Let’s say you are the owner of a manufacturing company.  You’ve decided to sell your business and you are presented with a Letter of Intent to buy the business.  It’s everything you wanted with respect to the price and the buyer is financial sound. 

You may be excited about the potential sale but a word of caution.  Do not forget to address the environmental issues up front.  In many instances a bank will require the buyer to obtain a Phase I assessment by an environmental consultant.  The cost varies but you are looking at approximately $2,500 for such a report.  If recognized environmental conditions (REC) are present the consultant could recommend a Phase II report.  The Phase II report is usually much more expensive and could easily approximate $10,000 and up.

So who pays for these environmental inspections?  It is a negotiable item that you should address from the outset of your Letter of Intent or business purchase agreement.  The seller must carefully consider the environmental issues.  Some of the things to think about include:

  1. Who pays for the environmental inspections/assessments?
  2. What happens in the event a Phase II is recommended?  Again, who pays?
  3. Have you included a provision that allows you to back out of the sale in event the Phase II is not something you are willing to do?
  4. What if there is a likelihood of groundwater contamination?  You may be required to notify the DNR after the Phase II.
  5. What steps are necessary for clean up and who will pay for those recommendations?
  6. Will you be required to indemnify the buyer?
  7.  If you don’t take care of the environmental issues with the current sale are you only delaying the inevitable problems in the future?
  8. If the buyer walks won’t you be required to disclose any recognized environmental conditions to another buyer?

I am not an environmental lawyer but fortunately Mark Landa from our office has been particularly helpful in this area.  Mark’s previous experience in working with the Iowa DNR has proven invaluable.  Environmental issues could make or break a deal in certain business sales.  I have had make or break issues come up in the sale of manufacturing companies, gas stations, implement dealerships, and more.  If you are selling a business with potential enviromental hazards carefully consider your options from the outset and reach a preliminary agreement with the buyer before due diligence begins.