Licensing challenges for enterprise mergers and acquisitions

Mergers and acquisitions (M&A) are a part of business life. Market pressures and societal trends can influence the ebb and flow of M&A activity, but as long as capitalism exists, companies will continue to buy, sell, combine, and re-form.

There’s a lot of due diligence required for a successful M&A deal. It’s not just researching the financials, investigating the foundation and fundamentals of the business, and ensuring customers are real people, not bots. Some of the legwork is about compliance, specifically around taxes and licensing.

Compliance Week and Avalara recently conducted a survey of 102 risk, compliance, and accounting and audit professionals. While businesses are aware of licensing complications in the M&A process, there’s certainly room for improvement in compliance management when ownership changes hands.

This blog post will look at three key factors of license compliance during mergers and acquisitions:

• Understanding governmental licensing challenges with M&A
  
• Preparing for licensing compliance during the M&A process
  
• Getting the licensing expertise you need for your merger or acquisition
  

There are several reasons why licensing is a particularly sticky wicket for businesses. The challenges can be even more complex in the midst of a business deal:

• So. Many. Licenses.
  Depending on the type of business you have, licensing can be as simple as applying for a license to operate in a state, or as complex as licensing the types of products you sell (e.g., animals, alcohol, ammunition) or the elements of your physical location (e.g., freezers or fire safety systems).
  
  Even if each business has the proper licenses going into a merger or acquisition, the change in business structure or ownership often means obtaining new licenses or updating existing ones with the appropriate business name, new FEIN, primary address, new locations, and so on.

• Layers of authority
  Getting federal and state licenses is just the beginning.Counties, cities, and special zones all have their own licensing requirements. And because each jurisdiction sets its own rules, the requirements vary from location to location. Licenses typically aren’t transferable (to other owners or locations) and even the types of licenses required can change from one place to another.

• Maintaining valid licenses
  Some licenses expire, others don’t. When business information changes, licenses will need to be updated, which means reapplying with each individual jurisdiction where you hold a license. It’s easy to see how joining or absorbing another business can make manually maintaining a license portfolio rather daunting.

• Skeletons in the filing cabinet
  Auditors are busy, and businesses can sometimes fly under the regulatory radar, getting some, but not all of the necessary licenses. But nothing catches regulatory attention quite like M&A activity. If processes are inefficient and records are messy, there may be complex issues lurking in the system, just waiting for an auditor to discover.

As with most things regulatory, M&A compliance isn’t a particularly fun or sexy side of a major business deal. But the stakes for mishandling licenses during an M&A deal can be high. For instance, survey respondents cited fines and fees as a top concern. And for good reason. Improperly licensed businesses can find themselves in a cascading series of financial penalties, according to Andrea Jaffe, Senior Director of Professional Services at Avalara.

Rounding out the top three concerns were business disruptions and M&A delays. Both are valid concerns, and can even be more severe than fines and fees. While the latter can be expensive, serious interruptions in business threaten process and cash flow, with impacts to staff, customers, vendors, public perception, and future financial stability.

According to the Compliance Week/Avalara survey, 30% of respondents address licensing early in the M&A process with another 30% indicating license compliance is addressed throughout. More concerning, 9% of businesses wait until later in the process. A lot can change and ideally, tax and licensing departments should be kept in the loop, early and often.

Properly evaluating and updating your license portfolio can save you time, money, and headaches in the long run (not to mention avoiding the ire of licensing authorities). When it comes to license compliance, there are several key steps to setting yourself up for success. Some of the initial work includes: 

• Figuring out how the businesses will be incorporated
  Will one be merged into the other or will they remain separate entities? Each option has different licensing requirements.

• Coordinating registration changes or new registration activities across departments
  Make sure all teams are in communication as the merger or acquisition takes place — and don't let the tax department be the last to know when things shift.

• Understanding which licenses are needed and where
  Depending on your business, what you sell, and where you operate, you’ll need to apply for specific licenses from the federal, state, county, and local government authorities.

Even the best legal, accounting, or tax team may not be adept at the processes required for M&A activities. Third-party experts can help fill in the knowledge gaps that arise during complex business deals. 

For instance, with Avalara License Professional Services, you can get a detailed analysis of your current portfolio, with guidance around missing documents and changes needed for M&A compliance. You can also get help applying for licenses of all types, across jurisdictions.

Once your license portfolio is properly aligned with your new or expanded business, Avalara License Management can help you maintain compliance. This sophisticated software is ideal for complex, error-prone processes. By turning licensing over to secure, reliable technology, you increase the likelihood of retaining the correct licenses and keeping them properly updated as your business evolves.

Mergers and acquisitions make for an exciting time for businesses; make sure yours doesn’t lead to licensing headaches. With proper licensing guidance, you can avoid surprises that could result in business slowdowns or fines at a time when you should be celebrating.

Want to see if Avalara is right for you? Learn more about our licensing and registration solutions.