Special guest, Michael Kulka, Founder and CEO of PM Environmental, Inc., and Cascade Partners Managing Director, Ron Reed, discuss environmental concerns businesses need to consider as they plan to either acquire or sell their business.

Listen as Kulka and Reed share real-life examples of how they have assisted business owners to successfully navigate the complex maze of continually evolving environmental regulations as they apply to transactions—uncovering issues that could have cost them millions of dollars had they not been discovered early in the transaction process.

What you don’t know could hurt your transaction and your business. Experienced environmental and financial consultants can help.

 

Video Transcript

Welcome to Cascade Conversations. Join the team at Cascade Partners and their network of trusted advisers as they work to demystify details, terminology and strategies in the world of acquisitions, divestitures and financings.

Ron Reed – Managing Director of Cascade Partners:
Mike, thanks for joining us today and thanks for the luncheon we just went through. You and I just went through a pretty interesting transaction. And today what we wanted to talk about to educate both our current and prospective clients, would be: What types of businesses should think about using an environmental consultant like you when considering a transaction?

 

Michael Kulka – Founder and CEO of PM Environmental, Inc.
OK, well, thanks for having me, Ron, and I am honored to be participating in this conversation. The transaction we worked on had a very industrial flavor and a couple-century old portion of Detroit, so, that seems blatantly obvious. But you’d be amazed how many don’t look quite so ominous on the surface.

We’ve done apartment complexes that were built in the sixties on what used to be an industrial area. So, it’s it’s hard to pick a class of business type or class of property use that is an automatic “You must” or “You must not.” There’s low level due diligence products that can identify those lower risk by perception, that can answer those questions with relative ease at a very minimal cost.

So, I would really say I’ve worked on every type of property that you would think is contaminated and is not, and the ones you would be sure are clean that are not. So, it’s a wide range.

 

Ron Reed: So, if I’m a business owner or I’m buying a business, what are the topics I should be thinking about relative to environmental? Knowing that I’ve probably performed some level of environmental if I purchased property historically, what should I be thinking about now as I’m preparing for a transition?

 

Michael Kulka: So, most business owners are aware of doing an annual review of their financials, meeting with their CPA, doing tax planning, knowing what the tax liabilities are, because you have to file a tax return every year. When you look at environmental, really the things that drive it are an action that drives the regulatory issues. So, a forklift had some drums in, it spills or something happens, you react and then you compare it to laws because you have to react to that incident.

If nothing happens, and you bought a property 15 years ago and everything was fine, you may not know that regulations have changed two, three or four times in that timeframe. So, if you have anything you know that’s got a E in front of it on a report that you’ve done, and then a V after that, you probably really are wise to have that reviewed and make sure there’s nothing in there that may raise red flags to a potential purchaser and could delay the diligence on your transaction.

 

Ron Reed: So, give me an example of that; I just want to drill into that a little bit. So, I purchased a property, say 15 years ago. I’ve been running my business on that property for 15 years. I did environmental work when I purchased it. The bank made me do that and we have all the reports.

What can I do now as I’m preparing to go through a transaction? Do I need to do a full environmental drilling? Do I have to go out and do soil samples, or is there something I can do just to kind of check my data against the modern regulations?

 

Michael Kulka: On a buy-side, you’re always going to do a full phase one due diligence that’s a prerequisite and deal flow. If they’re using anyone with a modicum of intelligence on a legal team—or really any investment banker. On sell-side you have a little bit more latitude to use some hybrid products because you already own the properties and you’ve already established, hopefully in the past, all appropriate inquiry and  innocent landowner defense.

So, if there is a problem later, you’re already—as they say—eight months pregnant. So, now how do we deal with that delivery? So, it’s a matter of looking at this and if there’s prior reports, you can do a technical peer review. We oftentimes will do limited historical review to just see if there’s any reason to believe that there could be other issues.

There might be a property they’ve owned for 30 years and they didn’t even know they needed to do environmental back then and maybe their operations are fairly benign—they’re doing light assembly, some welding, they’re not really using chemicals, they have a great business humming. But you might want to pull some historical aerials or historical sanborn maps that might show it was a plater in the thirties to the sixties. And then there’s potential for chlorinated solvents, and vapor regulations largely didn’t exist 15 years ago—they’ve changed four or five times in Michigan since then. And then you have emerging contaminants. So, they call it a forever cam or chemical device, which is used in bonding. So, it’s used in plating, it was used and waterproofing. It’s a very, very powerful tool with very, very low clean up criteria.

So, in my 33 year career, I’ve always dealt in parts per billion as a minimum threshold for detection. We now deal on parts per trillion.

So, that’s a significant difference. It’s being aware that these problems may exist that may not necessarily have any liability tied to them as an operator or their operations, but it’s going to affect the transaction, it can affect the collateral value of the real estate that’s tied into the business.

 

Ron Reed: And I want to drill into that one, because you and I have seen this together in a transaction where the our client did everything right when they purchased the property. They’d been they didn’t do anything further to pollute the property in any way at all. However, underneath them, the regulations changed. So when we went to market, knowing the regulations changed, actually changed the dynamics of their environmental due care.

Maybe you can talk a little bit about due care and those topics.

 

Michael Kulka: Well, and it becomes sensitive with sellers because they did do everything right. And it’s not like if you paid a 10 percent income tax rate in 1970, you’re going to find out they changed that rate and you have to now pay 15 percent because they increased the rate. We kind of do that backwards. We don’t grandfather things in.

