License hurdle when acquiring trade businesses

January 20, 2023

by a searcher from Pennsylvania State University in New York, NY, USA

If a non-licensed individual acquires a trade business (hvac, plumbing, etc.) they often will need a management level employee to hold the license for the company to operate. In some states, that individual is also required to have equity in the business (e.g. 1% in NJ for HVAC, 10% in NJ for plumbing).

Let's say you find a licensed individual and incentivize them with equity, profit share and a high salary. They could still leave at any time...even if there were possible contractual agreements in place they would not be for long term. If that were to happen - you would lose your ability to operate until you could replace that individual with another properly licensed individual. And then there is the question of what happens with the equity? You would also need to meet equity requirements for the new hire. Even if they were happy to stay long term - you would always be beholden to that individual.

Despite all of this - I keep hearing on podcasts, on twitter and other places about non-trade corporate types buying these trade businesses. Isn't the risk of ruin to great? Do they all partner with a licensed individual before pursuing these type of acquisitions? Are there just certain states that have looser requirements? My research is based on NY, NY, CT region. Am I missing something here?

Reply by an investor
from Western Washington University in Key West, FL 33040, USA

1) There are states that do not have equity requirements. However, it sounds like if you want to go into the plumbing business, you should be looking at other states besides NJ, However, the 1% equity requirement doesn't sound like a difficult hurdle to cross. Just find a partner and grant him/her equity that vests after 2-years (or however long it will take you to get yours) of qualifying the business under their license (or that can be clawed back if they fail to qualify for the full term). However, it cannot be the seller as that would not be SBA compliant.

2) In states that don't have equity requirements, I would suggest having the seller continue to qualify the business under his/her license for 2 years (or until you can get yours) as one of the contingencies for a seller note.

Problem solving will be your #1 daily task once you close on a business. Your ability to overcome closing hurdles (this is just one of many that you will face) is a good test of your problem solving ability and a potential indicator of whether or not you will be successful as an operator, IMO.

Reply by an intermediary
from United States Military Academy in Tacoma, WA, USA

Great question! I see your point. My thoughts are that you could structure your deal with the licensed individual to stay longer (I.e. equity growth at certain year and KPIs, similar to how an investor may incentivize their searcher). Would love to hear others thoughts!

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