In no time in recent history has the discussion about 'climate change' been so prevalent. This is a bold statement but look no further than google trends and type in ‘climate change’ and the following is the result.
The purpose of this article is not to debate environmental opinions, stances, policies nor thoughts on the impact of recent influences on climate change. The purpose of this article is to outline how environmental responsibility is factored into the business sale process. So often Politicians and some media position commerce and the environment as binary- either you support commerce or you support the environment; the reality is that the two stand beside each other ‘hand in hand’.
What does environmental responsibility mean for business owners selling a business? We can sum it up in one equation:
Environmental Responsibility Business Value Equation
- Environmental Responsibility +/- (2) Business Practices +/- (3) Alignment of values with customers (or potential customers) +/- (4) greenhouse gas benefit/ cost +/- (5) Asset value or Liability value == Impact on Business value
When valuing your business potential buyers are looking at your business and determining what risks they are willing to take? Not unlike other risks such as human resource risk, customer retention risk, financial risk, and litigation risk potential buyers are assessing environmental risk.
How does environmental responsibility affect value?
- Transaction Structure.
If a buyer perceives environmental responsibility to be low and wants to minimize or eliminate the risk then they may elect to leave it with the seller. In this case a buyer may look at an asset purchase versus a share purchase. If a seller is looking to realize capital gains through a share sale then this could have a material impact on after tax proceeds from the business sale plus the seller still holds onto any outstanding environmental responsibilities.
- Discount rate used in valuation
Simply put: Increased risk = a higher discount rate in valuing a business
- No deal at all
If environmental responsibility is perceived to be low and/or is perceived to have too many unknowns then potential buyers may elect to look at other opportunities.
- The shining light- Environmental Responsibility as a Business Differentiator
If your business is the leader in environmental responsibility present it as the asset it should be. Use the Environmental Responsibility Business Value Equation as a guide to how you have separated yourself from your industry or all other industries.
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