Understand the Bulk Transfer Law Before You Buy a Business

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Understand the Bulk Transfer Law Before You Buy a Business

The purpose of the bulk transfer law — also referred to as a bulk sale — is to protect the creditors of a business by notifying them that most or all of the company’s assets are being sold.  This is to prevent a seller from pocketing the proceeds of a business or asset sale without paying off creditors.  By providing such notification, the buyer protects himself from being liable to creditors for any of the seller’s debts or obligations. 

Typically, buyers making an asset purchase or buying a company outright are not liable for the sellers’ obligations unless the buyer agrees to assume those obligations.  However, there are laws that can create successor liability for the buyer of a business, and the bulk transfer law is one of them.  Not complying with the bulk transfer law could expose the buyer to liability for the debts and obligations of the seller after the purchase is completed.

To qualify as a bulk transfer, the sale must be:

  • outside the ordinary course of the seller’s business;
  • for more than half of the seller’s equipment and inventory; and
  • measured by the fair market value as of the date of the bulk sale agreement.

Transactions that are valued at less than $10,000 or more than $5 million are exempt from the bulk transfer law. 

  • If the transaction is subject to the bulk transfer law, the following steps should be taken to be in compliance:
  • The seller provides a complete list of creditors.
  • The buyer and seller prepare an inventory of all the property being purchased.
  • The buyer notifies the seller’s creditors of the transaction at least 10 days prior to the sale and in full compliance with the statutory requirements of the state where the transaction is taking place.

Many buyers and sellers find compliance to be a tedious process and often agree to waive compliance.  In that case, the buyer would likely demand some protection from the seller, such as holding part of the purchase price in escrow for a certain period of time. 

Complying with the bulk transfer law will not protect a buyer from liability for any of the seller’s unpaid sales tax or other tax obligations.  The buyer should withhold any amount owed for taxes from the purchase price.

Williams Mestaz, L.L.P., has the experience and reputation that you want when you are dealing with a business-related lawsuit. We are here to obtain the best possible outcome for your situation. Do not hesitate to contact Williams Mestaz, L.L.P., at (602) 256-9400, and see how we can help you resolve your legal matter.

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