If you are buying a California business through an asset purchase and the deal falls between $10,000 and $5 million, the bulk sale escrow requirements in California obligate you to publish and record a notice at least 12 business days before closing, run the sale through a licensed California escrow that pays the seller’s creditors from the proceeds, and secure tax clearances from three state agencies before any money is released to the seller. The rules live in Division 6 of the California Commercial Code, and the legal exposure for getting them wrong sits on the buyer, not the seller.
When Division 6 Applies to Your Purchase
A transaction is a “bulk sale” when the buyer acquires more than half of the seller’s inventory and equipment in a deal that falls outside the seller’s ordinary course of business.1California Legislative Information. California Code COM – Division 6 Bulk Sales The law targets businesses whose main activity is selling inventory from stock — retail stores, restaurants, and bars are the classic examples. A software or services company that doesn’t sell inventory from stock typically falls outside the definition.
Two value thresholds decide whether the rules apply. If the net value of the assets (after subtracting liens and security interests) is less than $10,000 or more than $5,000,000 on the date of the agreement, Division 6 does not apply at all.2California Legislative Information. California Commercial Code Division 6 – Section 6103 Small transfers aren’t worth the overhead, and the legislature assumes buyers in eight-figure deals will protect themselves through negotiated contract terms.
Sales That Sit Outside the Process
Some transactions inside the value range are still exempt. Court-supervised sales (bankruptcy, receivership, probate), foreclosure and other Division 9 dispositions of collateral, general assignments for the benefit of creditors, and sales required by statute all fall outside Division 6.2California Legislative Information. California Commercial Code Division 6 – Section 6103 A sale in which the buyer assumes all of the seller’s pre-sale business debts in full, remains solvent afterward, and records and publishes notice of the assumption within 30 days is also exempt.
Alcoholic beverage license transfers have their own path. If the sale is already subject to the notice requirements under the Alcoholic Beverage Control Act (Business and Professions Code Section 24070 and following), it is exempt from Division 6, provided the buyer also records and publishes a notice containing the essential bulk sale information at least 12 business days before closing.2California Legislative Information. California Commercial Code Division 6 – Section 6103 The ABC process substitutes for the standard procedure, but the public notice is still required.
What the Buyer Must Do Before Closing
Section 6104 puts three obligations on the buyer in a non-auction bulk sale. First, obtain from the seller a list of every business name and address the seller has used within the three years before the list is delivered, including any DBAs or trade names.3California Legislative Information. California Commercial Code Division 6 – Section 6104 Creditors need to be able to recognize the seller in the published notice under whatever name they know.
Second, give notice of the bulk sale in compliance with Section 6105. Third, comply with the escrow rules of Section 6106.2 if the sale is within that section’s scope. The buyer carries the exposure on all three, which is why the buyer should drive the process rather than assume the seller or the seller’s broker is handling it.
In practice, you will also ask the seller for a list of known creditors with names, addresses, and amounts owed. Section 6104 doesn’t demand a creditor list on the standard path, but the escrow agent needs it to manage claims, and skipping it invites problems at closing.
The Notice: What It Says and When It Publishes
The bulk sale notice is the central document. Under Section 6105 it must contain:
- A statement that a bulk sale is about to be made.
- The names and business addresses of both buyer and seller, plus any other business names the seller has used.
- The location and a general description of the assets being sold.
- The place and anticipated date of the sale.
- Whether the sale is subject to Section 6106.2 and the related details required under that section.4California Legislative Information. California Commercial Code Division 6 – Section 6105
The notice must be completed at least 12 business days before the date of the bulk sale. In that window, it has to be recorded with the county recorder in the county where the tangible assets are located (and, if different, the county where the seller is located) and published at least once in a newspaper of general circulation in the relevant public notice district. If no such newspaper is published in the district, publication moves to a newspaper of general circulation in the county containing the district.
The notice also has to be delivered or sent by registered or certified mail to the county tax collector where the tangible assets are located. If that delivery happens between January 1 and May 7, the notice must include a completed business property statement for the property involved in the sale.4California Legislative Information. California Commercial Code Division 6 – Section 6105 This January-through-May property tax filing rides on top of the standard notice and is one of the details buyers most often miss.
The Escrow Requirement for Sales of $2 Million or Less
Section 6106.2 adds a mandatory escrow layer whenever the bulk sale consideration is $2 million or less and the payment is substantially all cash (or an obligation to pay cash later).5California Legislative Information. California Commercial Code Division 6 – Section 6106.2 That covers most small-business asset sales in the state.
Under this section, the buyer or the escrow agent must apply the cash consideration to pay the seller’s debts that are due and payable on or before the bulk sale date, to the extent creditors submit written claims by the deadline stated in the notice. The obligation runs directly to each creditor who files a timely written claim.
The escrow agent has to be licensed in California. The Department of Financial Protection and Innovation regulates independent escrow agents through licensing, oversight, and examination.6Department of Financial Protection and Innovation. Escrow Agents Using an unlicensed intermediary creates a regulatory problem and can undermine the entire process, leaving the buyer exposed to creditor claims.
