License Continuation for Deals in the Skilled Trades

June 28, 2023

by a searcher from University of Pennsylvania - The Wharton School in Boston, MA, USA

SF Community - curious if anyone here has any experience on this topic.

A lot of businesses I've seen in the trades fields (HVAC, Plumbing, etc.) have the current owner hold the license for that trade for the business. Many times, that owner is the only one in the organization with that license. Depending on the state, it may take years of experience for a new applicant to obtain one of those licenses, especially if they've never worked in that trade before.

I had a broker speak with me about this, and while there is the workaround of having the former owner lease out the license to the new owner, I think the current situation is that they can only do that for 11 months (<1 year) if the acquisition is an asset purchase vs. a stock purchase.

My question is, has anyone found other workarounds here that don't involve hiring someone with a license (and thus maybe having your business "held hostage" to an extent)? I was wondering if you do a stock purchase (and thus owner can technically lease out his license to you for 12+ months) and undergo a 338 election to preserve the tax benefits of an asset purchase (assuming purchasing company is an S or C corp)

Would love to hear what current owners of trades businesses have done...

Reply by a professional
from Dartmouth College in Los Angeles, CA, USA

As a lawyer representing buyers, this comes up quite a bit and is often a sticking point. It may depend on the specific license as to how long the business can continue to utilize the owner's license, but in all cases you want to have a transition plan in place to replace the license of the owner. You can insert a closing condition in the PA which states that this needs to be locked up prior to closing (e.g. being able to agree with a senior employee about becoming licensed in exchange for better compensation). You could potentially do a 338(h###-###-#### if your tax advisor says so), but now you're in a position of assuming liabilities from the existing business as a result of the stock purchase, which may be a bigger negative than dealing with the license issue.

Reply by a searcher
from Dartmouth College in Hanover, NH, USA

I wonder if these trades could fall under "management service agreements" - I've seen these used in dental office roll-ups. Not sure if it is directly applicable, but I'd be curious.

+3 more replies.

Join the discussion