial Code of California. These laws protect many parties, including lien holders and creditors, as well as the State and Federal agencies. The primary purpose of California’s Bulk Sales Law is to protect buyers and creditors following the purchase of more than half of a business’s assets.

If a Buyer makes a bulk sale purchase but does not adhere to the requirements set out in the Bulk Sales law, the Buyer will typically remain liable to the Seller’s creditors. In addition to the recording and publication a Notice to Creditors, your Escrow Officer will perform searches on the Sellers and the business, which helps to determine what is required to transfer the business to the Buyer and avoid successor liability, so that the Buyer shall not be obligated to pay Seller’s debts.

Why Is it Important to Use an Experienced Escrow Agent?

Hiring an expert Escrow Agent to protect the Buyer against such liabilities, can avoid significant exposure to liability following the bulk sale of assets. In addition to accepting creditor claims as required in a small cash sale of assets, tax liabilities are also typically handled through an escrow agent in any bulk sale of assets.

Bulk Sales are an opportunity for the California State Board of Equalization (BOE) to audit the Seller’s sales and use tax payments for previous years. Therefore, the Buyer must place in escrow an amount sufficient to cover any tax liability owed to the BOE until the seller produces a receipt from the BOE indicating that all taxes have been paid or until the BOE issues a “Certificate of Tax Clearance” indicating that no amount is due.

If the buyer purchases a business with employees, the buyer must also place in escrow an amount sufficient to pay contributions, interest and/or penalties due or owing by seller for unemployment compensation insurance benefits or disability insurance. Failure to withhold sufficient funds may result in the buyer’s personal liability for the above payments.

What is a “Bulk Sale”?

A Bulk Sale any sale outside the ordinary course of the seller’s business of more than half of the seller’s inventory and equipment as measured by the fair market value on the date of the bulk sale agreement. California Commercial Code §6101(a)(3).

Generally, the California Bulk Sales Law requirements apply to sales of assets where the following two conditions are met:

– The seller’s principal business is the sale of inventory from stock, including those who manufacture what they sell, or a restaurant owner
– The seller is located in California.

However, there are some exemptions to these conditions. The Bulk Sales Law requirements do not apply to sales of assets with a net value (post-lien and security interest calculations) of less than $10,000 or more than $5 million on the date of the bulk sale agreement. In addition, if the net value of the purchased assets is equal to or greater than $10,000 but less than $2 million, the bulk sale is considered a small cash sale, with additional requirements detailed below. See generally California Commercial Code §§ 6101-6111.

Here is a summary of how the statute is applied based on the net value of assets on date of the bulk sale agreement:

Net Asset Value

– $0 to $9,999: Exempt from California Bulk Sales Law
– $10,000 to $2M: Small Cash Sales with additional requirements
– $2M to $5M: “Standard” Bulk Sales requirements apply
– Over $5M: Exempt from California Bulk Sales Law

What are the Requirements of a Bulk Sale

To comply with the law, there are two steps that are essential. First, the buyer prepares a notice of bulk sale that provides the following information:

– Statement that a bulk sale is about to be made
– The buyer’s name and business address
– The seller’s name and business address
– A list of any other business names and addresses used by the seller during the three years prior to the sale
– A description of the assets and their physical location
– The place of the bulk sale
– The anticipated date of the bulk sale
– A statement whether the bulk sale is a Small Cash Sale, and if so: the name and address of the person with whom claims may be filed. Also, the last date for filing claims, which must be one business day before the anticipated date of the bulk sale set forth in the notice.

Second, at least twelve business days before the sale takes place, the buyer must:

– Record the notice of bulk sale in the county recorder’s office
– Publish the notice in a local newspaper of general circulation
– Deliver the notice of bulk sale to the county tax collector

For more information about business escrows, call or message us now.

Frequently Asked Questions About Business Escrow Accounts

Here are 20 frequently asked questions specifically about business escrow accounts in California:

1. What is a business escrow account in California?
A business escrow account in California is used to hold funds, assets, or documents related to the sale, acquisition, or other business transactions until specified conditions are met.

2. Who typically manages the business escrow account in California?
An escrow company, attorney, or designated third party often manages the business escrow account to ensure compliance with agreed-upon terms.

3. What is the purpose of a business escrow account in California?
The purpose is to provide a secure mechanism for parties in a business transaction to exchange funds, assets, or documents with accountability.

4. Who selects the escrow company for a business transaction in California?
The parties involved in the business transaction usually mutually agree on the choice of the escrow company.

5. Are there specific regulations governing business escrow accounts in California?
While there are general escrow regulations, business escrow accounts might have unique considerations based on the type of business transaction.

6. Can a party’s attorney be involved in a business escrow process in California?
Yes, attorneys can provide legal guidance, review agreements, and ensure the transaction adheres to legal requirements.

7. What documents are required for a business escrow account in California?
Required documents vary depending on the type of business transaction and may include purchase agreements, contracts, and relevant legal documents.

8. Can the funds in a business escrow account be released before the specified conditions are met in California?
Funds are typically released when all parties fulfill their obligations and conditions outlined in the agreement.

9. What happens if there are disputes over the release of funds from a business escrow account in California?
Escrow companies often have dispute resolution procedures. If no resolution is reached, legal action might be necessary.

10. Are there specific fees associated with business escrow accounts in California?
Escrow fees can vary based on the complexity of the business transaction and services provided by the escrow company.

11. Can the terms of the business escrow arrangement be negotiated in California?
Yes, parties can negotiate specific terms for the business escrow arrangement within legal boundaries.

12. Is using an escrow company mandatory for business transactions in California?
While not always mandatory, using an escrow company is recommended to ensure proper handling of funds and adherence to legal requirements.

13. Can a business escrow account be used for the acquisition or sale of business assets in California?
Yes, business escrow accounts can hold funds or assets during the acquisition or sale of business assets, ensuring conditions are met.

14. Can an out-of-state party use a California-based escrow company for a business transaction?
Yes, parties from outside California can use a California-based escrow company, but compliance with state regulations is necessary.

15. Can the business escrow process be expedited in California?
While timelines can be negotiated, the complexity of the business transaction and regulatory approvals might impact the process duration.

16. Can the business escrow account be used for franchise sales or transfers in California?
Yes, business escrow accounts can be used for franchise sales or transfers, ensuring compliance with franchise agreements.

17. Can a party assign the release conditions of the business escrow account to another party in California?
The terms of the business escrow arrangement are typically agreed upon by all involved parties and might not be easily assignable.

18. Can the business escrow account hold intellectual property or proprietary information in California?
Yes, a business escrow account can hold various types of assets, provided the terms and conditions are agreed upon.

19. Can a business escrow account be used for mergers and acquisitions in California?
Yes, business escrow accounts can be used to hold funds, assets, or documents during mergers and acquisitions, ensuring conditions are met.

20. What role does the escrow company play in the business escrow process in California?
The escrow company acts as a neutral intermediary, facilitating the exchange of funds, assets, or documents while adhering to agreed-upon conditions.

It’s crucial to collaborate with legal professionals, business advisors, and experts familiar with California’s business practices and regulations when dealing with business escrow accounts. Regulations can change over time, and specific circumstances may affect the application of these FAQs to your situation.

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