How to handle expert/professsional license requirements?

August 02, 2024

by a searcher from Harvard University - Harvard Business School in Salt Lake City, UT, USA

I've evaluated several companies that require some form of licensure to operate. Sometimes a GC license, a 'qualified expert' license for a more regulated field, etc. What is the best way to deal with this, if any? Keep the seller on as some employee/owner on paper? Can these be transferred?

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Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

I see this question a lot, so if this answer looks repetitive it is.

Great question. There are a number of different ways you can maintain licensing. This is important to all lenders for all deals, but especially important for SBA loans in particular. Please keep in mind that licensing rules can vary from state to state and business to business, so you need to be sure you fully understand the rules in your state. Sometimes the license needs to be maintained by the business owner and sometimes the license needs to be maintained by a key employee. So understanding the licensing for the specific business and state(s) you operate in is paramount. Here are ways you can help keep the license in place: 1) If the seller maintains the license, do not buy the entire business. If you are doing an SBA loan you can now do a partial business acquisition and so long as the seller retains less than 20% of the business they are not required to guarantee the loan based on the SBA rules. The only disadvantage of going this route is that you have to do a stock purchase when using an SBA loan for partial business acquisitions. If you are doing conventional financing you can have the seller roll-over some ownership and maintain the license. 2) If a key employee has the license you need and it is not required to be an owner, just an employee in the business, have that key employee sign a contract that they will stay post closing. If they are required to be an owner, give them a small ownership interest at closing to meet that requirement. 3) Bring on a partner that has the required licensing and give them a minority ownership at closing to maintain the licensing. 4) Some businesses you can have a third party not involved in the day-to-day of the business maintain a license for that business. If that is allowed for the business or state you work in, try to find someone to meet that requirement for you and get them on contract for the company or payroll based on what is required. 5) In some cases lenders will let a selling owner staying on a one-year employment contract maintain that license so long as there is a plan to replace that license prior to that employment contract expiring. Ways to replace that license are to higher someone else or to get another employee, including you as the buyer, licensed prior to that employee leaving. The key here is to be sure it is reasonable to get a replacement if someone is needed. Also, if you would need to hire someone else and pay them a salary, keep in mind the lender likely will adjust EBITDA to take into account that new employee needed to maintain the license. Overall I have found most lenders, including SBA lenders, are reasonable about a license transition so long as a good plan is identified up front. Not every lender will accept a plan, but most will if the plan makes sense and you have multiple options to maintain licensing throughout ownership. It is always best to have an eventual plan for you as the owner to have the required licensing, as that provides the best protection to you as the owner, but ultimately that is not always practical in every situation. I hope this helps to answer your question. If we can provide any additional assistance related to financing or other needs you can reach me here or directly at redacted Good luck with your search.

Reply by a searcher
from University of Virginia in Phoenix, AZ, USA

I'm a little late answering but want to reiterate that this varies significantly by state and the licensing issue can be much bigger than you originally think. I was in-house counsel in the construction industry for 6 years and none of that experience counts toward the license in most states, if I answer the application honestly, because it is not field experience.. Some states, such as Arizona, can be especially hard because some contractors licenses require 4 years of experience, which is a very long time for a seller to stick around. I could not find an SBA lender who was willing to bet on the seller agreeing to stick it out under any of the methods mentioned above, even keeping the seller on as a minority owner, because 4 years was too long. I would have had to find a partner who had a license and my experience is that if the license holder was a desirable partner he or she likely already had their own company. The reason for this is that in Arizona, although the license is obtained by an individual, it is tied to a company. Therefore, there is no need for multiple people in the company to concurrently hold a license. I looked at several companies that had a manager who would have been willing to sit for the exams and hold the license, but it was still a risk because of the 4 year time frame. I found a guy who had retired but had kept his license active who was willing to come on for a small amount of equity, but his level of involvement was likely not going to be sufficient to meet the letter of the law because it was clear he wanted to spend his time travelling with his wife. I looked at two deals in which I would have bought out one of two partners, but I would have owned 51%,, which made the deal mechanics very different from the traditional search model. Another reason that it can be hard is that some insurance providers will require that the majority owner hold the license, and you cannot operate without insurance. Again, I'm not saying that every state is the same as Arizona, but they can be tricky.

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