asset purchase in the context of a residential contracting business

March 09, 2024

by a searcher from Davidson College in Swampscott, MA, USA

Hello,

How have buyers dealt with the transfer of customer contracts in the context of an asset sale? What happens with projects that got contracted before closing with deposits already received? Do you inform customers that their projects have been assigned to a new company? If so, at what point in the process and how do you deal with project cancellations post closing?

Also, what is the best way to ensure that the new entity purchasing the assets has the necessary licenses (using seller's licenses) so employees can work on day 1 after closing?

I'm particularly interested in experience in the residential HVAC contracting space.

Thank you.
Daniel

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Reply by a professional
from University of Michigan in Detroit, MI, USA

Hi ^redacted‌, ^redacted‌ is right with respect to assignability. Review each customer contract. Check to see whether the seller can assign them. If not, you can either contact each customer to get their consent or consider a stock purchase (you should also check for a change of control provision just to be sure). With residential HVAC, I imagine the contracts are assignable. But there is no way to know for sure without a careful review.

Regardless of assignability, you will want to carefully think about a transition plan. Assuming the contracts can be assigned, is there a need to let your customers know about the change in ownership? If so, how are you going to communicate that news? Most buyers focus on transition post signing but pre closing (assuming you are doing a sign then close deal).

Licenses can be tricky. Again, as Brad notes, check with the state in which the business is located. If you need seller to retain equity post closing to give yourself time to obtain the necessary licensing, this may affect the structure of your deal. Some lenders may refuse to do an asset deal with a minority seller equity rollover. This is a conversation you will want to have with your lender and seller as soon as possible.

Finally, you will need to agree with seller what you want to do with AR with respect to projects that are outstanding at the time of closing. There is no one answer. It will depend on how much money is on the table. If there are a couple of really big deals, our clients sometimes enter into a separate agreement to split the proceeds when received.

I hope that helps. Good luck. Let me know if you want to discuss further. Always happy to chat. DM me here or reach out at redacted

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

Great questions. You have a couple of potential issues here. First, you need to look at the existing contracts and see if they are assignable. If they are not assignable then you would need to have each customer accept an assignment of that contract at closing to be sure you will still have control of that contract post closing. For deals where there are long-term contracts in place that are not assignable, we often see a stock purchase or a modified stock purchase done. I would definitely recommend talking with your attorney on this issue.

As for licenses, you need to check with the state in which the business is located to see what the specific licensing requirements are to be sure they can remain in tact post closing. Sometimes the license goes with the owner, sometimes with the company, and sometimes you just need a key employee to control that license. Many lenders are going to want to be sure you have the licensing in place post closing to operate the business or they are not going to finance the business acquisition.

One thing you can do, especially now that the SBA allows potential business acquisitions, is having a key seller remain a small equity interest in the business so that you can keep the license in place (if the license goes with the seller). If you have additional questions happy to help. You can reach me here or directly at redacted

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