Blog

Many businesses involved in mergers and acquisitions, even those that do not appear to have obvious environmental concerns, could greatly benefit from environmental consulting services. The following are some reasons why investment bankers may add environmental consulting as an integral part of the M&A transaction team for a wide range of businesses.

Types of Businesses that Should Consider Environmental Consulting

Environmental consulting is often needed for businesses other than those located in obviously contaminated areas. Transactions involving a variety of properties, from industrial zones to seemingly benign spaces like apartment complexes have involved businesses built on former industrial sites. The truth is the need for environmental due diligence can arise in the most unexpected places.

Imagine you have been running your business on a property for 15 years without any apparent environmental issues. When you first purchased the property, you conducted environmental assessments, and everything seemed fine. However, over the years regulations have changed, and what was acceptable 15 years ago might not be compliant today. This is where environmental consulting becomes crucial.

What to Consider Regarding Environmental Issues When Planning a Transaction

As business owners perform annual financial reviews, environmental considerations should be part of their due diligence process. While incidents like chemical spills or accidents trigger obvious environmental action, changes in regulations can often go unnoticed. In this case, what you do not know can severely impact your business and ignorance of the new regulations is no excuse and will not protect you or your business.

EV does not always mean electric vehicle. If an environmental report for your property has an “E” followed by a “V,” it is wise to have it reviewed to ensure there are no current issues that could raise red flags during a transaction.

Meaning of an EV code on a Property’s Environmental Vulnerability Assessment

An Environmental Vulnerability assessment is a type of environmental due diligence that identifies potential environmental risks and liabilities associated with a property. It helps determine if there are any environmental issues that could impact the property’s value or pose a risk to future owners.

When a property’s environmental report includes an “E” followed by “V,” it indicates that an Environmental Vulnerability assessment has been conducted, and the report contains information regarding potential environmental risks and liabilities associated with the property. This designation highlights areas that may require further investigation or remediation to ensure compliance with environmental regulations and to mitigate any potential risks to the property’s value.

Example of Environmental Issues in M&A Transactions

Consider a scenario where a property purchased 15 years ago easily passed all the necessary environmental assessments. However, over the years, regulatory changes have introduced new considerations. Historical reviews, aerial maps, or changes in contaminant detection thresholds might now reveal previously unknown issues – making what was considered acceptable contamination levels when the property was purchased unacceptable today. Modern technologies can also uncover previously undetectable – so although a property passed inspection 15 years ago, it may fail a new assessment despite regulations remaining unchanged.

The Importance of Due Care in Environmental Compliance

Due care does not end with ignorance. Even if business owners were unaware of the need for certain environmental precautions, they are still responsible for ensuring environmental compliance. Ignorance of the law is no excuse, and regulatory agencies do not make exceptions. So even if you are not considering selling your business an environmental consultation may be wise.

One such example is the case of United States v. Ward Transformer. In this case, Ward Transformer Company, a transformer recycling company, was found guilty of illegally storing and disposing of hazardous waste. Despite not intentionally violating the law, the company was held responsible for environmental violations. The court ruled that ignorance of the law is not an excuse, and businesses are responsible for ensuring environmental compliance regardless of their awareness of the regulations. As a result, Ward Transformer faced substantial fines and penalties for their environmental violations.

This example highlights the importance of due care and environmental compliance for businesses regardless of whether an M&A transaction is involved. Even if businesses are unaware of certain environmental precautions or regulations, they can still face significant consequences for environmental violations. Therefore, it is essential for businesses to take proactive measures to ensure environmental compliance and minimize the risk of environmental violations.

Navigating Environmental Issues During Transactions

When a property is put up for sale, sellers may find themselves facing unexpected environmental issues. Even if they have operated their business without incident for years, changes in regulations can uncover previously unknown problems. Or, as illustrated above,
a business may have been unintentionally violating environmental compliance laws out of ignorance.

Environmental consultants help sellers navigate these issues, ensuring they are aware of any potential problems before they arise during the transaction. Being proactive provides businesses time to either resolve the issue or fully disclose the issue and mitigate its impact on negotiations.

Experienced investment bankers and M&A attorneys know that ignoring environmental considerations can lead to costly deal consequences down the line and weaken bargaining position. By being proactive and seeking the help of environmental consultants, businesses can ensure compliance with regulations, avoid surprises during transactions, and protect the value of their business.

 

Learn more about the importance of environmental compliance considerations in this Cascade Conversation with Michael Kulka, Founder and CEO at PM Environmental and Cascade Partners’ Managing Director, Ron Reed here: Environmental Regulations & M&A Transactions