Vapor: The Next Environmental Cloud Rolls In
By Chris Fonzi
Logic Environmental, Inc.
3400 McClure Bridge Road, Suite F602
Duluth, Georgia 30096
ph: 770.817.0212 fax: 770.817.0214
For those of you who feel like global warming, deforestation and the decline in the world’s billfish population are just a little too abstract to be personally compelling, the American Society for Scaring the Hell Out of Everyone announces a completely novel environmental problem – and this one could land smack in the middle of your next real estate deal.
For years now, the Phase I/Phase II process of environmental site assessment has been focused primarily on identifying possible sources of soil and groundwater contamination – underground tanks, spills, dump sites, etc. This was the mandate established by the American Society for Testing Materials (ASTM), a private organization that sets the standards for what goes into a Phase I investigation. Although ASTM standards aren’t law, they are close to being the only game in town and virtually all reputable consultants follow them. In January 2014, ASTM revised the standards for what constitutes a Phase I, the first such revision in eight years. The most significant change was the addition of a requirement that all Phase I reports evaluate sites for the possible presence of vapor as a recognized environmental threat. And vapor, as it turns out, is everywhere.
In this context, “vapor” refers to the migration of gasses from volatile contaminants – like gasoline or dry cleaning solvents – in soil. Let’s say you’re doing a deal on a corner-lot restaurant, built 10 years ago on the site of a former gas station. The Phase I assessment shows that gasoline contamination was reported from the site just before its redevelopment. At that time, the testing showed that the contamination was not very severe and the state environmental department issued a no-further-action-required letter for the release. The station’s underground storage tanks were removed, but no other cleanup was performed and a moderate amount of residual contamination was left in place. (This is standard practice, by the way. Only very rarely do environmental authorities require a site be restored to pristine condition and often allow the owner off the hook without performing any real cleanup at all.)
Historically – and by that we mean, until four months ago – a Phase I on this property would most likely have concluded that the no-further-action letter was a silver bullet, and that the contamination warranted no further investigation. But now, the report may also bear the ominous conclusion that your property has a vapor condition. It might say no more than that, and leave the conclusion unexplained, like an odorous gray cloud above your deal. Or it might recommend some sort of testing. Or it might even recommend some type of modification to the property to mitigate the impact of these vapors.
“Vapor intrusion” is when vapor emerges from the soil into basements or structures and into our personal space.”
“Vapor encroachment”means presence of vapor in soil anywhere on a property – even if the property supports no structures.”
Before we talk about how you should handle this, we need to burden you with two terms of envirospeak jargon: vapor intrusion and vapor encroachment. “Vapor intrusion” is when vapor emerges from the soil into basements or structures and into our personal space. Human exposure to airborne chemicals can be a real issue. Any doctor, toxicologist or Richard Pryor can tell you that one of the fastest ways to get any chemical into your blood is to breath it in. Accordingly, most government studies and environmental guidelines involving vapor have focused on human exposure through vapor intrusion. “Vapor encroachment,” on the other hand, was basically invented by the lawyers of the standards-makers because creating standards for vapor intrusion raised too many legal issues. It means presence of vapor in soil anywhere on a property – even if the property supports no structures. Vapor encroachment is generally not a significant health threat in its own right, but is important mostly as a precursor to vapor intrusion. Vapor encroachment is unlikely to ever be directly regulated.
Distinguishing these two conditions – intrusion vs. encroachment – is important to understanding a central problem with the new Phase I standards. That is, that pointing out a vapor encroachment issue can accomplish very little apart from making everyone involved in a deal uncomfortable. There are no government standards, no reporting obligations and no clear response which arises from the identification of a vapor encroachment condition. Some benchmarks have been established for vapor intrusion, but they are still evolving on a state-by-state basis and Georgia has yet to enact any regulations. While buildings can be tested for vapor intrusion, testing for vapor encroachment (that is, testing away from a structure) rarely serves any clear goal.
The best advice for managing vapor issues – as it is for most environmental issues – is to have a clear goal in mind before either party begins investing time and money into a solution.
