Buying a Licensed Trades Business Under the New SOP

Lately the hottest question landing in my inbox has been: "Did the new SBA rules just kill trades and license deals where the buyer doesn't already hold the required state license (think HVAC, electrical, plumbing, and the like)?"

In short, the answer is no. An SBA-backed purchase of a trades business is not automatically off-limits under the new SOP. But it could be a lot harder now.

Here's why.

The New SOP Changes Everything About Seller Employment

Under the new SOP, sellers can no longer remain as W2 employees. They are strictly limited to 1099 consultants for a maximum of 12 months. The exact language from the SBA's SOP is:

You might say, "wait a minute, I thought you could keep a seller as an employee if they retained equity in the business?" Or said another way, doesn't rollover equity allow you to keep a seller as a W2 employee?

The answer is yes. You can keep a seller as a W2 employee if you structure a transaction as a partial change of ownership, where the seller retains a certain amount of equity after closing. Many refer to this in SBA transactions as "rollover equity." But if sellers retain even a tiny slice of equity (even 1%), the new SOP says the seller must personally guarantee (PG) your SBA loan for 2 years. Most sellers simply won't agree to this.

That functionally kills the solution buyers have relied on the last few years with licensed trades businesses, which was primarily the seller retaining equity and continuing to license the business post-closing. Today, given the new SOP, whether or not your deal will work depends on two key things:

• Is your seller the only license-holder available?
• Does your state licensing board allow someone to qualify your business under a 1099 independent contractor arrangement, or does the qualifier need to be a W2 employee or an equity owner?

How Different States Handle Licensing Requirements

Below is a quick breakdown of how different states handle licensing requirements:

If your state is an Option D jurisdiction, life is simpler: you can keep the seller under a 1099 consulting agreement, tie part of a seller note to maintaining the license, and stay inside both SBA and state rules. This solution likely gets your lender comfortable, because there is still "skin in the game" for the seller, with the note being contingent on the license being maintained.

If your state looks like Option A, B, or C, the path is tougher, because the qualifier must be inside the entity, either as an owner (PG risk) or as a W-2 employee (which the SOP forbids if it's the seller). In those states you need a different solution.

What Should You Do If You're Buying a Licensed Trades Business?

1. Confirm your state's licensing and qualifier rules before you go under LOI. Call the state licensing board, read the state statutes, talk to local industry folks, or hire a licensing expert if you have to (usually overkill for most buyers, but PE-backed groups do it all the time). Confirm whether a 1099 arrangement for licensing is legal.

2. If your state allows a 1099 independent qualifier, that is good news. It means you can structure a short-term (under 12 months) consulting agreement with the seller. I recommend structuring your deal with a seller note that is contingent on the seller maintaining the license. Your lender will likely require it anyway. Keep in mind, the seller's role as an independent contractor is limited to 12 months, so you still need a backup plan for licensure beyond the seller.

3. If your state demands equity or W2 status, this is a tougher scenario. For now, your best options are:

• Identify an existing employee who can qualify the business and lock them in with a strong employment agreement (retention bonuses, pay raises, training, exam sponsorship, and the like).
• Hire someone externally who already has the required license before closing, and build that cost into your projections clearly for lenders.
• Find a "licensing partner," someone you are willing to grant equity who already holds the required license, and plan to bring them on as a partner in the business post-closing. Vet any proposed partner thoroughly. Also, if they own more than 20%, they will be required to PG the loan, so be sure to keep them under 20%.
• Have a credible backup plan, ideally a clear timeline for you personally to get licensed post-close.

What Lenders Will Definitely Ask You

Be ready for these questions:

• Who holds the license on Day 1? You need to have that lined up and ready to go.
• What is the backup plan if that person quits, loses the credential, or gets hit by a bus? You might be able to present a plan to the lender where you are personally able to secure the license shortly after closing. If possible, that is ideal.
• Is your DSCR still good after factoring in any extra payroll or licensing fees? You need to factor the additional costs into your financial analysis.
• Is there a written employment or consulting agreement in place with your license holder?

Bottom Line for Buyers

The SOP doesn't ban licensed trades acquisitions. However, in many states, the SOP likely forces you to solve licensure without leaning on the seller retaining equity or staying in a W-2 role post-closing.

In states that accept 1099 qualifiers, deals will close without as much change or heartburn. But you'll likely still need a backup plan beyond the seller.

In states that demand ownership or W-2 status, you'll need a ready-to-go internal employee, an outside hire, or a licensed partner, and likely a plan for you to get the license yourself.

Bring that plan to the lender up front. If DSCR is solid and the licensing path is credible, SBA lenders will still finance the deal.

If you're evaluating a licensed trades business and want a quick sanity check, or some help pressure-testing your deal with SBA lenders, book a call with BayCoast or email me at drew@baycoastadvisors.com.