How Mergers & Acquisitions Impact Licenses: A Guide for AEC Firms

In the fast-paced world of Architecture, Engineering, and Construction (AEC) firms, mergers and acquisitions (M&A) have become increasingly common. These strategic moves can provide numerous benefits, such as expanding market share, diversifying services, and increasing competitiveness. However, amidst the excitement of a potential merger or acquisition, AEC firms must understand how these transactions can impact their licenses. In this guide, we will explore the intricacies of licensing requirements in the context of M&A activity and provide essential insights for AEC firms considering or currently involved in such transactions.

Increasing Prevalence of M&A Activity in the AEC Industry

The AEC industry has recently witnessed a surge in M&A activity. As the market becomes increasingly competitive, firms leverage M&A strategies to gain a competitive edge, broaden their service offerings, and maintain growth. This trend is partly driven by globalization and the need for AEC firms to have a global presence to attract larger clients. On top of this, introducing advanced technologies in the AEC sector has paved the way for firms to acquire others with unique technological capabilities, helping them stay ahead of the curve. This upward trend in M&A activity shows no signs of slowing down, underscoring the importance for AEC firms to understand the licensing implications of these strategic decisions.

The Impact of Ownership Structure on Licensing Requirements

Mergers and acquisitions (M&A) fundamentally alter the ownership structure of a company, creating new dynamics that can significantly affect licensing requirements. These changes must be managed carefully and promptly to ensure continued legal operations.

Shifts in ownership structure may necessitate changes to company licenses, including updating records to reflect new ownership details or applying for new licenses altogether. Many states require firms to have a specific share of ownership by licensed professionals. North Carolina architecture firm ownership requirements are one example. For a company to hold an architecture license there, at least two-thirds of its owners/shareholders must hold an architect license, and at least one of the officers or directors must hold an architect license in North Carolina.

Even if the changes in ownership structure won't interrupt a firm's eligibility for licensure, changes in ownership may need to be reported to avoid penalties. Take New Jersey’s licensing requirements for engineering firms as an example. The New Jersey State Board of Professional Engineers and Land Surveyors mandates that any change to the firm’s officers, directors, or principal stockholders must be reported within 30 days. Failure to comply with these reporting obligations can result in disciplinary action or a firm's license revocation.

It is crucial for AEC firms involved in M&A activity to thoroughly research and understand the specific licensing requirements of each state they operate in or plan to expand into.

Comparing Merger, Stock Sale, and Asset Sale Impacts

Regarding M&A transactions in the AEC industry, there are typically three primary structures - mergers, stock sales, and asset sales. Each structure has distinct implications for licenses held by the firms involved:

1. Mergers: In a merger scenario, two or more firms combine resources and form a new entity. From a licensing perspective, the impact will depend on the specific requirements of each state. In some cases, licenses may need to be transferred or reissued under the new entity's name, while in other instances, an entirely new license application may be necessary. True mergers of equals are far less common in practice than acquisition transactions.
2. Stock Sales: In a stock sale, the buyer purchases the ownership interests of the seller, effectively acquiring the entire company, including its assets, liabilities, and licenses. This means that the licenses held by the seller are transferred to the buyer, which can streamline the transition process. However, the buyer also takes on all the seller's liabilities, including any past violations or compliance issues related to those licenses. The seller's licenses remain intact since the legal entity continues to exist after the transaction. However, the composition of the ownership group may be substantially changed, which has implications for those licenses. To continue the North Carolina architecture firm example, firms may need to form a new entity under a different mix of owners to work in a particular state.
3. Asset Sales: In an asset transaction, the buyer purchases specific assets and liabilities of the seller. This may include physical assets like buildings or equipment and intangible assets like proprietary technology or customer relationships. The nature of these transactions will vary widely as buyers try to purchase the seller company's most valuable assets and leave out the liabilities. Depending on what is purchased, there may be implications for licenses held by either firm. For example, newly acquired clients and projects in states where the acquiring firm is not licensed may trigger immediate application needs. AEC firms must carefully assess licensing requirements and ensure compliance with applicable laws during an asset sale.

It is important to note that the impacts outlined above are general guidelines and should not replace thorough due diligence and legal counsel during an M&A transaction.

Best Practices for AEC Firms Engaged in M&A

To ensure a smooth transition during an M&A transaction and maintain compliance with licensing requirements, AEC firms should follow these best practices:

1. Thoroughly Assess Licensing Obligations: Before proceeding with an M&A deal, conduct a comprehensive review of all relevant licenses held by both firms involved. Identify any potential issues or discrepancies that may arise due to changes in ownership.
2. Engage Licensing Experts: Collaborate with experienced professionals specializing in licensing matters. They can provide valuable guidance throughout the transaction process and help navigate the complexities of licensing requirements.
3. Maintain Open Communication with Licensing Boards: Establish transparent lines of communication with the relevant licensing boards in each state where the firms operate. Keep them informed about changes in ownership, providing all necessary documentation within the specified timeframes.
4. Prepare for Potential License Transfers: If a license transfer is required for the M&A transaction, ensure that all necessary applications, fees, and supporting documents are prepared well in advance to minimize disruptions to ongoing projects or operations.
5. Stay Updated on Regulatory Changes: Keep abreast of any regulatory updates or changes to licensing requirements in the states where the firm operates. This proactive approach will help mitigate risks associated with non-compliance.

By following these best practices, AEC firms can navigate the complex landscape of licensing obligations during M&A transactions and ensure continued compliance while unlocking new growth opportunities.

How Harbor Compliance Can Help AEC Firms Navigate M&A Transactions

Mergers and acquisitions present exciting opportunities for growth and expansion in the AEC industry. However, it is essential for firms considering or currently involved in M&A transactions to understand how these activities can impact their licenses. With years of experience managing AEC licensing requirements, Harbor Compliance can help organizations on both sides of the transaction navigate M&A activity seamlessly.

By understanding state-specific licensing requirements, following best practices for compliance, and considering the implications of different transaction structures, AEC firms can navigate M&A transactions successfully while safeguarding their professional licenses. By leveraging the expertise of Harbor Compliance, organizations can streamline their processes, ensuring a smooth transition and avoiding interruptions.

Remember, seeking guidance from professionals with expertise in licensing matters is crucial throughout this process. Embracing transparency with licensing boards and staying informed about regulatory changes will contribute to a seamless transition and long-term success in a rapidly evolving industry.