Environmental history and performance guarantees

Industrial transactions fail or reprice on a narrow set of recurring issues. Two account for a disproportionate share, and what they have in common is that the seller could have quantified each of them before the process began.

Site history

Prior use, prior owners and any historical handling of regulated materials will be examined. Manufacturing sites frequently have long histories, and the operations that preceded the current owner are part of what a buyer inherits.

The critical point is how buyers treat an incomplete record. Where the history is documented and the position is known, a buyer prices the risk, which may be small or may be manageable through indemnity and insurance. Where the record is incomplete, a buyer prices the uncertainty, which is always more expensive because it is bounded only by imagination and by their counsel’s caution.

A Phase I environmental site assessment commissioned before a process costs very little relative to the range of outcomes it removes. Where it identifies a matter requiring further work, knowing that early is the whole point: it allows the issue to be scoped, priced, and presented rather than discovered.

Performance guarantees on installed systems

The second exposure is less well anticipated. Where equipment or systems were sold with throughput, availability, efficiency or emissions undertakings, those obligations continue after the sale of the business and attach to the buyer.

The accounting for them is frequently informal. Many owner-managed businesses handle guarantee claims as they arise, as a cost of doing business, without a provision that reflects the contingent obligation across the installed base. A buyer’s accountants will look for that provision, and if it does not exist they will construct one.

Quantifying it yourself means reviewing what was actually promised, contract by contract, across systems still within their guarantee period, and forming a view on realistic exposure. It is an uncomfortable exercise and it is far cheaper than having it performed by the other side during exclusivity.

The common thread

Neither of these is unusual and neither is disqualifying. What determines their effect on a transaction is who raises them first.

An issue presented by the seller, quantified, with a remediation plan and a view on cost, is a term to be negotiated. The same issue discovered by a buyer in month five is evidence that the business has not been examined, which invites the question of what else has not been.