Licensing and Financing: Which Comes First when Selling a Construction Business in California
One of the trickiest parts of selling a construction business in California is finding a qualified buyer. So what do you look for, and if you are a buyer, what targets do you shoot for?
Well, there are a couple of primary qualifications to buy a construction business, and they often seem like one of those chicken or the egg problems? Which comes first? They are licensing and financing. Let’s look at both and see if we can come up with an answer.
Licenses and Financing
This is where things can get a little dicey. Licenses often cost money to obtain, and there can be regional and county licenses as well. There may even be waiting periods for some, only certain testing periods for others, so often it will seem like there are constant obstacles for a buyer.
But for a buyer to get financing, they will have to either have a license already or be working with someone who has one. This has a direct impact on the way the sale is structured, and how it will affect you, as an owner looking to sell.
You could stay and help the new owner with the transition, which might be a good idea anyway, but what if they fail to get a license for some reason? What happens to the sale, and how long do you stay on and wait until they are qualified to take over?
The simple fact is that unless you are providing much of the financing, your buyer will need to be licensed in your niche before they even make an offer on your business. Ideally, the buyer should be a licensed contractor at a minimum before you even consider selling to them.
Financing and Licensing
For a moment, let’s flip things around. What if a buyer shows up who is licensed and ready to buy your business, but they don’t have financing in place yet? What do you as a seller do? There are a few steps you can take, and with the help of a business broker, you can vet buyers early.
- Will the buyer be able to get financing, whether SBA or another loan?
- How much cash do they have to put down? Is it enough?
- Does the buyer expect you to carry some financing? How much and under what terms?
The answer to all of these questions will help you determine if the buyer is a good fit. If they don’t have a financing plan, they may not be the best buyer for you to even start a conversation with.
What the Construction Business Seller Wants
So what do sellers want? First, they want as little risk as possible. If they do have to carry some financing, they want that potential liability to be minimal. They also want the potential buyer to be already licensed or well on their way to being qualified to take over the business. Even if there is going to be a transitional overlap, the seller wants it to be as short as possible.
The reason is simple. Usually, when you are ready to retire or exit your business for another reason, you are ready to leave, not to stay on and take on additional responsibilities. You also want to close the deal as quickly as possible, and someone who doesn’t already have both the licensing they will need and the financial backing to buy the business will likely delay the process. You want to sell your business as quickly as possible.
What the Construction Business Buyer Wants
We need to flip things and look at the buyer side though. Because it is rare in a deal when everyone gets exactly what they want. The buyer wants to come in with as little risk as possible. They don’t want to spend any money until they have to, and they want the sale structured so they emerge with the best tax situation possible.
They may want to wait to get licensing until financing is assured. The buyer may also want a longer transition and training period than the seller wants. They will want to do extensive due diligence to ensure they enter the business with the lowest risk and at the best price possible. Current events and market changes may sway their offer or even their interest in your business.
The key to all of this is a compromise. Often there is a middle ground that, while not ideal for either party, is acceptable to both.
Satisfying the State
The final point is that running and selling a business in California is different than in other states. Regulations, both state, regional, and local are even tighter than in other places. Sometimes the need for licensing may be determined by the governing body more than the desires of either the buyer or the seller.
There are a few key takeaways:
- Check local laws and regulations.
- Go into negotiations knowing what’s acceptable to you.
- Have an experienced business broker on your side to guide your transaction from the start.
- Examine the ability for the buyer to get financing in the same way they perform due diligence on your business.
Which comes first, financing or licensing? That all depends on who you ask, but for the most part, a buyer should have both in place at the same time before you even start to discuss selling your California construction business. But as an owner, you might have to make compromises to ensure the deal goes through.
Just be sure the buyer has the ability to produce both the chicken and the egg before closing, regardless of what order they come in.
Are you ready to sell your California Construction business? Contact us at Rogerson Business Services today. We look forward to being your business broker.
