Monday, January 12, 2009

Environmental Due Diligence – What Is Value and Cost of Information?

In most mergers or acquisitions, there is a transfer of information from the Seller to the Buyer. The Buyer begins with little or no information and over time collects data and information that will be used to base their decisions. Ideally, this information would be complete and would address all the needs of the Buyer so they can make optimal decisions.

In practice, this ideal is rarely met. Buyers will always be making decisions based on incomplete and sometimes inaccurate information. Therefore Buyers will often invest in gathering more or better information to improve their chances of making good decisions. Because Buyers are investing time and money upfront in order to reduce the changes of making bad (i.e., costly) decisions later, a Cost-Benefit relationship can be calculated on the value of collecting information.

Nowhere is the value of information more critical than in Environmental Due Diligence. Some information can be gathered at fairly low cost, such as a Phase I environmental site assessment. However, if environmental issues are identified, costs to collect further information can be high, and therefore the value of gathering the information must be put into context with overall decision-making processes.

Two questions help frame the value of information:

Depending on what I learn, would I make a different decision?

What are the costs associated with potential outcomes if I proceed without further information?

By considering the benefit of having the information in relation to the costs associating with collecting it, Buyers can make an informed decision on whether or not gathering more information is cost-effective.

Caltha LLP supports clients nationwide in evaluating and quantifying environmental liabilities and conducting environmental due diligence.

For further information contact Caltha LLP at
Caltha LLP Website

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