Buying a Machine Shop: Contracts, Licenses, Bonds

For most machine shop buyers the paperwork that matters most is the customer supply agreements, the lease or mortgage and the loan's insurance terms. Licenses, environmental registrations and defense registrations depend on your wastes and customers, and no single license applies to every shop. Bonds appear mainly where a customer or a license asks for one. This guide is for new owners of job shops and precision parts makers who need to know what to collect, what may not transfer in a sale, and what to ask the insurer, deal counsel and the relevant agency. Requirements depend on the shop's parts, customers, materials, state and city.

The short answer

No single license applies to every machine shop. Federal licenses attach to specific activities, states regulate more, and cities and counties add their own, so verify with your state and local authorities.
The insurance requirements to read first are in customer agreements, the lease and the loan: additional insured status, waiver of subrogation, primary and noncontributory wording, products limits and an umbrella.
If the shop makes defense articles or handles controlled drawings, registrations and cybersecurity duties can change when ownership changes. Take those questions to export control counsel.
A certificate of insurance is not the policy, and registrations, certifications and approved supplier status should not be assumed to transfer automatically.

What do customer contracts usually ask a machine shop to carry?

A supply agreement or purchase order for machined parts commonly asks for some mix of workers' compensation and employer liability, general liability with a products-completed operations limit, auto, an umbrella or excess limit, additional insured status, a waiver of subrogation, primary and noncontributory wording, a certificate holder and notice of cancellation. Limits come from each agreement, so read yours for its own numbers. Aerospace customers may add requirements for aviation products coverage, and some agreements add warranty and indemnity terms that insurance may not answer. A lender or customer may also require notice of insurance changes, evidence of coverage before the first shipment and annual renewal evidence. Failing to maintain the required insurance can be a breach of the agreement.

A hypothetical example. A new industrial customer sends a supplier agreement that asks for additional insured status, a waiver of subrogation, primary and noncontributory wording and a $5 million products limit through an umbrella. The shop's current policies carry $1 million per occurrence and no umbrella. The shop asks its broker to read the clause before signing. Options include negotiating the limit, adding an umbrella, or declining the contract. The numbers are illustrative, and each carrier's endorsements and underwriting decide what can be added.

A certificate of insurance shows that a policy exists. It does not change the policy and does not by itself prove additional insured status. See when customer contracts require coverage you do not have, how to check your customer contracts against your policies and why a certificate is not coverage.

Which documents should you pull at a sale, and what do they mean for insurance?

Machine shop documents and what to check at a sale
Document or registration	Why it matters for insurance	What to check when you buy	Who to ask
Customer supply agreements and purchase orders	Often set limits, additional insured, waiver and primary wording, and evidence before shipment	Whether the agreements assign to you, and whether your policies meet them	Deal counsel, your broker
Lease or mortgage	Leases commonly address liability, property, business income and workers' comp, and some address pollution	Assignment, landlord's insurance clause, who pays for environmental findings	Counsel, your broker
SBA 7(a) loan or equipment financing	On SBA loans over $50,000, property insurance on collateral, replacement cost (or maximum insurable value) on equipment and a lender's loss payable clause	Loss payable wording and notice terms	Your lender, your broker
Hazardous waste identification number and records	Spills and waste handling are a pollution question, and do not assume fines are insured	Whether the shop has an ID number, its generator status, manifests, used oil records	Environmental consultant, counsel
Export control registration and defense flow-down clauses	Cyber and contract duties follow the customer's terms	Whether registration and approvals continue after the sale	Export control counsel
Quality certification and approved supplier status	Customers may tie orders to them	Whether they carry over to the new owner	Certification body, the customer
Bonds	Mainly come up when a customer or a license asks	Which exist, who signed the indemnity	Surety agent, counsel

See lease insurance requirements new owners have never read and when the lease or building stays in the seller's name.

What licenses does a machine shop need?

There is no single license every machine shop must hold. The U.S. Small Business Administration (SBA) says federal licenses are tied to specific regulated activities, states regulate a broader range of activities, and counties and cities may add their own licenses and permits. Local permits vary by city and county. Depending on the shop, they can include a business license, a certificate of occupancy or fire inspection for the building, and permits for wastewater, air emissions from degreasing or coating, or stormwater.

Three situations deserve a flag. A shop that generates hazardous waste may need an Environmental Protection Agency (EPA) identification number before it treats, stores, disposes of or ships that waste. Whether it does depends on how much waste the shop generates in a month, its generator category and its state's rules, and states may have their own registration, so confirm with the EPA or your state agency, or ask an environmental consultant. Industrial facilities may need stormwater coverage, which most facilities get through their state. And a shop that makes firearm parts or ammunition components should ask counsel whether federal licensing applies. None of these applies to every shop. Verify each with your state and local authorities.

