M&A in AE: Why State Licensing and Tax Compliance Can Make or Break Your Deal
Architecture and engineering (AE) firms do not operate like most other businesses. They are heavily regulated, with state laws setting the rules around who can offer professional services, how firms are structured, and even what they can be called. That makes mergers and acquisitions (M&A) especially tricky because a single misstep can ruin the deal.
Whether you are merging, acquiring, selling, or planning for internal succession, compliance must be front and center, not something you check off after closing. Without a proactive plan, you could run into issues such as invalid firm licenses, unexpected tax bills, or the need to completely restructure your legal entities.
Most firms focus on the financials and legal documents during a deal, and rightfully so. But they should also assess licensing, ownership structures, new registrations, and new state obligations.
Getting ahead of these matters helps avoid delays, protects the deal’s value, and sets the buyer and seller up for a smoother transition and future success.
State Tax Noncompliance: The Inherited Liability That Kills Deals
An area that often gets overlooked, until it becomes a problem, is state tax compliance. If a target firm has not registered in states where it has nexus or has failed to file or pay the appropriate taxes (income, franchise, sales, gross receipts, etc.), those liabilities may not disappear in a transaction. In fact, buyers often inherit these obligations, and they can quickly turn a profitable deal into a financial problem.
Due diligence should include a thorough review of multi-state tax filings, registrations, and potential audit exposure. And if issues are discovered, consider remedies such as voluntary disclosure agreements or settlement strategies before moving forward. Cleaning things up ahead of the deal can help avoid price adjustments, escrow holdbacks, or, worse, no deal.
Mitigate Tax & Licensing Risk in Due Diligence
Protect the deal’s value by addressing historical risks early. We break down the licensing and tax liabilities that due diligence MUST uncover.
AE Licensing and Entity Structure: What You Must Know Before M&A
Licensing for AE firms varies by state, with each state having its own requirements. Some states license both the firm and individual professionals, while others have rules on who can own or control the business. On top of that, certain entity structures, such as PCs, PLLCs, or LLPs, have naming rules and ownership restrictions.
Changing ownership and entity structures through the M&A process can unintentionally void a firm’s professional licenses if you are not careful.
Need Entity Structure Clarity?
Ensure your ownership structure (PC, PLLC, etc.) meets state licensing rules before signing. Watch our on-demand webinar, Blueprint for Growth, to define the best legal entity for your acquisition and ensure multi-state compliance.
How Deal Structure Creates New State Tax Exposure
State and local tax planning often gets less attention than federal tax, but it is just as important. A poorly structured deal can lead to unexpected exposure to state income tax, franchise tax, sales tax, gross receipts tax, or even employment tax.
M&A activity can also expand your footprint into new jurisdictions, bringing new filing obligations and compliance you did not plan for.
Post-Closing Compliance: Final Steps to Protect M&A Value
The work does not stop once the deal closes. Finalizing an M&A transaction requires careful attention to post-closing compliance tasks that are just as critical as the upfront due diligence.
This includes filing final state and local tax returns for dissolved or merged entities, closing out old tax accounts, and confirming that all registrations align with the new business structure. You will also need to formally notify the Secretaries of State of any changes in stock classes or the number of shares issued/outstanding, entity name, or principal office address. Professional licensing boards must be informed of new leadership, changes in ownership, or other qualifying details that could affect firm licensure.
Overlooking these steps can result in penalties, lapses in good standing, or even license suspension, all of which can disrupt operations and decrease return on investment.
Position Your Deal for Sustained Value
M&A is a huge opportunity, but only if state compliance is part of the blueprint. Deals are becoming more complex, especially with new ownership models and multi-state operations. Firms that place state compliance at the center of their strategy will be in a much better position for long-term success.
If you are planning or exploring a transaction, now is the time to bring in your advisors and map out your state compliance plan. It is one of the best moves you can make towards the success of your deal.
Accelerate Your Deal’s Success
Join us for our upcoming webinar, Strategic M&A Planning: State Compliance in AE Transactions, where a panel of state advisory, M&A, and tax experts will break down the compliance considerations that can make or break a deal.
Whether you’re preparing for a leadership transition, a partner buyout, or a full merger or acquisition, understanding state-specific requirements is essential. SN’s panel will help attendees address and manage these complexities with confidence, positioning your transaction for long-term success.
To help you anticipate and overcome the specific regulatory and structural hurdles discussed here, we recommend our strategic buyer foundational guide: Acquisitions of AEC firms: State Matters.
