Contractor Licenses in the Context of a Business Purchase

What’s the deal with contractors licenses when you’re buying or selling a business? Well, there’s a lot to it and the process can be a long one so the issue should be identified as early as possible in a transaction so as to avoid unnecessarily delaying the closing.

Contractors licenses are not transferable like a liquor license is. Liquor licenses are, very generally, a mere permit to sell alcohol and they have little to do with the license’s owner. They’re just a way that the government can regulate how much alcohol is being sold and where, and the quality of person doing the selling is of less concern to the government.

Conversely, a contractor’s license has everything to do with the license’s owner and is far more than just a permit to do business. Rather, a contractor’s license is sort of a blessing of the license holder by the Contractors State Licensing Board, or CSLB, in order to protect the public from incompetent and/or dishonest contractors. In order to obtain and maintain a contractor’s license, the license holder must jump through a lot of hoops, and, in the case of an entity such as a corporation, it must be insured and bonded to a certain minimum level and have Workers Compensation coverage for its employees, etc.

Therefore, if you’re going to buy a business that requires a contractors license, you’re going to have to be licensed (either as an individual or your entity) immediately upon closing the deal. If you’re not licensed on day one then if you operate the business (i.e., performing work to earn money to pay your employees and lender) then you’re in violation of the Contractors State License Law and the penalties can be onerous, including but not limited to potentially forfeiting any and all claim against clients for money you’ve earned while operating without that license. They way you go about being licensed as of the closing date differs between whether you’re buying the business as an individual or whether you’ve formed an entity to be the purchaser (i.e., you’re the shareholder of a corporation you’ve formed to buy and then operate the business).

If you’re using an entity such as a corporation, then the corporation itself must be licensed. (I.e., just being owned by a licensed individual or having a licensed individual as a key employee is not enough. You’ve got to get the corporation itself licensed.) You can get an entity licensed in one of two ways: (1) At least 20% of the ownership must be in the hands of a licensed individual (known in CSLB licensing parlance as a “Responsible Managing Officer,” or RMO); or (2) you need to employ a licensed individual (known as a “Responsible Managing Employee,” or RME). As to option (2) in the prior sentence, by “employ,” you have to employ them for at least 32 hours a week, have Workers Compensation insurance in place, etc.. (Note that by the time you read this, it may have been a while since I published it and the laws may have changed in the interim. Don’t take what I’ve written as gospel-do your research into the rules as they exist when you read this.)

In either circumstance, you have to go through a process with the CSLB to use the licensed individual’s experience and know-how to convince the CSLB that the individual’s qualifications should be imputed to the entity through which the individual is operating the business. That process involves preparing and submitting the application, getting fingerprinted, and ultimately being approved by the CSLB. Once that’s done, the entity is licensed, but the process is presently (as in, as of the date of this writing) taking six-ish weeks to complete. You can look up the processing time on cslb.ca.gov, and add four to five weeks to develop an educated guess as to when you might receive approval. Whenever a government bureaucracy is involved, I always recommend adding another week or two onto your estimate in order to account for the seemingly inevitable delay-causing issue that may arise, so instead of six-ish I might even say “seven.”

So if you’re not licensed yourself but you really want to buy a contracting company, then you’re going to have to figure out how to do get yourself licensed before you close the deal. There are ways to accomplish it, and those ways depend on whether you’re doing a stock deal or an asset deal. A lawyer experienced with contractors licenses and the transfers thereof will be able to advise you on how to accomplish it.

Greg Borman is an attorney in San Diego, California. He practices in the areas of corporate law, business transactions, and estate planning. He can be reached at greg@bormanlaw.com and at (858) 232-7100.

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