So, you really have to hold their hand and let them be aware of that this is an issue and you now need to deal with this, and you also need to be aware you should have been dealing with this three, four or five years ago when the regulation changed. They don’t know it. The regulators don’t send them anything, but if another event occurs, such as that forklift hitting a drum and the regulators get on site, and they pull their files and look at them like, “Huh? You guys should have done all this stuff.”

So, it’s not policed as heavily as you would think it would be in the environmental world. And how sensitive—especially in Michigan, with the Flint water crisis—you would think there’d be more resources on it, and they’re spread pretty thin. So, when a transaction occurs, a buyer becomes aware that this really could be an issue. And as much as the seller kind of feels, “Why, why am I now being told I could have a a six or seven figure problem? Well, now, even if they walked away, they’re aware of it. So, I always tell sellers, “If you want to hire us to do some preliminary, you better be prepared to deal with whatever we find because it’s going to surface.”

 

Ron Reed: And as we talked about your responsibilities for due care aren’t served by ignorance. So, just because you are ignorant of the fact that you should have been delivering due care doesn’t change the fact that you are still responsible for due care.

 

Michael Kulka: Correct. And it is unfortunate that, when they do change some tax law, you pay more or less—something in the tax code you’re not going to know, but your CPA is going to know it, and you’ll be happy if you get more money back and you’ll be mad if you got to pay more. You don’t get mad at the CPA. That’s just the system.

I find people get very emotional about it differently than taxes, and I draw that analogy often because environmental consultants are to the EPA or EGLE, these regulatory agencies, similar to what a CPA is to the IRS when it comes to pleasing the IRS. Everyone knows that you don’t want to mess with the IRS. Well, guess what? You don’t want to mess with these regulators either. They have a tremendous amount of power, and there are letters that go out documenting due care or they threaten fines and penalty, and then they impose fines and penalties. And you just don’t read about it a lot.

 

Ron Reed: Well, one thing I think that was also valuable, that you’ve helped educate us here at Cascade, is just how many pools of money there are for entrepreneurs and owners for taking care of some of these issues. So, once you learn about them, doesn’t mean you’re completely on the hook depending on the nature of the situation for all the funds.

 

Michael Kulka: That’s a great point. I’m glad you absorbed that from the presentation. They don’t always work. They don’t help parties that cause a contamination. But if there are residual legacy issues—the example I gave of the player that went out of business in 1960—there are some good tools out there to proactively identify the problem, get your arms around it and see what’s the best way to solve the problem—whether if there is some assistance or not, how can you spread expenses that you didn’t know about for a 15-year time period that maybe should have been done ten years ago—you know try to figure out the best way to soften that blow.

 

Ron Reed: Right. And so, we are in southeastern Michigan and you and I deal with this a fair amount. The types of businesses that we routinely work with are benign. They don’t use solvents. They wouldn’t think of themselves as having environmental issues. They may be doing assembly, as you describe. What are the kind of things they really need to be thinking about as they go into preparing for a transaction?

 

Michael Kulka: On the sell-side?

 

Ron Reed: Yes, on the sell-side.

 

Michael Kulka: Well, they don’t know what they don’t know, right? So, environmental is the one that’s probably the worst. Especially, most of these business owners that you’re going to represent started their business 15, 20 or 30 years ago. So, a lot has changed, so, Circle and Environmental Due Diligence, that law passed in 1980 and no one really knew much about what it was or what it did until the late eighties. So, there’s a lot of businesses that fall into the establishment of kind of the new normal today, and they just don’t know any better because they haven’t had a transaction occur that brings them awareness to what and how much has changed.

 

Ron Reed: So, say I have a business; it’s an assembly, it’s 50,000 to 250,000 square feet of space that I either own or that I’m dealing with. What’s the budgetary price for getting you involved pre-transaction, just to help me think through what issues I may or may not have.

 

Michael Kulka: It’s hard to put a price on a per square foot or a per use because you never really know—that’s the current use. You could have a cell phone store that was a gas station or a donut shop, or the manufacturing light assembly that was just a warehouse and the light assembly was well done and they didn’t really use any chemical. So, the low end of a property like that could be $1,500 to $2,000 to really get a handle on knowing you’re not going to get T-boned in the middle of an intersection, whereas other property is, I have a portfolio of 20 properties that are 50 to 100,000 feet, and I just throw out $20,000 could go a long ways to peel some layers back and see if there’s a problem.

 

Ron Reed: So, it’s a manageable number, I shouldn’t be afraid of it. The number that would be the concern is when I find something. That’s when things can get expensive, but ignorance is really not bliss in this case.

 

Michael Kulka: Yeah, unless it’s a very heavy industrial user that has really poorly managed their process—whether it’s got a lot of issues or not—our percentage of a deal is less than, it’s in fractions of a percent. Not that I’m trying to downplay the importance. My point is, it’s not a lot of money for something that really will add significant value and save a lot of time.

 

Ron Reed: Well, I’m really appreciative and grateful that you showed up again today. We’ve enjoyed working with you, Mike, and and I’m grateful that we put this together and we look forward to working with you many years in the future.

 

Michael Kulka: I look forward to it as well. Thank you, and thank you for the gift.

 

Gain more expert insight by tuning in to our other Cascade Conversations episodes!