Once the 12-business-day notice period closes and the sale funds, the buyer or escrow agent has 45 days after the buyer takes legal title to pay filed and undisputed claims. If any claims can’t be resolved, the buyer or escrow agent must file an interpleader action in the county where the seller had its principal place of business and deposit the disputed funds with the court clerk.5California Legislative Information. California Commercial Code Division 6 – Section 6106.2
Tax and Employment Clearances You Need Before Funds Release
Three state agencies can hit the buyer with successor liability for the seller’s unpaid obligations. Clearances from each are a non-negotiable part of closing.
CDTFA (Sales and Use Tax)
Under Revenue and Taxation Code Section 6812, a buyer who fails to withhold enough from the purchase price becomes personally liable for the seller’s unpaid sales and use taxes, up to the total purchase price. The buyer or escrow agent requests a tax clearance certificate from CDTFA. The agency then has 60 days, measured from the latest of the date it receives the request, the date of sale, or the date the seller’s records are made available for audit, to either issue the certificate or provide a notice of the amount owed. If CDTFA fails to respond within that 60-day window, the buyer is released from any further withholding obligation.7CDTFA. Sales and Use Tax Law – Section 6812
EDD (Employment Taxes)
Section 1731 of the Unemployment Insurance Code requires anyone who acquires a business or substantially all of its assets to withhold money or property sufficient to cover unpaid employment taxes, interest, and penalties until the seller produces a clearance certificate from EDD.8Employment Development Department (State of California). Release of Buyer Request Form DE 2220R If the seller can’t produce one, the buyer must pay the withheld amount to EDD at the time of acquisition.
Clearance is requested using Form DE 2220R. EDD must respond within 30 days, either by certifying nothing is due or by stating the amounts owed. Silence past 30 days is treated as a certificate of no liability, and the buyer is released.9California Legislative Information. California Unemployment Insurance Code – UIC Section 1732
FTB (Income and Franchise Tax)
The Franchise Tax Board handles the seller’s state income and franchise tax exposure. The concept is the same: request clearance, withhold funds until it arrives, release only what remains after any assessed liability is paid. Request all three clearances at the same time, because any one of them can stall closing.
How Creditors Get Paid When Claims Exceed the Proceeds
When timely claims total more than the cash in escrow, Section 6106.4 sets a mandatory distribution order. The escrow agent delays distribution for 25 to 30 days from the date of the notice, then pays in this priority:
- Debts owed to the United States, to the extent given priority by federal law.
- Claims secured by statutory or judicial liens, up to the value of the securing property. A secured creditor participates only by depositing a conditional release of lien.
- Escrow, professional, and broker fees directly attributable to the sale.
- Employee wage claims given priority under Section 1205 of the Code of Civil Procedure.
- All remaining tax obligations.
- All other unsecured creditors on a pro rata basis, including deficiency claims from partially secured creditors.10California Legislative Information. California Commercial Code Section 6106.4
Trade vendors and suppliers sit at the bottom of the ladder. When the seller’s debts exceed the sale price, unsecured creditors should expect cents on the dollar.
Closing the Escrow and What Stretches the Timeline
The escrow cannot close before the 12-business-day waiting period ends. Even after it expires, the escrow agent must confirm that all required clearances are in hand or that sufficient funds have been reserved to cover any outstanding tax liabilities before releasing proceeds to the seller.
In a clean transaction where timely claims don’t exceed available cash, the escrow agent pays the filed claims, deducts escrow and professional fees, satisfies whatever tax clearance notices require, and releases the balance to the seller. The buyer takes clear title to the assets free of the seller’s pre-sale debts, which is the whole point of running the process correctly.
Complications stretch the timeline. Disputed claims can force interpleader proceedings. A delayed CDTFA response can hold escrow open for up to 60 days beyond the request date. Build these contingencies into the schedule from the start; a bulk sale escrow rarely moves as fast as a simple real estate closing.
What Happens If You Skip or Botch the Process
A buyer who fails to comply with Section 6104 is liable to creditors for damages equal to each creditor’s claim, reduced by any amount that creditor wouldn’t have recovered even with full compliance.11California Legislative Information. California Commercial Code – COM Section 6107 The creditor proves the validity and amount of the claim; the buyer proves what the creditor would have missed anyway.
Cumulative liability in a single bulk sale is capped at twice the net contract price (for sales consisting only of inventory and equipment), less amounts already paid to the seller or creditors. On a $500,000 sale, that ceiling reaches $1 million, which is painful for what is usually a small-business deal.
A buyer who can show a good-faith and commercially reasonable effort to comply with Section 6104, or a reasonable and good-faith belief that Division 6 didn’t apply, has a complete defense. That protects a buyer who tried and made a technical misstep. It does nothing for a buyer who ignored the process.
Non-compliance doesn’t unwind the sale. The buyer’s title to the assets stays intact even when the procedures were bungled; the remedy is money damages. Creditors have one year from the date of the bulk sale to sue the buyer for non-compliance.