Why might an energy audit be important for M&A transactions?

Environmental, social and corporate governance (ESG) issues are increasingly playing a major role in mergers and acquisitions (M&A) transactions. The possibility of conducting an energy audit is worth taking into account as part of these ESG considerations. In the current business environment, investors wish to avoid situations such as acquiring companies which have high carbon footprints or which require costly investments to reduce energy consumption. Whenever funds are invested in a business entity, it is useful to have a broad view of its holistic situation, and not merely its economic situation. Depending on the type of transaction carried out as part of an acquisition or merger, certain situations may arise throughout the process that can create commercial uncertainty or adversely impact negotiations.
An enterprise energy audit of the business being acquired or sold can be a helpful instrument in M&A transactions. Regardless of which side of the transaction you represent, such an audit can be important and help to plan negotiations or the operations of the business after the transaction is completed.

Enterprise energy audit

An energy audit is a procedure to obtain adequate knowledge about the energy consumption profile of a building, a group of buildings, a business, or an industrial or commercial installation. The audit seeks to determine how much energy can be saved, and via which methods, to determine the potential cost-effective use and production of renewable energy sources (RES).
The scope of an energy audit can vary. The Energy Efficiency Act (Journal of Laws 2017, item 831, amended) stipulates that large companies must conduct an enterprise energy audit at least once every four years. They must include a detailed overview of the energy consumption of buildings, industrial installations and transport which result in at least 90% of the entity’s total energy consumption. However, any company, regardless of its size, can conduct an energy audit for its own purposes and benefit from it.
An energy audit can cover the issues that are most interesting to investors at the transaction stage, to increase a company’s awareness of any planned merger or acquisition. An audit can also provide important support in negotiations and help to obtain more favourable terms for a business sale.
An audit provides information on the level of energy efficiency of a plant/business, and it raises awareness of the amount of energy consumed and its relation to production. It also identifies changes that could be made to increase efficient energy management. Often, the completion of the audit involves a site visit, which provides even greater insight into the company’s energy policy.

Main benefits of having an energy audit for M&A transactions

The audit can be tailored to the requirements of a particular M&A transaction. The benefits of such an audit include:

• awareness of which investments are required to increase the target company’s energy efficiency, considering environmental benefits and financial costs;
• awareness of monthly energy consumption in recent years, including an analysis of any anomalies in energy consumption;
• awareness of energy consumption ratios in relation to the floor area and/or production and an analysis of how they have changed in recent years;
• overview of most production, peripheral and auxiliary equipment, as well as external and internal transport vehicles;
• overview of the operation of the production process and other sub-processes;
• overview of the company’s carbon footprint.

The main advantage of an audit is that the scope of the analysis can be expanded as desired to obtain any relevant data, depending on the information relevant to the transaction or which may assist the negotiation process.
Energy audits are beneficial to the M&A sector for another important reason. In addition to the benefits outlined above, the resulting audit report becomes an excellent foundation for preparing an energy consumption reduction strategy or carbon footprint report, which is one of the most important issues after a merger or acquisition process has finalised.

Conclusion

Having an enterprise energy audit is helpful. When dealing with demanding transaction conditions or when doubts arise regarding the completion of a transaction, the insight provided by such an audit is important to allow energy efficiency or environmental impact issues to be taken into account in assessing the viability of a potential merger or acquisition. Such audits are not time-consuming and, provided the necessary data is provided, do not delay the underlying transaction.
To maximise the benefit of energy audit reports and ensure that yours is as useful as possible for the transaction, we recommend that you contact a dedicated team of specialists in advance to discuss the scope of the final document.