Phase I Environmental Assessment in M&A Transactions

A Phase I environmental site assessment is commonly required by buyers and lenders in merger and acquisition transactions that include commercial real estate. One may even be called for when the target company (seller) uses or stores hazardous materials at a leased facility.

Sellers are generally rewarded for conducting a Phase I assessment before taking a deal to the marketplace. Understanding environmental risk allows sellers to argue for a higher price and increases the likelihood of closing a deal. This article explains why.

What is a Phase I Environmental Assessment?

A Phase I environmental site assessment (ESA) consists of a thorough inspection of a commercial property and research into its current and historical use to identify potential environmental contamination liabilities. These assessments are conducted by independent, certified and trained professionals. The environmental expert produces a written Phase I report. When site contamination is found to be likely, a Phase II investigation follows, which involves taking soil, groundwater or material samples.

What All Buyers Want

When acquiring a business, buyers want to understand the potential liability for environmental contamination on facilities owned or operated by the target company; any past non-compliance with environmental laws and regulations; and costs to comply with any post-closing environmental compliance obligations. An understanding of their potential liabilities as a parent or successor dictates their acquisition strategy.  The scope of a buyer’s potential liability for existing environmental contamination issues can influence the basic structure of the transaction — asset or stock purchase — and proposed purchase agreement provisions.

How Sellers Benefit

Obtaining a Phase I report before putting a business with real property up for sale provides several benefits to sellers. It flags potential problems that the seller can mitigate or remediate in advance. If contamination is reported to be present or likely, the seller can better compare the value of bids and make better decisions regarding indemnities and potential insurance products. Having a Phase I report increases a buyer’s comfort, and results in better offers, less renegotiation and a smoother LOI-to-closing process.

Al Statz is founder and President of business valuation and M&A brokerage firm Exit Strategies Group, Inc., which has offices in California and Oregon. For further information on this subject or to discuss a valuation or M&A question or need, confidentially, you can reach Al at 707-781-8580 or