Construction & Contractor Businesses & Licenses

Construction & Contractor Businesses & Licenses

Overview of Situation

This case study is relevant to every contractor and construction business Pacific Business Sales has successfully sold. These transactions serve as a blueprint illustrating how construction and contractor businesses can effectively be sold utilizing SBA financing and licensing issues with the buyer.

Construction Business Brokers On A Site Visit For Potential Client

California construction and contractor businesses require licenses ranging from the General Engineering A license to General Contractor B license, and C licenses which cover everything from plumbing, HVAC, and electrical, to pipelines, and roofing, and the long list of C61-D specialty licenses. Companies performing these services must have the proper licensing, and each licensed company must have either an RMO (Responsible Managing Officer) or RME (Responsible Managing Employee) – a licensed individual as the qualifier for the company.

Licensing is a problem when selling a business because rarely does the prospective buyer have the exact license required for that particular trade. Even buyers with vast construction experience may not have the right license, for example, a prospective buyer for a plumbing company with 20 years as a licensed General Contractor (B license), may not have the C-36 plumbing license. To operate the business they will need an RMO or RME until they obtain their C-36 license. In this example, the general contractor would likely be able to get their license within a year and would only need an RMO or RME for that period. Many prospective buyers may not have the experience to qualify for taking the license test and may need two years or more to qualify for the test.

Another challenge is SBA financing approval. SBA lenders will require a license qualifier to be in place at closing. The lender will not accept an RME because an employee can leave at any time and then there is no qualifier for the corporate license. If the buyer cannot obtain their license before closing this leaves the owner (seller) to be the RMO post-closing.

Even with the seller acting as the RMO post-closing, many SBA lenders only allow the seller to be the RMO for 12 months. This would seemingly limit the buyer pool to licensed contractors and those who can obtain their license within 12 months.

The consensus is contractor licensing and RMO requirements make construction and contractor businesses difficult to sell and can only be sold to licensed contractors.

Approach & Solution to Selling a Contractor-Construction Business

There are two key challenges in selling a contractor business, 1) the licensing required by the CSLB, and 2) obtaining SBA financing for the transaction (which circles back to the licensing).

Firstly, why is SBA financing important? For sellers, it can provide up to 100% cash at closing, for buyers it offers 10% down with bank financing for 10 years. The 10% down payment vastly opens up the pool of buyers that can qualify to buy the business and allows the buyer to acquire a much larger business with the same capital.

Technology Business Broker Assisting Client With SBA Loan

Read more about Financing the Sale of Your Business

Having sold numerous construction and contractor businesses, we’ve observed a lack of clarity and consistency in implementing SBA’s Standard Operating Policy (SOP) among lenders. This ambiguity allows most lenders to establish their own credit policies, particularly evident in the construction industry. While some SBA lenders refuse to entertain construction businesses altogether, others restrict their focus solely to contractor businesses offering services like HVAC or plumbing, excluding construction. On the other hand, some lenders provide financing for construction contractors. Given this variability, reaching out to a random SBA lender for financing relating to construction or contractor business acquisition is a gamble.

Our firm has developed direct relationships with top SBA PLP (Preferred Lender Program) banks and in doing dozens of transactions with these lenders we have an understanding of each lender’s underwriting approach and credit policies. We know the industries each bank prefers and those they will not consider regardless of how strong the deal is. This allows Pacific Business Sales to match the right bank to each transaction to obtain the best financing.

Step 1) When we take on an engagement to sell a contractor business at Pacific Business Sales our first step is to obtain a PreQualification letter for the business from one of our SBA lenders. The PreQualification letter will of course assume the buyer meets certain criteria.

Step 2) Is the contractor license. The seller (owner) will almost certainly need to act as the RMO for up to one year. The odds of finding a buyer with the correct license or being able to obtain their license by closing are exceedingly low. We have been very successful in helping buyers obtain their contractor’s license much sooner than expected and often within a year.

We use a very experienced contractor license consulting firm that works directly with our prospective buyers to obtain their contractor licenses as soon as possible. Often buyers have more experience than expected that will count toward the four years of required experience and the required additional experience can be reduced to one or two years in the trade.

As part of step 2, our buyer acquisition targets buyers that have relevant industry experience and will be able to qualify within a year or at most two.

Contractor and construction businesses also need customized purchase agreements. Many contractors have WIP, A/R, and retention that must be considered in the company value and purchase price. There is also a need for an RMO addendum to the purchase agreement spelling out the terms and conditions of the seller acting as the RMO. We have developed these agreements specifically for contractor and construction business sales.

Results & Conclusion, Pacific Business Sales Contractor & Construction Business Sales

The sale of construction and contractor businesses demands a specialized approach that transcends conventional market strategies. A “one-size-fits-all” method simply doesn’t suffice. Irrespective of the business’s quality, factors such as licensing, transaction structure, and SBA financing elements must be integral components of the business broker’s toolkit right from the outset.

At Pacific Business Sales, we incorporate SBA financing into nearly all our transactions, including those involving construction-contractor businesses. In fact, over the past several years, approximately 90% of our transactions have utilized SBA financing.

For insights into our past sales of construction and contractor businesses, as well as reviews from both buyers and sellers, please refer to the links provided below.

See our recent successful construction & contractor transactions.

Buyer and Seller Reviews