What changes when the shop does defense work?

Only some shops need this section. If your parts or drawings come from defense customers, ask your customer and export control counsel two questions: are we registered under the International Traffic in Arms Regulations (ITAR), and does our contract carry cybersecurity duties?

ITAR. A person who manufactures defense articles in the United States must register with the State Department, even if the person does not export. A registrant must notify the department in writing within five days of a change in ownership or control, and give at least 60 days' notice before an intended sale or transfer to a foreign person. Whether your parts count as defense articles depends on the part and the customer.
Cybersecurity duties. The Defense Federal Acquisition Regulation Supplement (DFARS) safeguarding clause requires protections for covered defense information, reporting of cyber incidents within 72 hours and flow-down to subcontractors. The Department of Defense's Cybersecurity Maturity Model Certification (CMMC) program applies to contract and subcontract awardees that process, store or transmit certain contract information on their systems.

CMMC is being phased in over several years. The final DFARS rule took effect on November 10, 2025, which started the first phase. A later phase, about a year after the first, is expected to add the Level 2 third-party assessment requirement for some contracts, but the Department of Defense can adjust the dates. Ask the customer which level your contract requires, and check the Department of Defense CMMC page for current dates.

The insurance consequence is narrow. General liability excludes electronic data, cyber policies are usually claims-made, and whether a cyber policy responds to a contract compliance failure depends on its wording. Do not assume it does, and do not assume fines are insured. See the cyber review and cyber risk during IT and email migration.

Does a machine shop need bonds, and do they transfer?

Bonds are not an industry-wide requirement for machine shops. They show up when a customer asks for one, for example a bid, performance or payment bond on a contract, or when a license requires one. The Miller Act, which requires bonds on federal construction contracts, is not aimed at an ordinary parts supply contract, but ask counsel if your parts go into a federal construction project. If a customer asks for a bond, the surety expects to be repaid, because a bond is not insurance for the principal.

If the seller carried any bond, the seller's personal indemnity to its surety generally survives a sale, and the buyer typically signs a new indemnity agreement for new bonds. See do surety and license bonds transfer when you buy a business? and surety bonds.

What may not transfer when you buy, and what should you collect?

Do not assume that the seller's registrations, certifications or approvals pass to you on closing. A registered shop's notice duties start at a change in ownership. A quality system certification, such as one under International Organization for Standardization (ISO) 9001 or the aerospace version, AS9100, is issued to the audited organization, and customers may tie their approved supplier list to it, so ask the certification body and each customer what they require after the sale. Do not assume a certification or approved supplier status carries over automatically.

Pull every customer agreement and purchase order with an insurance or indemnity clause.
Collect the lease, the loan insurance terms and every certificate the seller issued. See certificates the seller issued that your policy does not back up.
List registrations, permits and certifications, with expiry dates and the contact at each agency or body.
Identify bonds and who signed the indemnities.
Set up certificate tracking. Set up certificate tracking in your first month as owner shows how.

For the broader process, see licenses, permits and registrations when buying a business and the first guide in this set, just bought a machine shop. When choosing who will read these documents for you, see best insurance broker for a machine shop.

Keep reading

Frequently asked questions

Does a machine shop need a special license?

Not one license that every shop holds, but some shops have registrations tied to defense work, hazardous waste or local permits. Federal licenses attach to specific activities, states regulate more, and cities and counties add their own. Check with your state and local authorities for your activities, wastes and location.

What insurance do customers usually ask a machine shop to carry?

A common menu is workers' comp, general liability with products coverage, auto, and umbrella or excess limits, often with additional insured status, a waiver of subrogation and primary and noncontributory wording. The limits are set by each agreement, so read yours.

Does a shop's defense registration continue after a sale?

Do not assume it does. Under the International Traffic in Arms Regulations a registrant must notify the State Department within five days of an ownership change. Ask export control counsel what applies to your shop and your parts.

Do machine shops need surety bonds?

Not as an industry rule. Bonds appear when a customer or a license asks for one. If one does, the surety expects to be repaid and typically asks for a new indemnity agreement from the new owner.

Will my customers' supplier approvals and quality certifications still apply after I buy the shop?

Do not assume they do. A quality certification is issued to the audited organization, and a customer's approved supplier status is the customer's decision. Ask the certification body and each customer what they require after an ownership change.

References

Just bought a business? Get your insurance reviewed.

Send Morrow the declarations pages, loss runs and key contracts you inherited. Morrow can review them against the business you bought, flag gaps and request quotes where it makes sense. Any new terms depend on carrier underwriting.

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This article is general information, not legal, tax or financial advice, and not a coverage determination. Coverage depends on the actual policy wording, carrier underwriting, your purchase agreement and your contracts. Ask your attorney and accountant about deal and legal questions.

Contracts, Licenses and Bonds for a Machine Shop