With climate change and environmental issues making headlines this week, we look back to Episode 67 of The ESOP Podcast for a brief discussion about the effects of environmental issues on ESOP valuations and transactions.
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Mini-cast 62 Transcript
Brian Keisling: 00:03 Welcome to The ESOP Mini-cast. A great way to wrap up the week.
Bret Keisling: 00:13 Hello, my friends. Thanks for listening. My name is Bret Keisling and as it says on my business cards, I'm a passionate advocate for employee ownership. This week, as in many weeks, there was much attention focused on climate change and environmental issues. The United Nations is poised to issue a report and a number of scientific journals and scientists have done the same thing. I'll be honest with you, I don't really understand the science behind climate change, but I also don't understand the science behind aviation and I get on airplanes all the time. What I do understand is the effect of environmental issues on an ESOP valuation or ESOP transaction. So I thought for this episode of the mini-cast, we turn to our archives Episode 67 which was a grab bag question and answer episode where Brian Keisling posed questions to Rich Heeter and myself back when all three of us were with Cap Trustees. I hope you find this brief excerpt regarding the effect of environmental issues on valuations to be helpful. Here's Brian.
Brian Keisling: 01:23 How would environmental factors affect a valuation?
Rich Heeter: 01:28 Well, I think environmental effects, not only valuation, but it depends where you are in the process. So if you are, if you're working on a transaction it's not necessarily a valuation issue per se, it's a risk factor that you've tried to quantify what the potential damages and costs and expenses would be to the ESOP. If it's buying the company and there's an environmental issue, you know, what's it going to cost to remediate this? Can it be remediated? What are the legal risk factors that are on the hook and it's, you know, can you even proceed with a transaction until things become more known? Cause many times it's going to put a hold on things and it will change what the representations and warranties may be and any escrows and parts of the deal. So, may not necessarily be directly tied to the valuation, although it could be. If it's bad and you decide you want to move forward, it's obviously going to lower the value when there's a big risk factor.
Bret Keisling: 03:00 Well and even on an ongoing -- and then I want to go back to the transaction, because Cap Trustees has some experience with few of these -- but on an ongoing, if your property has environmental issues that for whatever reason have been really difficult to mitigate and let's say that you don't have insurance to cover the potential problems there certainly is a potential for an effect on valuation. Once you no longer are responsible for that property, presumably you might see an increase in valuation. As far as the transactions itself, Rich, one of the things, I think it's worth saying because boy, I think it was 2016 the fall we suddenly had two or three transactions that we had environmental concerns pop up. And our understanding of some other ESOP transactions prior to this is that a lot of times they would handle the transaction through reps and warranties from the sellers and if a problem arose, we'd work it out down the road and claw backs, without going too deep. And what we had discovered is there's a definitive process in non-ESOP transactions when an environmental concern comes up. So we took the approach, and I'll mention his name, which will probably horrify him because he's not into publicity, but there's an attorney in Harrisburg, Pennsylvania, Steve Nudel, who's been a real estate lawyer his entire career, really smart guy and he just does environmental stuff all the time as part of his practice. So we reached out and one of the things that we've learned is that we called up Steve and said, hey, there's a concerning environmental report and, and, and we want to know as trustees how to proceed. And Nudel said, here's what you got to ask yourself. How close is the environmental concern to a water source? And how close is the water source to a school, a daycare, a senior citizen... and at that point, Rich, that said to us as Capital Trustees, we need to be very careful, very proper. Correct?
Rich Heeter: 04:57 Mmm hm.
Bret Keisling: 04:58 So what we kind of did was have the approach of we can't go through the transaction until we quantify if there's a serious problem and how to mitigate it. And I can say in the two or three that we got involved with where it came up, in all of them it turns out it was not as bad as was projected. So, the transaction was better. The participants were protected. We didn't overpay. Sometimes getting the information is the best thing possible.
Rich Heeter: 05:30 But we did take a pause and a delay. And you know, it may have taken an extra, you know, you know, 30 days, 60 days to get the results and make sure that all the I's were dotted and T's were crossed.
Bret Keisling: 05:49 And it's one of those subjects, although generally selling shareholders understand this one, specifically, they understand. If we weren't thorough on the environmental concerns that could trigger a real problem with a transaction with the DOL. Two or three years after the transaction a major environmental issue blows up, they're going to ask to the trustee why they didn't know, they're going to ask a selling shareholder why he got overpaid or she got overpaid. So even though the gut reaction might be, oh my gosh, we've got to take care of this issue and there's going to be a pause. It's better for everybody.
Rich Heeter: 06:24 Correct.
Bret Keisling: 06:28 My thanks to my longtime friend and colleague Rich Heeter and my son and former colleague Brian Keisling for that excerpt. The take away from today's mini-cast is if there's an environmental issue, identify it, quantify it, get it resolved. Don't put your head in the sand. Don't take the attitude that what you don't know won't hurt you. Get on top of it and make sure that you take the steps necessary both to make sure that environmental remediation is properly done and that the employee owners a.) have a correct valuation, but perhaps even more importantly aren't working at a worksite where there might be environmental issues.
Bret Keisling: 07:14 If you found this excerpt helpful or interesting, I hope you'll refer back to Episode 67 of the podcast, which was a grab bag and Episode 68 happened to be part two with additional grab bag questions discussed by Brian Keisling, Rich Heeter, and myself. You can find all of our archives at theESOPpodcast.com. "The" is included in the name, theESOPpodcast.com. Chances are if there's a topic you're curious about, we've discussed it either in length or at least briefly on one of our podcasts, but if you can't find an ESOP related topic, jet us an email, we'd love to do a future episode on something that's of interest to you. Here's Bitsy with how to contact us.
Bitsy McCann: 07:55 We'd love to hear from you! To contact us, find us on Facebook at KEISOP, LLC and on Twitter @ESOPPodcast. To reach Bret, with one "T", email Bret@KEISOP.com, on LinkedIn at Bret Keisling, and most actively on Twitter at @EO_Bret. Again, that's one "T".
Bret Keisling: 08:16 With that, my name's Bret Keisling. Thanks for tuning in. I hope you have a great weekend. Bye bye.
Bitsy McCann: 08:21 This podcast has been produced by The KEISOP Group, technical assistance provided by Third Circle, Inc. and BitsyPlus Design. Original music composed by Max Keisling, archival podcast material edited and produced by Brian Keisling, and I'm Bitsy McCann.
Standard Disclaimer: The views expressed herein are my own and don't represent those of my own firms or the organizations to which I belong. Nothing in the podcast should be construed as guidance or advice of any kind in any field. And the fact that I mentioned an organizational website or an advocate or a company on a podcast does not reflect an endorsement. But if you've heard your name or your group's name mentioned on this podcast, I'd love to have you come on and talk about it yourself.