PRIVATE EQUITY PERSPECTIVE:
Environmental Due Diligence Creates Opportunities
Environmental due diligence in M&A has expanded beyond just looking for liabilities, explains Peter Baty, a project director at Sanborn Head & Associates Inc., an environmental engineering and consulting firm. Todays dealmakers also see the potential for leveraging sustainability initiatives to increase value
Environmental due diligence in M&A has expanded beyond just looking for liabilities, explains Peter Baty, a project director at Sanborn, Head & Associates Inc., an environmental engineering and consulting firm headquartered in Concord, N.H. Today’s dealmakers also see the potential for leveraging sustainability initiatives to increase value. Sell-side due diligence is also on the rise, as sellers recognize the importance of identifying and addressing environmental issues before trying to sell. We caught up with Baty at the 2012 Boston Growth Conference & ACG Capital Connection. Check back soon for our video interview with him.
What’s the risk of not performing environmental due diligence?
In the best case, a buyer might not be able to negotiate the best possible purchase price for the business that they are buying. And in the worst case, a buyer might inadvertently acquire a major liability that could significantly alter the value of the business they have bought.
What’s involved in doing environmental due diligence in mergers and acquisitions?
A lot of factors come into play, such as the stage of the acquisition, the nature of the business being acquired, the acquirer’s appetite for risk, the timeframe for due diligence and the purpose of it, which could be internal risk management, deal negotiation, or to satisfy lenders.
In general, a due diligence process will include: a review of publicly available information from regulatory databases, news outlets and other sources; a review of documentation made available by the seller, which, nowadays, is typically provided in an electronic data room; and interviews with key personnel at the business or facility. It may also include physical site inspections to assess the conditions visually at some or all of the facilities and the surrounding areas.
If it’s determined to be necessary, due diligence might also include doing some sampling to determine if soil or groundwater contamination is exists – or if hazardous building materials, such as asbestos or polychlorinated biphenyls (PCBs), are present. Then we prepare a report that matches the needs of the client. This may also include the development of short- and long-term plans to address the identified issues.
What tips can you offer private equity firms and strategic buyers?
In my experience, private equity firms and strategic buyers will often have a very different approach to conducting environmental due diligence, primarily because their long-term plans for the target are often quite different. I think it’s important understand your own firm’s tolerance for environmental risk, and more specifically, determine what size of an issue is material to your transaction. Then, be sure to communicate that with your environmental consultant so that, together, you can develop a scope of work and a reporting format to match that risk tolerance.
There are also many ways that environmental issues can be leveraged to enhance the value of almost any business (contributing both to the bottom and top lines), and the period of due diligence is an excellent time to identify what those issues might be and develop short- and long-term strategies to realize that value.
For the video interview with Baty, see "Environmental Due Diligence Evolves" on the Mergers & Acquisitions video page.
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