The food and beverage industry is ripe for growth. Cultural shifts and consumer trends are fueling new opportunities in this arena, and companies are hoping to capitalize on related markets. But acquiring a food and beverage business doesn't come without risks, and potential liability.
In our latest edition of the Nixon Peabody & WSP webinar series, we discuss best practices for navigating environmental health and safety (EH&S) compliance risks when buying a food and beverage business.
It's important that buyers evaluate the real property and the operations they're purchasing, and plan proactively for associated EH&S risks. Ideally, we're gathering proposals for a Phase I environmental site assessment from the get-go — typically the same day after our client sends us a Letter of Intent, draft proposed purchase document, or asset sale agreement. That Phase I environmental site assessment forms the bedrock of EH&S due diligence. At a minimum, this assessment identifies potential or existing environmental contamination liabilities related to the real property. It's a critical prerequisite for various "innocent" liability defenses. In other words, this assessment is the first step toward ensuring the buyer isn't unwittingly held jointly and severally responsible for the cleanup of a previously contaminated property — such clean-ups can exceed seven figures quickly.
The Phase I environment site assessment focuses on several factors. Licensed environmental professionals tour the property and survey current or previous operations that may have an impact on the environment. They also review relevant permits and documents. Sources of concern can include lead, asbestos, peeling paint, or — what we're seeing a lot of lately — vapor intrusion concerns, where chemicals from the soil or groundwater migrate to indoor air above the site.
In our experience, these assessments can sometimes make or break deals: We've seen acquisitions dissolve after the Phase I report reveals previously undisclosed underground storage tanks, significant environmental compliance issues, and extensive groundwater contamination. Some buyers choose to pair these Phase I reports with limited environmental and health and safety compliance reports — sort of a mini-audit, which allows buyers to gain insights on operations beyond the real property concerns that Phase I focuses on.
We'll communicate any potential concerns that arise from the assessment with clients promptly and upfront. When we detect recognized environmental conditions like vapor intrusion, we may initiate a Phase II environmental site assessment, which is an invasive investigation with samples taken and analyzed, and often requires renegotiation of the due diligence window with the seller.
We may also incorporate any potential issues into the purchase or asset deal. For example, we can create diligence documentation requests, pre-closing and post-closing deliverables, and environmental escrow accounts or purchase price reductions — all of which minimize risk for and shift liability away from the buyer. We can also evaluate where self-disclosure protections under the Environmental Protection Agency (EPA) Audit Policy may minimize potential liability post-closing.
It's important to note that the Phase I Environmental Site Assessment requirements are subject to change. Most recently, the American Society for Testing and Materials (ASTM) approved a slew of revisions that bring the Phase I assessment process up to speed with modern science and laws.. The updated language clarifies the due diligence window. It also addresses emerging contaminants — such as Per- and Polyfluoroalkyl Substances (PFAS) — and their potential inclusion in Phase I assessments. When approved by the EPA, the updates will bolster Phase I assessments, potentially offering greater options to protect buyers.
We're excited to continue guiding buyers through the environmental safety framework of food and beverage businesses. Please reach out to either of us — Alison Torbitt or Betsy Mitton — with any questions you might have.