The deposit is a standard and integral term in buy-sell agreements, whether in an asset purchase agreement (an “APA”) or stock purchase agreement. The focus here will be APAs, since they are used for the vast majority of automobile dealership buy-sells.

We explore some of the legal and deal considerations that buyers and sellers face in dealing with various types of acquisition financing in this article, originally published in Automotive Buy Sell Report.

In a simple asset purchase agreement (an “APA”), a seller makes warranties about assets, a buyer purchases them, and if the warranties turn out to be inaccurate, the buyer’s main recourse is to collect damages from the seller. However, in the sale of an existing dealership business, where the selling entity often exits the business and may even dissolve shortly after a sale, a buyer may worry that the entity and its owners have less incentive to stand behind their representations regarding the assets and operations of the business. The risks of purchasing the operating assets of an existing dealership are numerous and difficult to estimate: the fixtures, equipment, inventory, and any real estate purchased may have unknown and costly problems, the prior dealer’s employment policies and practices could be non-compliant, and there may be unknown claims resulting from questionable prior customer dealings that have not yet come to light.

Back when service loaner vehicles were an uncommon perk, parties to a buy-sell agreement may have simply treated them as “used vehicles” without any thought as to how to calculate their value. But now that service loaners are increasingly necessary under factory margin programs, or simply to offer competitive customer service, it is worth carefully considering how to address them when a dealership is sold.

Dealership asset sales commonly involve the termination by the seller of its employees at closing and the rehiring of the employees by the buyer. Depending on the number of affected employees, both federal and California law may impose prior notification requirements on the seller, failing which the seller could be hit with substantial financial damages and penalties.

One of the key issues in any sale of dealership assets is whether a bulk sale notice is required under California law prior to the closing of the transaction. It is important to understand when a bulk sale notice is required because the failure to give the notice when required can result in potentially serious adverse consequences for both the buyer and the seller.