By: Tyler Archer
November 2017
As the modern economy becomes greener and more efficient, environmental considerations are requiring more and more attention. This is especially true as older factories, mills, and manufacturing districts are being retooled and repurposed. To cope with changing priorities, small businesses should consider contracting with environmental lawyers and professionals to conduct an environmental audit, which can be a valuable tool for starts-up in identifying risks, correcting problems, crafting successful deals, and building responsible companies.
The goal of an environmental audit is to reduce environmental exposure. Operationally, this is important because pollution can always trigger potential enforcement, which can be detriment to both the bottom line and public perception. And from a deals perspective, increased risk can reduce bargaining power and can bring down the deal all together. The environmental audit and due diligence process generally includes the following: identify the framework, develop standards, document and analyze results, and establish a follow-up procedure.
For the purposes of this blog, envision a fictional start-up working in light manufacturing and machining. They operate in a centuries-old factory building, regularly use oils and other chemicals, and produce a moderate amount of metals and packaging waste. Assume the manufacturing company is looking to improve its environmental record in the hopes of securing a buy-out from a larger competitor, and approaches a law firm for guidance. (Many of these environmental and considerations would not apply to technology start-ups, unless they manufacture hardware.)
The first step is the most important. Without the appropriate framework, the environmental audit won’t prove successful. It begins by identifying the relevant statutes, regulations, and jurisdictions. Insurance requirements are also worth reviewing. For example, our manufacturing start-up regularly uses metals, oils, and other potentially environmentally risky products which can implicate a range of rules regulating discharge, storage, and disposal.
After establishing the framework, the next stage is all about collecting data. As always, proper documentation is extremely important, particularly if there is a chance of appearing before a court. There are two important steps in this stage: reviewing the start-up’s documents and operations. While the document review is fairly straight forward—and can include state and federal filings and employment and vendor agreements — “walking the land” is vital. Examining the facilities and operations first hand provides valuable context and can reveal problems and inefficiencies that can be overlooked in paperwork.
In a transactional setting, it is important to realize the other party—whether friend or foe—will be conducting their own due diligence for the deal. While they may not have the same access, particularly to facilities and employees, they will certainly review public documents and industry contacts. They will be concerned about inheriting environmental liabilities, and this play out in the structure of the deal. For example, a potential buyer may prefer an asset sale and dissolution, which would erase all liability, rather than a merger, which would transfer liability to the successor.
In the final step, creativity is key. Working with their attorneys and business advisors, the start-up should develop ways of addressing the environmental issues identified by the audit that are both business-friendly and sustainable. Some—such as purchasing more robust oil storage containers—can be simple yet impactful. Others can require a bit more ingenuity—such as redesigning the plant to reuse excess heat in the building rather than as a discharge, thereby reducing pollution and lowering energy bills long term.
Regular environmental auditing can be a valuable tool for managers both from an operations perspective and in the context of a corporate transaction. In general, companies need to consider how the various laws and responsibilities impact their operations (i.e. production) and bureaucracy (i.e. paperwork), and how they can be creative in addressing these issues. This can be particularly important to start-ups, where inefficiency and wasted capital can change the trajectory of a new business. By incorporating environmental responsibly into their business plans from the outset, start-ups can set themselves up for a sustainable and profitable future.