Pitfalls to Avoid in a Company Sale: Forgetting About Collection Licenses

June 30th, 2008

During the due diligence process, issues can arise that have the potential to jeopardize a merger or a sale.

One issue that has caused closing and funding delays – and in rare cases has squandered a sale altogether – is the transfer or renewal of state collection licenses from the seller to the buyer. This issue is critical, especially for non-industry buyers, yet it is often overlooked until after due diligence begins. Non-industry buyers are typically not aware of the nuances involved in obtaining state licensing, including how long it takes to transfer existing licenses and what risks they are exposed to while they are conveying.

This issue needs to be addressed early in the due diligence process. Due diligence is the investigative stage when the buyer reviews and confirms confidential information about the company prior to closing. This process generally starts after the buyer and seller have executed a non-binding letter of intent that details the purchase price and terms of a transaction, and ends at a closing when a definitive purchase agreement is executed and funds change hands.

If the transfer or renewal of licenses in the name of the new owner is not addressed early on in due diligence, the seller risks a delay in closing or may face receiving a partial payment of the purchase price until all of the licenses have fully conveyed to the buyer.

To avoid these delays, the buyer and seller should first determine the length of time needed to get licenses in place for the new owner. A timeline should then be created for conveyance, ensuring that all applicable licenses are renewed under the new owner/company name, and that they adhere to various strict state guidelines. An experienced M&A advisor can help identify how to address this issue so it doesn’t delay a closing.

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