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Considerations When Buying a Construction Company

The California Construction and Industrial Materials Association (CalCIMA) cites data showing the construction industry generates nearly $35 billion in revenue in our state each year. There are a lot of options for entrepreneurs in construction; you may be considering purchasing a construction company. Here, our Fremont attorney for buying a business highlights key considerations to keep in mind when buying a construction company in California.

Research the Market, Develop a Business Strategy

Before purchasing a construction company, thorough market research is essential. As a starting point, prospective buyers should be sure to understand the current market conditions—such as the demand for construction services, competition, and the economic trends in your target region. This knowledge will guide your decisions throughout the purchase process and help you identify the company that best aligns with your long-term objectives.

Know Your Options to Structure a Construction Business Purchase

How are you going to structure this business purchase? It is an important consideration. There are three general options available when buying a contractor business in California:

  • Stock purchase: In a stock purchase, the buyer acquires the selling company’s stock directly from the shareholders. In effect, the buyer obtains full ownership over the legal entity. Notably, this method includes assumption of all assets and liabilities.
  • Asset purchase: With an asset purchase, a buyer selects specific assets and liabilities they wish to acquire from a business, rather than taking over the entire entity. In some cases, this approach can minimize risk as the buyer can avoid inheriting unwanted liabilities.
  • Business Purchase.  Provided you have a California State License Board (CSLB) licensed contractor, you may want to purchase the licensed business, which would include using the same tax ID and credit of the business, same license, but you take the business “as is” with all its assets and debts.  There may be known and unknown risks in this approach, but you do not have to wait for a new entity license from CSLB.

Whether a stock purchase, business purchase or asset purchase makes more sense when buying a construction company is highly case-specific. An attorney can help you weigh your options and provide legal assistance in minimizing the risks.

Ensure You can Obtain All Required Licenses

Licensing is a critical issue that must be addressed when buying a construction company or any type of contractor business in California. The state requires construction firms to hold valid licenses for the specific types of work they conduct. It should be noted that an individual contractor’s license is not transferable in California.  However, an entity license may be transferred in two of the above options.  As such, the new owner of a construction company may be required to either obtain their own license through the Contractors State License Board (CSLB) in an Asset Purchase, or possibly transfer the license with a Stock Purchase or Business Purchase. An Attorney can assist you with either the license application or change of an existing license as required by CSLB.

Perform Comprehensive Due Diligence

Conducting comprehensive due diligence is a must when purchasing a construction company in California. The process should encompass an assessment of all financial records, including debts, assets, revenue streams, and profitability. Beyond that, you should evaluate the company’s client base, project pipeline, and the status of ongoing contracts to understand the company’s operational health. Finally, legal due diligence is also important. You should check for any ongoing litigation, compliance with employment laws, and the validity and transferability of contracts. An attorney can help.

Contact Our California Attorney for Buying a Construction Company Today

Lynnette Ariathurai is a business lawyer with the experience to advise clients buying a construction company. Contact us now for a confidential initial appointment. From our Fremont office, we help entrepreneurs buy businesses throughout the San Francisco Bay Area.

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