Janeen,
You CAN install ArcGIS License Manager on the same virtual machine as ArcGIS Server. Depending on your environment limitations/resources you might be forced to utilize this type of setup.
Just be aware if you need to restart that VM for issues, updates, etc... that your license manager will go down as well.
We recommend installing on separate machines due to workload separation, so if ArcGIS Server pushes your VM to 100% of resources, it would not bring down your license manager or other software on the VM.
Here is the documentation for installation:
License manager installation and startup—License Manager Guide | ArcGIS for Desktop
~Alex