Early and Often

The Business Case for Turn-Key Environmental Due Diligence
December 09, 2014

Many companies rely on internal staff to initiate the environmental diligence process, and only bring in their environmental attorney for the final days or hours of a transaction, usually to triage a deal that is about to go off the rails. Perhaps it’s the specter of a nasty contamination issue that suddenly appeared, or the parties can’t agree on the scope of the diligence investigation or the significance of its findings, or maybe the contract is too draconian or too bare bones. Whatever the sticking point, an experienced environmental deal attorney can help get the transaction get back on track. However, in the long run, using your environmental attorney as an EMT is to miss out on many fundamental benefits and real cost savings that accrue by bringing him or her into the acquisition process earlier.

This article explains what some of those benefits are and demonstrates in real dollars the points along the acquisition timeline where your company stands to increase leverage and spend less by including a seasoned environmental attorney on your deal team early on.

The fact is that most business entities do not require fulltime environmental staff. In fact, unless you run a hazards-intensive industry, or are acquiring 2-3 environmentally impaired properties every week, your need for environmental expertise may be far less than part-time. As a result, companies often address this staffing quandary, by assigning environmental, health and safety (EHS) responsibilities as an adjunct to other job duties, such that, for instance, the human resources person, property manager, or operations foreman may also wear the company EHS hat. This type of arrangement may work for day-to-day operations, but it can also expose the company to unintended liability risks. Multi-tasked employees cannot stay current on emerging compliance trends and more importantly lack the expertise to spot, anticipate or manage EHS liabilities. Likewise, environmental consultants can identify Recognized Environmental Conditions, but are not trained to advise on strategic positioning vis-à-vis identified issues.

So what is a company to do? Placing a law firm on retainer for the purpose of ongoing environmental advice is frequently not cost effective, and may not even be possible. Likewise, relying on outside environmental engineers to provide strategic advice on transaction positioning or post-acquisition integration may result in missed leverage and legal obligations.

The truth is that it takes years and years of transactional experience and deep involvement in diverse environmental due diligence processes to become both proficient and efficient in issue spotting and resolution. Moreover, being able to bracket environmental risks in a manner that is useful to a transaction team is an art form.

What most companies need is:

  • An expert who maintains a close watch on emerging environmental issues specific to the industry sector of interest, and who will not be billing the client as they come up to speed for each new deal;
  • An environmental professional with active relationships amongst regulators, engineers and insurance providers that can be leveraged to facilitate deal snags and procure services at a discount and on an “as needed” basis;
  • A single point process manager who can oversee the entire environmental diligence review from the outset, capable of guiding a graduated diligence process so that the client is apprised of potential issues before committing too much (e.g. not waiting until the entire Phase I is completed to learn of possible deal-killing liabilities), and who can then translate the diligence information into strategic advice to be leveraged leading up to and at the deal table.

So how can a business deal team access this scope of expertise without breaking the bank? And how can this level of assistance possibly be more cost effective than relying on existing staff to take care of the nuts and bolts of a transaction?

Let’s dissect this premise in the context of a hypothetical acquisition. First, assume that most in-house employees tasked with part-time environmental oversight responsibilities receive a salary between $80,000 and 120,000 per year. With overhead, benefits and other internalized costs such a person represents a net company cost of $100,000 - $150,000 per year. Second, assume that this multitasked employee spends about 20% of their time supporting environmental aspects of a transaction. The value of their time, which could be used for other company priorities, is roughly $30,000/year, and for a typical transaction would be about $3,000.

Now, let’s look at some of the tasks that experienced and efficient legal counsel would perform along with the cost savings of same:

  1. Locate and task the diligence team (usually involves identifying environmental consulting firm for conducting a graduated investigation (public database, Phase I, Phase II as appropriate);
  2. Analyze preliminary results of public database review, provide to client with assessment of any risks revealed. This step is key, as it can provide go - no go risk data at the earliest stage of diligence. Why wait for the entire Phase I to be completed at much more cost to make this decision?
  3. Coordinate environmental site assessment logistics, access, initial issue spotting, and drafting. This ensures that the product is tailored to client’s time, financial and risk constraints.
  4. Provide client with acquisition advice such as strategic risk evaluations and allocation, and assistance with negotiating and drafting deal documents to leverage environmental diligence outcomes. Notably, the resulting work-product can be maintained as a privileged or confidential work-product.

A reasonably priced law firm would charge approximately $3-5,000 to complete this work, depending on how complex the site and acquisition is, which is about the same as the cost of an in-house, multi-tasked staff person. What really makes a difference in the calculus is, in the end, most of the attorney costs pay for themselves through avoided costs and risks, and improved negotiating leverage.

For example:

  • Keener and more rapid analysis of potential risks provides leverage and ability to establish superior negotiating position earlier in the process before final Phase I is completed = a potentially significant price break and efficient executive time use = thousands of dollars
  • Avoided costs based on identifying unacceptable environmental risks prior to drafting Phase I and/or Phase II report, reduces diligence costs by eliminating lengthy (extraneous) report(s) = $2-5,000 per site
  • Avoided costs due to extra time the deal team would otherwise be required to spend renegotiating deal provisions when environmental risks are uncovered late in the transaction timeline = $5000+
  • Being able to maintain otherwise multi-tasked staff on other needed company work projects = $3000 or more
  • Cost savings on Phase I environmental site assessments based on attorney’s volume relationships with environmental consulting firms = $1-2000 per site
  • Avoided costs based on environmental counsel’s knowledge of industry-specific requirements for regulatory permits and notice approvals in post-transaction period by avoiding violations and addressing such administrative tasks efficiently = $2000+.

The foregoing partial list of advantages demonstrates that by including an experienced environmental transaction attorney in your deal team at the early stages of your acquisition, you stand to save significant staff and executive time and will receive more sophisticated advice earlier in the transaction, rather than scrambling in the final stages to save your deal, and/or justify the time spent chasing good money with bad.

Superior knowledge early in the diligence period helps cement your negotiating advantage, and reduces deal team haggles and time spent renegotiating terms when environmental issues are identified late in the process. Ultimately, a company can save thousands of dollars by outsourcing their environmental due diligence management to experienced outside counsel. Early and Often equates to Fewer Risks, Tailored Products, Better Outcomes, No Overhead.