Purchasing an existing construction company — is it
a smart business move?
Question: We are a small corporation with
a C- 8 (concrete) license. We have been looking for ways to
expand our business, and a business broker approached us with
the idea of buying out an existing construction company in
our area. His says that we can “instantly” expand
if we buy a company that is already established. This makes
sense to us, but after several months of looking over some
of the available businesses, we’ve found a number of
small general contracting businesses up for sale for little
more than their equipment value.
These contractors are obviously victims of the economy and
are not what we had in mind. We did come across one business
owner who wants to retire due to deteriorating health issues.
He also has a couple projects already going and a few others
ready to start in the next few months. The price is right,
and we are excited about starting off with some good projects.
Another attraction is that the business is a turn-key operation
and will include all trucks and equipment, building lease,
yellow-page advertisements, some of his employees who want
to stay on, and all current business licenses, including his
general contractor’s license.
The owner will help train our personnel for a month or so
since we only do concrete work. We think with this training
and our own experience we can easily take over his business.
The broker suggested that we set up a limited liability company
with the same name as the other owner has been using to purchase
the new business, and then we can hit the ground running with
the projects that are in the works. Eventually, we would like
to change the name to something similar to our current business.
Is there anything else we should be taking into consideration?
Answer: The business broker is doing you no favors
with his suggestions of how to go about this because he obviously
does not know, or possibly does not care, about the many issues
that you need to evaluate. Your proposed venture, while seemingly
straight forward, could be a Pandora’s Box.
First, many brokers and business attorneys do not know that
a contractor can only be one of the following business types:
sole ownership, partnership, limited partnership, corporation
or a joint venture. You cannot set up an LLC (limited liability
company) as he suggested because the Contractor’s State
License Board (“CSLB”) does not issue licenses
to LLC’s. Also, many brokers and attorneys don’t
know that the general contractor’s license isn’t
up for sale. It is not like a liquor license that can get
sold to the new owners along with the business assets and
trade name. This is because of the need for a qualifier.
Even though, in general, a contractor’s license is associated
with the business and not necessarily the qualifier (i.e.
the person who passed the test and qualifies to hold a license),
the license itself is not “for sale.” The business
is only able to obtain a license (and license number) because
an individual is acting as the qualifier for the business.
But, if that particular individual leaves the company, they
cannot take the license with them because it belongs to the
company.
Except in the case of a sole proprietorship, where the individual
qualifier is the business. In the case of any other business
entity, after the qualifier leaves they disassociate from
the license and the company would have to hire a new qualifier
within 90 days of that individual leaving the company (be
aware that it often takes longer than 90 days for the CSLB
to process the paperwork). And, that individual would have
to get a new license issued to them if they wanted to start
their own business. Further, a license issued to one business
entity is not transferrable to another business, except possibly
in the case of a corporation. If the corporation’s registration
number assigned by the California Secretary of State remains
the same after the sale of the business, the same license
can be used. The officers and the qualifying individual do
not necessarily have to remain the same, but, as I explained,
if the qualifying individual does not remain, then they must
be replaced with another qualifier within 90 days.
So, whether or not you can even keep and use the contractor’s
license of the company you are buying depends on (1) the type
of entity the business is, and (2) if it is a corporation,
whether or not you are doing a stock purchase and truly taking
over the entire business. If the current business is a sole
proprietorship, the contractor’s license cannot be part
of the deal. Once the current owner gives up ownership of
the business, the license goes with him. If the current owner
was healthy enough and wanted to remain active for a while,
you could use him as the qualifier for the new business as
either an RMO (Responsible Managing Officer) or RME (Responsible
Managing Employee). As an RMO he must own 20 percent of the
new company and have direct supervision and control of the
construction operations. If the current owner maintains at
least 50 percent ownership, then his actual license and number
can be transferred to a new corporation upon proper application
to the CSLB.
If the current owner was to remain involved as RME, then he
must be regularly employed by the company and actively involved
in the operation of the business at least 32 hours per week
(or 80 percent of the total business operating hours per week,
whichever is less). But, in your case, it looks like you will
have to hire someone who has a current general contractor’s
license and make them the qualifier, or find someone with
the required experience, and have them apply and take the
test.
Either of these options could take several months to process
with the CSLB. If you end up owning a construction company
with no qualifier, it is the same as doing work without a
license. Thus, not having both a qualifier and a valid license
in place when you take over the business could subject your
new company to severe financial penalties. Aside from this
licensure issue, there are other business considerations you
should take into account, which I will address in next week’s
column.
• • •
Disclaimer The information in this article is based upon California
law and is for general information only. Any information or
analysis presented here is intended solely to inform and educate
the reader on general issues. Nothing presented or referenced
to, regarding facts, documents or applicable laws, constitutes
legal advice. Before acting or relying on any information,
including any information presented here, consult with a qualified
attorney for your specific situation.
Scholefield holds an active PE license in Colorado, an undergraduate
engineering degree from the University of Florida, and received
her JD from the University of San Diego. Source Code: 20080502tca
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