Although some draft federal guidelines exist – including screening levels for a range of common contaminants – the government has, for the most part, not really chimed in on the question of how much vapor is too much. For this reason, getting a no-further-action letter or some other government blessing that a vapor condition is “acceptable” may not be an option. The EPA is scheduled to release their final guidance document about vapor very soon (we would be more specific, but the government has goals, not deadlines) and most states, including Georgia, have created vapor intrusion task forces to address this issue.
Testing a building for potential vapor intrusion involves collecting an air samples from beneath the slab of the structure. This can involve the uniquely disruptive step of coring a hole through the floor of a building, but can also sometimes be accomplished by forcing a direct-push probe (imagine a giant steel syringe attached to a pickup truck) at an angle beneath the slab. Expect the cost of vapor intrusion testing to be comparable to other Phase II investigations, typically $2,500 or more.
While testing the air IN the building would seem like a more straightforward approach, it carries several potential problems.
A shocking number of common household or business items can contribute vapors to an environment, including dry-cleaned clothing, new carpet, soaps and lotions, nail polish remover, cleaning supplies, etc. Since most indoor sampling techniques would evaluate the space over a period of time, even a brief exposure to some of these chemicals could cause a false positive. For this reason, a preferable method involves collecting samples from below or near the building slab, then using a computer model or a screening level calculator to predict the indoor air concentration. This also provides a level of liability protection to the property owner, as an estimated result would not carry the same liability as an actual positive sample result from direct indoor air testing.
Fixing a vapor intrusion condition means directing the soil vapors away from the structure. During building construction, this can be as simple as installing a vapor barrier under the foundation. For existing structures, it might involve the installation of a subsurface venting system, or alterations to an existing HVAC system. Once again, however, the absence of government oversight in this area will make it important for buyers and sellers to reach a clear and meeting of the minds as to the goals of any mitigation project.
For the moment, vapor issues are in a nascent and unsettled stage in their development, lacking the predictability which makes other environmental issues easier to quantify and less likely to be deal-breakers. As government regulation and industry practice evolve, vapor will inevitably become easier to manage in a transactional context, even as the frequency of vapor-related issues increases.
Chris is founder and principal of Logic, GABB Affiliate member and a GABB Platinum Sponsor. He is a graduate of the University of Florida and the UF School of Law. He has performed environmental assessments and provided consulting services in more than 20 states during the past 15 years.
Read MoreCreating Value in Privately Held Companies
“As shocking as it may sound, I believe that most owners of middle market private companies do not really know the value of their company and what it takes to create greater value in their company … Oh sure, the owner tracks sales and earnings on a regular basis, but there is much more to creating company value than just sales and earnings”
Russ Robb, Editor, M&A Today
Creating value in the privately held company makes sense whether the owner is considering selling the business, plans on continuing to operate the business, or hopes to have the company remain in the family. (It is interesting to note that, of the businesses held within the family, only about 30 percent survive the second generation, 11 percent survive the third generation and only 3 percent survive the fourth generation and beyond).
Building value in a company should focus on the following six components:
- the industry
- the management
- products or services
- customers
- competitors
- comparative benchmarks
The Industry – It is difficult, if not impossible, to build value if the business is in a stagnating industry. One advantage of privately held firms is their ability to shift gears and go into a different direction. One firm, for example, that made high-volume, low-end canoes shifted to low-volume, high-end lightweight canoes and kayaks to meet new market demands. This saved the company.
The Management – Building depth in management and creating a succession plan also builds value. Key employees should have employment contracts and sign non-compete agreements. In situations where there are partners, “buy-sell” agreements should be executed. These arrangements contribute to value.
Products or Services– A single product or service does not build value. However, if additional or companion products or services can be created, especially if they are non-competitive in price with the primary product or service – then value can be created.
Customers – A broad customer base that is national or international is the key to increasing value. Localized distribution focused on one or two customers will subtract from value.
Competitors – Being a market leader adds significantly to value, as does a lack of competition.
Comparative Benchmarks – Benchmarks can be used to measure a company against its peers. The better the results, the greater the value of the company.
