Looking for help on understanding licenses.

July 31, 2024

by a lender from University of Missouri - Columbia in Denver, CO, USA

Hi,

I am looking for assistance on how to navigate needing licenses for service businesses. I have looked at a few different companies recently one being HVAC and one being property management. If no one on the loan has the license to run this business, how does that work with SBA?

Could you get another firm to sponsor a license, or if an employee has the license would that work? How do you navigate this scenario.

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

Great question. There are a number of different ways you can maintain licensing. This is important to all lenders for all deals, but especially important for SBA loans in particular. Please keep in mind that licensing rules can vary from state to state and business to business, so you need to be sure you fully understand the rules in your state. Sometimes the license needs to be maintained by the business owner and sometimes the license needs to be maintained by a key employee. So understanding the licensing for the specific business and state(s) you operate in is paramount. Here are ways you can help keep the license in place: 1) If the seller maintains the license, do not buy the entire business. If you are doing an SBA loan you can now do a partial business acquisition and so long as the seller retains less than 20% of the business they are not required to guarantee the loan based on the SBA rules. The only disadvantage of going this route is that you have to do a stock purchase when using an SBA loan for partial business acquisitions. If you are doing conventional financing you can have the seller roll-over some ownership and maintain the license. 2) If a key employee has the license you need and it is not required to be an owner, just an employee in the business, have that key employee sign a contract that they will stay post closing. If they are required to be an owner, give them a small ownership interest at closing to meet that requirement. 3) Bring on a partner that has the required licensing and give them a minority ownership at closing to maintain the licensing. 4) Some businesses you can have a third party not involved in the day-to-day of the business maintain a license for that business. If that is allowed for the business or state you work in, try to find someone to meet that requirement for you and get them on contract for the company or payroll based on what is required. 5) In some cases lenders will let a selling owner staying on a one-year employment contract maintain that license so long as there is a plan to replace that license prior to that employment contract expiring. Ways to replace that license are to higher someone else or to get another employee, including you as the buyer, licensed prior to that employee leaving. The key here is to be sure it is reasonable to get a replacement if someone is needed. Also, if you would need to hire someone else and pay them a salary, keep in mind the lender likely will adjust EBITDA to take into account that new employee needed to maintain the license. Overall I have found most lenders, including SBA lenders, are reasonable about a license transition so long as a good plan is identified up front. Not every lender will accept a plan, but most will if the plan makes sense and you have multiple options to maintain licensing throughout ownership. It is always best to have an eventual plan for you as the owner to have the required licensing, as that provides the best protection to you as the owner, but ultimately that is not always practical in every situation. I hope this helps to answer your question. If we can provide any additional assistance related to financing or other needs you can reach me here or directly at redacted Good luck with your search.

Reply by a searcher
from North Dakota State University in Fargo, ND, USA

Like ^redacted‌ said, it depends on state and type of license.

For me, I'm looking at buying a plumbing company in North Dakota and to pull permits in city limits I'll need a master license on staff, journeyman for county. I'm an Architect, not a plumber.

Additionally, the SBA told me there is no relevant experience required for the plumbing industry.

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