Acquisitions of Architecture & Engineering Firms: State Matters
The architecture and engineering (AE) industry has become a focal point for strategic buyers seeking growth, high-profit margins, and opportunities for consolidation. As strategic buyers acquire AE companies, they must carefully navigate a range of state-level regulatory and tax considerations that can impact the success of the acquisition and post-deal operations.
Challenges can arise around firm licensing, ownership changes, and entity structure modifications, which require close attention to state rules governing the AE profession. Unlike other industries, AE firms are subject to strict state regulations regarding professional licensing, firm ownership structures, and legal entity requirements, making it crucial for strategic buyers to work closely with state advisory professionals throughout the acquisition process.
Firm Licensing
AE firms are subject to professional licensing requirements at both the individual and firm levels. Each state has its own regulations governing the licensure of professionals and specific rules that apply to businesses offering professional services.
When strategic buyers acquire an AE firm, one of the first steps is to ensure that the firm’s existing licenses remain valid and compliant under the new ownership structure. In many states, firm licenses must be renewed or updated to reflect changes in ownership or control, particularly when a strategic buyer takes a stake in the business.
Ownership and Entity Requirements
One of the biggest and overlooked obstacle in strategic buyer acquisitions of AE firms is managing state regulations governing firm ownership. Many states have strict rules regarding who can own or control a professional AE firm. In some states, a majority of the firm’s owners must be licensed professionals in the same field, while in others, ownership by non-licensed individuals or entities (like private equity firms/holding companies, etc.) may be limited or restricted.
Ownership structures in professional service firms often need to be carefully restructured to comply with these state regulations. Strategic buyers must evaluate whether their desired ownership model is permissible under state law and, if necessary, work with state advisory professionals to develop a compliant ownership structure.
Entity Structure
A key issue in strategic buyer acquisitions of AE firms is how changes to the firm’s legal entity structure may be regulated at the state level. Many AE firms operate as professional corporations (PCs), professional limited liability companies (PLLCs), or similar entities specifically designed for licensed professionals.
Depending on the state, only licensed professionals can serve as shareholders, directors, or managers of these entities. Also, the transaction may trigger the need to form new professional entities in each state where the firm operates.
State Licensing Boards
Ownership changes and entity restructuring in the AE industry often require reporting to state licensing boards and other regulatory bodies. When a strategic buyer firm acquires an AE firm, changes to the firm’s legal structure—such as converting it to a different type of entity or reorganizing it under a holding company—may require approval from state licensing boards or regulatory agencies.
In certain instances, a formal review process may be required, which could delay the closing of the transaction or the post-acquisition integration process. Strategic buyers must understand and address the reporting requirements early to avoid unnecessary delays or compliance issues.
State Tax Implications
In addition to regulatory and licensing concerns, changes to the ownership and entity structure of an AE firm can trigger state and local tax implications. Each state has its own tax rules related to entity conversions, mergers, or ownership changes, which can affect everything from sales and use tax to personal property tax liabilities.
For instance, converting a firm from a professional corporation to an LLC, might result in the loss of certain tax attributes, such as net operating losses (NOLs). In addition, if the transaction involves the sale of assets, certain states may impose transfer taxes or other transaction-related taxes, such as sales tax. Strategic buyers must be prepared for potential state tax liabilities when structuring the acquisition.
Professional License Management
After the acquisition, strategic buyers should implement systems to ensure that all firm professional licensing and licensed professionals within the firm continue to meet their ongoing professional obligations. Strategic buyers should establish a system for tracking and managing the firm and individual licenses to avoid disruptions in business operations.
Next Steps
Strategic buyer acquisitions of AE firms present unique challenges, particularly in terms of state licensing, ownership changes, and entity restructuring. With each state imposing its own rules, strategic buyers must conduct careful due diligence and work closely with state advisory professionals throughout the acquisition process.
By proactively addressing these state-level matters, strategic buyers can ensure a smooth transition, avoid regulatory pitfalls, and set the stage for long-term growth and success in the AE industry. Register for our upcoming webinar, Blueprint for Growth: State Expansion for Strategic Buyers of Architecture & Engineering Firms, part of our ongoing Value Creation series to help strategic buyers uncover value before, during, and after a transaction.
