Business Licenses and Permits

One of the most common issues that can be overlooked during due diligence involves business licenses and permits. Too often the required licenses are left to the buyer to manage after the deal is closed. Whether the business operates under a large portfolio of licenses or just one simple permit, a missing, expired or unknown business license can catch even a careful legal practitioner by surprise and disrupt the deal.

Take into consideration a recent deal between a nationwide rental car company that purchased a competitor out of bankruptcy.

Although the purchase of the company had been finalized, a local county License & Inspection Department said, “not so quick.” The buyer learned they couldn’t open their new location because they didn’t have the appropriate licenses in place. They needed to file a name change prior to opening. This was after they remodeled the location and trained their employees in preparation for their grand opening.

Come to find out they overlooked this item in the thirteen locations across four states and all were scheduled to open within a fifteen day period.

A simple search to verify the required business licenses, known as a “License Verification,” conducted as a part of the due diligence process could have uncovered these issues and prevented the last minute angst from occurring.

Just as you request corporate information, contracts, and intellectual property data such as domain names, trademarks, and patents, make sure you also request and verify a list of the seller’s licenses and permits. A License Verification search can be conducted usually within 24-48 hours by a professional service company and provide you the necessary requirements for a name change or related change of ownership. For example, in which county, municipality, or state can you file the name change at the time of the renewal; which license authorities require a filing at the time of the deal close; and will take a simple letter notifying them of the transfer?

In the rental car company case, a rolling 20% monthly penalty was incurred until the licenses were changed into the name of the buyer.

The license verification not only aides the one buying a company, but can also benefit the seller or those preparing for a sale. The license and permit verification can be used to ensure that all the “T’s are crossed” and “I’s are dotted” in order to prevent any last minute obstacles of your sale.

Another resource at your disposal is to engage in a simple “Audit & Gap Analysis.”  It doesn’t hurt to conduct a random spot check of a seller’s licenses and permits from the list provided as a part of the due diligence process. The Audit & Gap Analysis will provide you three results:  1) it will verify the validity of the license and/or permit and expiration date; 2) it will identify any gaps or holes of licenses required to keep you in compliance and; 3) the analysis will identify if you have any unnecessary licenses that are no longer required.

Paying close attention to these few items can save you and your client time, aggravation and money, and avoid any unfortunate surprises in your next deal.