EXECUTIVE SUMMARY: An electrical business acquisition was stuck because the buyer did not have the required license to operate the company. The SBA loan moved forward after the buyer secured a two-year employment agreement with the company’s licensed manager, giving him time to obtain the designation himself.

Licensing Requirements Are Becoming a Bigger Deal

More and more, banks have gotten a lot more picky on licensing requirements for buyers when it comes to purchasing trade-related businesses that require a specific license to operate.

This is mainly because the SBA has really made it a point to crack down on this requirement more so than in years past.

That matters in acquisition financing because some businesses cannot legally operate without the proper designation in place. Electrical companies are a perfect example.

The Seller Was Smart

The seller had been running this electrical business for decades under his personal license.

But he was smart.

He had hired a manager a few years back with the same designation that he had, so when he went to sell, he would have backup.

Thank God he did this, because the buyer did not have this designation, and it would probably take him about a year to achieve it.

Just using the license of the seller does not cut it anymore for most financing sources. They just don’t feel it is a long-term solution because they really want someone in the new ownership structure to have the proper designations.

This Was Gray, Not Black and White

Now, here is where it becomes gray, and not black and white.

The buyer had a long-standing history in the trades, and it would not take him that long to achieve this license within this state because of his background.

Put it to you this way: he was not an IT person or investment advisor trying to buy an electrical company.

We felt comfortable with him and his plan of getting this license.

He was also motivated to get it because he did not want to rely on others for it.

Smart man.

The Fix Was a Two-Year Employment Agreement

We told him to secure a two-year employment agreement with the current manager in the company, which would give him the time it would take to get his own license.

Our funding source would be able to work with that.

If we did not get that, then we would not be able to move forward.

He was able to do this, and this deal was able to get to the finish line quickly.

Why This Deal Could Have Died

This deal could have died because the buyer did not personally hold the required license at the time of purchase.

That is a real issue in trade-related business acquisitions.

It is not enough anymore to assume the seller’s license can simply carry the company forward after closing. Financing sources want a real operating plan, not a temporary patch that falls apart later.

Key Takeaway

When buying a licensed trade business, the license issue needs to be solved before the deal gets too far down the road.

If the buyer does not personally hold the required designation, there needs to be a credible transition plan inside the company. In this case, a two-year employment agreement with the existing licensed manager gave the buyer enough time to obtain the license himself and allowed the deal to move forward.

Licensing issues can kill a trade-related acquisition fast. Get the structure right early, or risk losing the deal.

Frequently Asked Questions

Why did this electrical business acquisition get stuck?

The deal got stuck because the buyer did not have the required license or designation needed to operate the electrical company. Since the seller had been operating under his own license, the financing source needed a stronger long-term plan after the sale.

Can a buyer use the seller’s license after buying a trade business?

That usually is not enough anymore for many financing sources. In this case, relying only on the seller’s license was not viewed as a long-term solution because the seller would no longer be the owner after closing.

Why do licensing requirements matter for SBA business acquisition financing?

Licensing matters because certain trade-related businesses require specific designations to operate legally. If the buyer or management team cannot satisfy that requirement, the financing source may not be comfortable moving forward.

How was this licensing issue solved?

The buyer secured a two-year employment agreement with the company’s existing licensed manager. That gave the buyer time to obtain the required license himself while keeping the proper designation inside the company.

What should buyers do before purchasing a licensed trade business?

Buyers should confirm early whether the business requires a specific license, who currently holds it, whether that person will remain after closing, and how the buyer plans to satisfy the requirement long term.