Many contractors who have been in business for 30 or more years are ready to sell their business and retire. The combination of aging ownership in the construction industry and a lack of skilled personnel to take over has created sales that implicate issues unique to the construction industry so there are pitfalls both sellers and buyers need to avoid.

Licensing

There’s a growing trend for construction companies to acquire related businesses. For example, an HVAC contractor may acquire an electrical or plumbing contractor in order to expand offerings. A general contractor may acquire a subcontractor. Despite these transactions being between licensed professionals, ensuring that the purchasing entity will end up properly licensed is often an afterthought.

In some instances, the license may transfer from one company to another, or maybe the individual license holder will become an employee or qualifier of the new company. But if not, then the buying company needs a plan for who will be its license holder. While this is not alarming, the amount of time it can take to establish a new license holder can be. For example, in Florida, qualifying a second company with an existing license can take anywhere from three to six months, which could delay or even derail a deal completely.

It is important to think through the licensing issues early and often to ensure that by the time closing occurs, the business will be properly licensed to service existing contracts and sell new ones. This may involve hiring the existing license holder for a period of time if the purchasing company does not have a license holder ready to step in. Regardless of the type of license, these are critical considerations to ensure that work can continue.

Niche Licensing

Buyers and sellers also need to be aware of the exact licenses needed for the new company to perform the work previously performed by the purchased entity. Many licenses contain sub-categories. For example, a plumbing contractor may need different licenses or qualifications to plumb water lines as opposed to gas lines. If an existing plumbing contractor acquires another one, attention must be paid to make sure that the existing company has all the same licenses as the company being acquired. Alternatively, the purchasing company can decide it is going to discontinue a line of business that requires a license it does not have, but this needs to be factored into the purchase price.

Another variation of this can be acquiring a business that requires two licenses to carry out a portion, but not all, of its work. For example, an HVAC contractor could have an electrical license and electrician on staff to perform any electrical work that is attendant with completing an HVAC installation. While the focus of the purchase may be almost entirely on the value of the HVAC business, an electrical license may be required to take full advantage of the assets being purchased. Buyers should ask for a full disclosure of all licenses being used in the business in order to evaluate these issues.

Application of Construction Funds

Adding to the complexity in the purchase and sale of construction companies is that many states have statutes that make it a crime (and licensing violation) to misapply construction funds. In determining what assets transfer to the purchasing company and what assets will be disbursed to the seller, the parties need to consider deposits paid, percentage of work complete, and other job-accounting procedures to ensure that any unearned deposits remain with the new company that will be responsible for finishing the job. The purchasing company also needs to ensure that it receives deposits paid that are to be used to purchase materials or labor. Failing to do this can result in starting deep in the hole on day one after the sale.

One way to address this is to come up with a formula that takes into account the percentage completion of the projects and the amount of money paid for each project. Adjustments can then be made for front-end or back-end-loaded jobs. The formula can be agreed on as part of the purchase and sale agreement and then the final calculation run the day before closing to finalize the amount of money staying with the seller and the amount being transferred as an asset to the purchaser.

These are just some of the considerations that should be weighed when buying or selling a construction business. Many of them can be addressed in the agreements between the parties, but be sure to consult with not only the attorney or broker handling the sale, but also construction counsel to ensure that the critical items are addressed in order to avoid hiccups in the sale or liability after.