Hi Reader

Have you considered buying a licensed home services business like HVAC, electrical, or plumbing? If so read on. This issue is for you!

How to Handle License Continuity When Buying a Home Services Business with SBA Financing

Home services businesses are some of the best “boring” businesses to buy. Margins are solid, supply is low, barriers to entry are high, and demand is strong—possibly getting stronger if the economy weakens.

But, there’s a catch: licensing. If you’re not already licensed in the industry, this can be a significant barrier. Without proper licensing, you won’t be able to legally operate the business after closing.

In today’s issue, I’ll show you how to create a Licensing Continuity Plan, which is essential when buying a licensed home services business using SBA financing.

Why You Need a Licensing Continuity Plan

1. Required to Close the Deal: Your SBA lender will require a licensing continuity plan to approve your loan.
2. Legally Required to Operate: Without proper licensing, you can’t legally operate the business, which means no income post-closing!
3. Eliminate Risk: A good plan ensures you’re not relying on a single point of failure, like a seller or key employee, to keep the business running.

State-Specific Considerations

Licensing requirements vary by state, so it’s important to understand what’s needed where you plan to buy:

1. Some States Don’t Require Licenses: For example, Texas doesn’t require roofers to be licensed—avoiding the issue altogether.
2. Licensing Individuals: In some states, individuals can “attach” their licenses to a business, often to multiple businesses at once.
3. Licensing Businesses: States like California license businesses but require a designated licensee with actual supervisory authority over the work.

Licensing Continuity Plan Options

Your plan should have at least two layers of protection to avoid relying on one person or point of failure. Here are a few solid options:

1. Self-Licensing: The ideal situation is for you to get licensed yourself. This gives you control and removes reliance on others. Even if you’re not licensed yet, plan to become licensed as soon as possible.
2. Seller Licensing: The seller may be able to serve as licensee, but this depends on the deal structure:
   • Asset Deals: SBA rules prevent the seller from being a “key employee,” limiting them to a consulting role for 12 months max. This can be a problem in states where the licensee must have significant supervisory authority.
   • Stock Deals: In stock deals where the seller retains equity, they can stay on as an employee and serve as licensee indefinitely. But consider the risks—how will this affect your authority with employees and customers?
3. Employee Licensing: Key employees who already have or can obtain a license are a viable option. Make sure you understand any additional steps they need to take (exams, bonding, etc.) to legally serve as licensee.

Additional Considerations

1. Get Lender Approval Early: Talk to your SBA lender early in the process and get written approval of your licensing plan from their underwriter. Delays here will delay your closing.
2. Employee as Licensee? Lock It Down: If relying on an employee, have an employment agreement ready, consider offering a bonus, and ensure their continued employment is a closing contingency.
3. Seller as Licensee? Have a Backup Plan: If the seller is serving as licensee, especially with retained equity, make sure you have a plan—and legal ability—to replace them if needed.
4. Don’t “Rent” a License: Some companies offer to act as your licensee for a fee. Most lenders won’t accept this in your continuity plan.
5. Consider a Licensing Consultant: Consultants can help you understand state requirements, develop a continuity plan, and sell the plan to your lender if necessary.
6. Licensing is Critical During Diligence: During due diligence, ensure you know exactly who will be the designated licensee after closing, and have proof to back it up.

A well-structured Licensing Continuity Plan is key to ensuring a smooth transition and ongoing operations after buying a home services business. Avoid legal risks and lender delays by preparing early and thoroughly.

Any more questions? Hit me up on Twitter @lawyer4smbs.
Until next time, happy deal hunting!

Eric

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