Three keys to adding value to a company are: building a top management team coupled with a loyal work force; strategies that are flexible and therefore can be changed in mid-stream; and surrounding the owner/CEO with top advisors and professionals.
Using Pratt’s Stats To Sell More Businesses
One obstacle to selling a business is an unrealistic asking price. GABB members can obtain access to Pratt’s Stats which can help sell more businesses by helping to price a business accurately. While Pratt’s no longer offers GABB members complimentary access, if a broker submits the details of a sale, they can obtain access to the database for a period of time at no cost.
The following is from GABB President Matt Slappey’s presentation at the July 2013 GABB meeting.
Pratt’s Stats can help you:
- Set REALISTIC owner expectations.
- Feel confident that you can support your asking price for your listings.
- Become knowledgeable about many industry values.
Brokers should use this tool in conjunction with Business Reference Guide and other sources. Pratt’s Stats allows you to validate information from each source!
What is the difference between BIZCOMPS® and Pratt’s Stats®?
BIZCOMPS® mainly covers main street businesses. As of February 2013, the median selling price of all the transactions in BIZCOMPS® was $168,000. BIZCOMPS® data includes up to 21 data fields per transaction.
Pratt’s Stats® covers both main street businesses, middle market transactions, and larger M&A transactions. As of February 2013, 60% of the deals in the Pratt’s Stats® database are businesses that sold for $1,000,000 or less, and 38% of the deals are businesses that sold for between $1,000,001 and $500,000,000. As of February 2013, the median selling price in Pratt’s Stats® was $440,000. Pratt’s Stats® data includes up to 89 data fields per transaction.
Does BIZCOMPS® overlap Pratt’s Stats®?
There is little overlap of information from BIZCOMPS® and Pratt’s Stats®, although there may be a few transactions that are in each database.
Do BIZCOMPS® and Pratt’s Stats® calculate transaction multiples the same?
No. There is one key difference between the two databases. BIZCOMPS® sales are all asset sales and the selling price does not include the cash, accounts receivable, accounts payable and inventory. Pratt’s Stats® sales can be either an asset sale or stock sale. For an asset sale, the Pratt’s Stats® selling price generally includes inventory and generally excludes cash, accounts receivable and accounts payable.
What is Pratt’s Stats?
- A Database of 19,500+ Private Company Sales
- Two Decades of Accumulated Transactions
- Additional Articles and Quarterly Reports
- Run by Business Valuation Resources, LLC and located at www.BVMarketData.com
- It’s FREE for GABB Members
- Board Members may issue a password
See a detailed primer describing how to use Pratt’s Stats Transaction Data for Private Company Valuations.
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SBA Tidbits
Cheryl Beer, Sr. Vice President
Cornerstone Bank
Whether you are a seasoned broker or just beginning your career, information about SBA loan programs can help you steer your buyers and sellers in the right direction when structuring the sale of a business.
The SBA 7(a) loan program is a term loan program that is generally guaranteed 75% by the U.S. Small Business Administration. A qualified bank underwrites the loan request and submits the loan to SBA for approval. The Borrower must be an operating business, be organized for profit, be located in the United States (includes territories and possessions), be small (as defined by SBA) and demonstrate a need for the desired credit. Terms are generally ten years for business acquisition loans and twenty-five years for real estate purchases. The maximum rate is Prime + 2.75%. Eligible uses of proceeds include the acquisition of real estate, equipment, inventory and goodwill and for working capital.
The SBA 504 loan program is strictly for the funding of real estate and large equipment purchases. A typical 504 structure includes a 50% loan by a Bank, a 40% SBA debenture at a favorable rate and a 10% down payment. The down payment may increase to 20% for special use properties and new businesses. The SBA debenture is a fixed rate loan for either ten years for equipment financing or twenty years for real estate financing. The February 2012 twenty year debenture rate was 4.7%.
Most SBA lenders are willing to pre-qualify your businesses assuming a strong buyer. The SBA loan program is designed to finance some goodwill, but the buyer must have liquidity and personal collateral. SBA 7(a) and 504 loans are great options for financing business acquisitions.
