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The M&A process is fraught with regulatory and other pitfalls. For example, your client can acquire a company and possess their assets, merge with their staff and take advantage of their experience, purchase their patents and own their business model. But a client can't automatically absorb the business licenses or regulatory licenses, or even the building permits of the acquired company. Those licenses — i.e. financial, security, food, alcohol, contractor, and environmental licenses — can become serious problems for your M&A client that expects to operate their acquired locations on day one, sell their new products on day two, and keep their distribution and supply chain functional on day three and beyond. Further, without detailed records of the acquired entity's diverse activities and compliance history, your client lacks enough actionable intelligence to be confident that their operations will be unencumbered by past, present or future non-compliance issues. Even with the most airtight reps and warranties, the potential operational hurdles should not be underestimated.
Just as you would want to advise a client in other complex compliance areas, business license management during M&A is an opportunity for your firm to help clients avoid vulnerability and ensure that the licenses owned and maintained by their acquired entity are up-to-date and that a strategy is in place to transfer all licenses to that entity.
Licensing is obscure, complex and essential to "open for business"
Operational licensing is often a hazy area that can fall off the radar during due diligence and might also be skipped over during discussions regarding entity restructuring. It's essential to understand that not all business licenses are the same. Some can be updated, or transferred, and allowed to continue with little disruption. Others must be forced to expire so that replacements can be issued. Still others require waiting periods and/or inspections before ownership is reassigned.
Regulated licenses are often tied to a particular individual or officer, so a change of ownership can unintentionally up-end the validity of a license, if the individual does not serve in the same capacity post-transaction. Unfortunately, this scenario is quite common. Furthermore, replacing these licenses can be onerous — many require background checks or fingerprints, and the individual deemed the responsible party is not always identified in ample time to carry on the licensing task.
Even in cases where licenses do not attach to an individual, replacing licenses can require lengthy lead times in order to be available on the first day following transaction close, so diligent coordination is required. And grace periods for licenses need to be clearly understood to ensure the operating entity is covered on Day 1.
Real-world examples can help drive home these points. As a case in point, a franchise company in the convenience store space acquired several gas stations. Immediately following transaction close, a key supplier cut them off from tobacco and alcohol sales due to licenses that had not been transferred, and lapses in obtaining new licenses. This required several weeks to get the new licenses in place, even though they had started the process prior to the transaction date. The result was a large hole in their expected revenue from the acquisition, and a painful lesson was learned.
Firms have an opportunity to advise, outsource and better serve clients
Growth-oriented firms looking for new ways to advise existing and prospective clients should look to license management during M&A as a way to differentiate their offerings and create stickier client relationships. This is an area that often has no clear owner, and clients face an onerous and complex web of requirements with hard deadlines. And even if the acquiring company has a dedicated business license team, as some large companies do, that doesn't mean they are equipped to handle the extreme work expected of them during this brief window (which is anything but business as usual).
Indeed, relicensing at scale is too overwhelming without automating at least some of the most cumbersome steps. For instance, the need to automatically geocode locations in order to quickly determine which licensing authority has ownership of a location. And it's important to have licenses tied to a national database of license information so essential data is automatically fed to the business entity (instead of waiting on hold with a city clerk). It's also worth having a quick method of sending out requests for data (for instance, gross receipts or facility-related details) to stakeholders to avoid delays in filing applications due to incomplete information.
As is the case in numerous areas of firm practice (client advisory services are a good example), efficiently and reliably serving the license compliance needs of clients going through M&A begs utilizing outsourced services that leverage technology. These specialized services allow a firm to advise the M&A client but leave the complexity of operational license management to a trusted compliance partner expert whom the firm can use on an as-needed basis.
The end result for the firm is gaining a competitive differentiator in helping clients reduce their risk of business interruption during M&A and leveling up their advisory services in a mission-critical area.
