Bulk sale escrow can be defined as an escrow agreement placed on the sale of inventory, business assets, or a company. The escrow is designed to protect the assets of unsecured creditors. It is designed to eliminate the possibility of the seller using the money from the sale on other things besides taxes owed or debts to be paid.
If a business is experiencing financial difficulty, it can lessen its issues by downsizing business and selling portions of inventory or business assets. An escrow agent will collect the funds from the seller to protect them from being used on unprofitable business deals. The escrow agent will then forward the funds to the right parties. Generally, escrow fees will be charged for this service and the service costs are split between the buyer and the seller. However, the two parties can agree in writing to any specified amount of payment.
Any purchaser buying assets or a business is generally not liable for the seller’s obligations unless the buyer agrees to take on those obligations. There are a number of laws that determine the successor to become liable for the purchase of a business, the bulk sale law being one. If the buyer fails to ensure that the bulk sale transaction agrees with the law, the buyer will be responsible for the seller’s debts, and be subject to the seller’s creditors.
However, if a buyer gets locked in to paying for the seller’s debts when it was not part of the agreement, the seller can be reimbursed. Therefore, in most cases, a buyer will want to ensure that a business purchase complies with the bulk sales law.
There is no escrow requirement for a bulk sale if the price is greater than $2,000,000. There is also no escrow requirement if the amount to be paid is payment other than cash. This includes a promise to pay cash in the future.
If the price to be paid is less than $2,000,000 and the amount to be paid is in cash, or there is a promise for payment in the future, there is an escrow requirement. If escrow is required, then the buyer is required to put the full amount of the purchasing price into escrow. If a portion of the purchasing price is promised to be paid in the future, then the promissory note must also be included in escrow.
Bulk sale laws are put in place to prevent business owners from defrauding creditors by the act of transferring the business assets to another individual. It is also put in place to prevent the opportunity for a business to sell below fair market value with the intent of maintaining some amount of control over the business. For more information on the bulk sale law refer to your local Uniform Commercial Code.