Business valuation when environmental problems are present

If you tackle valuation of a company with significant real property and fixed assets, there is a possibility that you can encounter environmental issues that require remediation. Most business appraisers are not experts in environmental engineering.

What you can do is conduct an inspection of the business property. If there are signs of environmental problems, it is a good idea to get an estimate of the cost to cure it from an expert engineering firm. Business owners are often aware of such problems and may have had an environmental study done.

Business valuation is usually done under the assumption that all underlying assets are free of any problems. If remediation is required, the cost of the effort is subtracted from the fair market value of the business property. For example, if the property is valued at $500,000 and the cost of an environmental clean-up is $100,000; then the value of the property is $400,000.

But what if the cost of remediation exceeds the business property value? In this case, it is possible that the fair market value of such property is negative. Some business people have trouble dealing with this. Yet it is possible that the cost of a clean-up can exceed the value of the business property. In this case, business buyer prospects are unlikely to be interested.

In addition, the effect on the value of business property can be indirect. If there are two properties on the market, one with environmental issues and the other without; most buyers would prefer the trouble free property even if the two properties are valued at the same amount.

When environmental problems are present, business buyers never know if the current clean-up estimate is truly accurate. Regulations may change requiring additional expenses to comply, or some areas of contamination can be missed on initial inspection.

It is difficult to state just how much the presence of environmental issues can affect the value of business property. Some business appraisers conservatively estimate an additional 10% reduction in the value of a remediated business property.

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