Purchasing an existing construction company — is it
a smart business move? Part 2
Discussion from last article: I had a contractor who was
interested in purchasing an existing construction company.
They were being guided by a business broker who had not exactly
provided good advice thus far. The for-sale company was a
general contracting firm, while the purchaser was only a concrete
contractor. The attraction to this business was that the general
contracting firm was fully functional and was a turnkey operation.
The sale would include all trucks and equipment, building
lease, yellowpage advertisements and some employees who want
to stay on with the new owners, and all current business licenses,
including his general contractor’s license. The owner
will help train the buyer’s personnel for a month or
so since the buyer only currently does concrete work. As another
big attraction, there were several pending projects that would
become part of the purchase.
In last week’s discussion, I touched on some of the
potential pitfalls regarding purchasing this business, including
restrictions of transferring a contractor’s license,
license qualifier requirements, and business entity restrictions
(i.e. a limited liability company cannot obtain as contractor’s
license). I also provided some ideas that could help a specialty
contractor ease into general contracting without violating
the law.
Additional concerns -There is more to consider in this purchase
decision than licensing, qualifiers and business types. It
is extremely important to understand exactly what you are
purchasing when it comes to taking over an ongoing business.
For example, your purchase could be for the entire business,
and, rather than just purchasing the assets and taking over
existing contracts, you may end up taking on the liabilities
of this company as well. Thus, depending on how you arrange
the purchase, you would end up with both the good and the
bad. If you end up purchasing the entire company, assets and
liabilities, you need to recognize problems that the company
may have related to past projects, such as failure to pay
subs and suppliers. Claims of these types have up to a four-year
statute of limitations, and may not surface for some time
after the purchase.
The same goes for claims from an owner of a past project,
such as for damages due to delays caused by the general contractor.
Again, if these are breach of contract claims, then they may
not surface until four years after the fact. More of a concern
would be construction defect claims for latent defects. You
could end up being liable for the work this seller had done
almost 10 years ago. Also, you could end up being at risk
for another 10 years for work the seller completed just before
you purchased the business.
An investigation into the insurance coverage that the seller
has (or had) needs to be done to see the extent of coverage
for the prior projects and whether that coverage will transfer
with the sale. This may depend on the type of business entity
the seller is. Because of these risks, you need to make sure
you have very good counsel on how this business transaction
should be handled and documented. Also, make sure you have
some sort of indemnity agreement from the seller so that the
seller will defend any claims brought as a result of projects
done before the purchase, to the extent those claims are not
covered by any insurance.
The second area of concern is the pending projects. This seller
has contracts for projects not yet started, but those are
contracts between the seller and the project owner. Depending
on the terms of the contract, those projects may not be assignable
to another company or if the business transfers to a new majority
owner. This may not be an issue if the business is a corporation
and you are buying the shares of stock, since the contracts
are between the corporation and the owner.
But, even with a corporation, the contract may restrict assignment
or transfer to new majority owners. Also, sometimes the project
team is defined in the contract as comprising certain individuals,
so those issues need to be addressed if they exist. The same
restrictions against assignment may apply to the lease as
well. You must review the lease and understand its terms.
Depending on how you end up purchasing the business, you may
want the landlord to provide written approval of the taking
over of the lease regardless of whether or not there are express
restrictions. The leased land itself may be of concern if
the business has been there for a long time because of the
possibility of improper hazardous waste disposal by the seller.
This is another area where you would not want to take on the
risk of liability. A due diligence investigation may be warranted,
and even if that comes up clean, the purchase agreement should
include an indemnity by the seller if this becomes a problem.
One final thought is liability for employee claims. There
are various statutes of limitations for those as well and
you would not want to be on the hook for those issues if you
have taken over the entire company. Again, this may be another
good area for an express indemnity agreement from the seller.
As you can see, there are a multiple of issues to investigate,
resolve and document as the purchase agreement is prepared.
Because of the risk involved, you really must seek the service
of a competent attorney, and not just rely on the guidance
of the business broker.
If you have a construction question, submit it to: info@construction-laws.
com
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: 20080516tca
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