An SBA-guaranteed loan may be used to finance a change of ownership that includes intangible assets.
(1) If the purchase price of the business includes intangible assets (including, but not limited to, goodwill, client/customer lists, patents, copyrights, trademarks and agreements not to compete) in excess of $500,000, the borrower and/or seller must provide an equity injection of at least 25% of the purchase price of the business.
(2) (Seller equity is defined as seller take-back financing that is on full standby (principal and interest) for a minimum of 2 years.) The borrower and seller will agree how much equity each will provide. For example, the borrower and seller may each provide half of the equity or the borrower may provide 15% and the seller may provide 10%. Any seller financing that exceeds the 25% equity requirement does not have to be on full standby. It just needs to be subordinate to the Bank financing.
If there are other topics you would like me to cover, please feel free to contact me at cbeer@cornerstonebankga.com.
Cheryl Beer is senior vice president of Cornerstone Bank, which is a GABB Platinum sponsor.
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What Would Your Business Sell For?
There is the old anecdote about the immigrant who opened his own business in the United States. Like many small business owners, he had his own bookkeeping system. He kept his accounts payable in a cigar box on the left side of his cash register, his daily receipts – cash and credit card receipts – in the cash register, and his invoices and paid bills in a cigar box on the right side of his cash register.
When his youngest son graduated as a CPA, he was appalled by his father’s primitive bookkeeping system. “I don’t know how you can run a business that way,” his son said. “How do you know what your profits are?”
“Well, son,” the father replied, “when I came to this country, I had nothing but the clothes I was wearing. Today, your brother is a doctor, your sister is a lawyer, and you are an accountant. Your mother and I have a nice car, a city house and a place at the beach. We have a good business and everything is paid for. Add that all together, subtract the clothes, and there’s your profit.”
A commonly accepted method to price a small business is to use Seller’s Discretionary Earnings (SDE). The International Business Brokers Association (IBBA) defines SDE as follows:
Discretionary Earnings – The earnings of a business enterprise prior to the following items:
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income taxes
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nonrecurring income and expenses
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non-operating income and expenses
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depreciation and amortization
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interest expense or income
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owner’s total compensation for one owner/operator, after adjusting the total compensation of all other owners to market value
Here are some terms as defined by the IBBA:
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Owner’s salary – The salary or wages paid to the owner, including related payroll tax burden.
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Owner’s total compensation – Total of owner’s salary and perquisites.
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Perquisites – Expenses incurred at the discretion of the owner which are unnecessary to the continued operation of the business.
Developing a Multiplier
Once the SDE has been calculated, a multiplier has to be developed. The following (just as a guideline) should be rated from 0 to 5 with 5 being the highest. For example, if the business is a highly desirable business in the current market, “desirability” would be rated a 4 or 5. If the business is in an industry that is quickly declining or nearly obsolete, “industry” would be given a 0 or 1 rating.
Age: Number of years the seller has owned and operated the business.
- Terms: Is the seller willing to offer terms? For example, will the seller accept 40 percent as a down payment with the seller carrying back 60 percent at terms the business can afford while still providing a living for the buyer?
- Competition: Consider the local market.
- Risk: Is the business itself risky?
- Growth trend of the business: Is it up or down?
- Location/Facilities
- Desirability: How popular is the business in the current market?
- Industry: Is the industry itself declining or growing?
- Type of business: Is the business type easily duplicated?
The average business sells for about 1.8 to 2.5. Obviously, if the SDE is solid and the multiple is above average, the price will be higher. Keep in mind that the price outlined includes all of the assets including fixtures and equipment, goodwill, etc. It does not include real estate or saleable inventory. The price determined above assumes that the business will be delivered to the buyer free and clear of any debt.
Veteran Wisdom
When all else fails, the words of a veteran business broker will work.
Asking Price is what the seller wants.
Selling Price is what the seller gets.
Fair Market Value is the highest price the buyer is willing to pay and the lowest price the seller is willing to accept.
Sellers should keep in mind that the actual price of a small business is about 80 percent of the seller’s asking price.
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