Why You Need to Incorporate Health and Safety Reviews into the Due Diligence Process

When purchasing a business or pursuing an acquisition, assessing the management of health and safety programs during the due diligence process plays a key role in the overall assessment of potential liabilities. Imagine buying a company without performing a health and safety assessment only to find out after closing that the company’s injury rates were well above the industry average and it had numerous OSHA inspections, thousands of dollars in citations and sky-high legal costs. An OSHA due diligence assessment puts all of the information on the table.

But health and safety due diligence is more than just an evaluation of OSHA compliance. Depending on the overall objectives of the transaction, it can also focus on a company’s:

• Injury frequency and severity rates
• Injury claims history
• Safety culture and organization
• Safety compliance and performance programs
• Safety management system
• Health and safety organization and staff qualifications

One element that’s useful in the facility’s overall liability picture is the cost associated with occupational injuries. A facility with expensive workplace injuries indicates inadequate control of risks. And these costs could be expensive. According to the National Safety Council, the cost for each medically consulted work-related injury in 2017 was $39,000, while the cost per death was $1,150,000.  Even a small operation with a high number of injuries can have significant health and safety liabilities, which often go uncovered during an environmental due diligence assessment.

And then there are the remedial costs to bring a facility into compliance and reduce the incidence or severity of injuries – items such as installation of ventilation or fire protection systems, chemical handling procedures, compliance program development and employee training.

How to Conduct a Health and Safety Due Diligence Assessment

A health and safety due diligence assessment is similar to an environmental due diligence assessment. Both processes assess how a business operates to ensure all processes fall in line with relevant regulations. Every business will have its share of risks. The best companies to acquire have systems in place to mitigate risk and respond in a way that saves time and money while prioritizing employee well-being. 

Due diligence assessments will occur when one entity is interested in acquiring another. Potential buyers should assign a due diligence team to assess the new business’ policies and procedures and report on how they reduce risks for employees and prevent liability for the company. Potential buyers see the best results when the assessment team has the most time and resources to invest in the report.

A health and safety due diligence assessment is comprised of the following steps:

Defining the objectives of the assessment

Setting clear objectives is important to any due diligence assessment, and it’s one of the first things that should occur. The objectives set will determine the elements the assessment will look for and how long the assessment will take place. There are a few common objectives that due diligence assessments should include. Essentially, the due diligence process should focus on:

• Assessing the facility’s condition to observe any potential compliance concerns. 
• Obtaining all documents and records that would describe the facility’s existing health and safety policies and procedures. This information can also provide insight into how well the facility follows its existing system.
• Understanding the facility and its industry to develop or update health and safety plans. 

Understanding the Operation of the Business Being Sold

EHS due diligence assessments help new or potential owners understand the business and how to conduct it safely. Assessment teams will use this time to learn about the industry, the risks involved and the best ways to mitigate those risks. This process involves analysis of the previous ownerships health and safety practices. Gathering a thorough understanding of how a business operates and navigates EHS challenges can ensure continuity of workplace safety. 

Additionally, assessment crews should look beyond the business in question when analyzing its operation. Researching the ways similar businesses operate within relevant regulations can yield helpful insight and highlight areas for improvement. 

Performing an Injury Database Review

Even the most diligent businesses experience on-the-job injuries on occasion. What’s important is having a system in place to respond to an injury and reduce the risk of a similar injury occurring. A business should have an injury database that details important information around the incident. 

Checking a company’s injury database is an important step when performing an EHS due diligence assessment. Assessment teams check that the existing injury database is thorough and up to date. An injury database should feature information like the type and severity of the injury, the frequency of that type of injury, the cause, the events that lead to the incident, the business’ response to the injury and any other relevant information. 

Identification of Key Documents for Review

Businesses will have numerous other documents containing EHS information beyond their injury database. Due diligence assessments should pull all of these documents to understand how the business in question handles various safety topics. 

Documents such as orientation records and safety training guidelines will verify that the business communicates safe work practices to its staff. These documents may even have names of the individuals in charge of training employees or the employees who have undergone specific training. 

Other important documents to review include records of corrective actions, reports from meetings that discussed EHS topics, first response and building evacuation plans, medical certificates and more. 

Conducting a Site Visit

A due diligence site visit is one of the most important and revealing steps. Visiting the location in question enables assessment teams to analyze daily processes and safety mechanisms first-hand. While reviewing various safety documents is an important element of the due diligence process, the site visit is critical in seeing first-hand how the business is operated and how safety is managed. Sometimes the site visit will tell a very different story from the review of documents posted in the virtual data room.

There are a few things that due diligence crews can look for during the site visit. For one, it’s important to pinpoint all safety hazards. From there, crews check to see if the hazard is marked and determine if an adequate safety system is in place to communicate the risks to employees and teach them to handle them properly. It’s also important to observe potentially hazardous procedures in action to see if the staff follows relevant safety protocols. 

Interviewing Facility and Corporate Personnel

There is a lot to gain from speaking with facility staff during a due diligence assessment. Interviews with the employees and managers who work in potentially dangerous conditions can provide insight into the business’ safety systems and the degree to which the staff follows them. The interview process is a time to verify that all personnel understand relevant safety regulations, how to follow them and how to respond when an incident occurs. 

Corporate EHS due diligence is just as important during the interview process. Assessment teams will interview corporate staff to ensure all record keeping is accurate. Cross-checking back-office interviews with facility staff interviews helps assessment crews confirm that both parties report all incidents and respond accordingly. 

Identifying and Quantifying Potential Liabilities

One of the most important reasons for conducting an EHS due diligence assessment is to determine if the business will be worth acquiring. There will be risks involved with any commercial facility. Potential buyers must weigh the risks before making a decision. All of the information assessment teams gather from record reviews, site visits and personal interviews helps to identify and quantify potential liabilities. The most important liabilities to look for include: 

• The building’s conditions
• Regulatory requirements specific to the industry
• The staff’s ability to follow safe work practices and keep thorough records 

Reporting

Due diligence assessment teams look at numerous aspects of a business and uncover an extensive amount of information. After gathering all necessary information, presenting it in an accessible way will make it easy to decide to acquire or pass on the facility. Creating a due diligence report is the final step of the process. 

A due diligence report should cover in extensive detail all information gained through visiting the site, interviewing staff, analyzing records and more. The report should also feature relevant background information, such as information from past due diligence assessments that will help decision-makers compare the facility to others. Assessment teams should also add their own analysis to complete the report. 

Benefits

One of the key benefits of incorporating health and safety into the due diligence process is avoiding heavy financial penalties for non-compliance with OSHA regulations. The cost of penalties can range from $13,260 for a minor infraction to 10 times that amount for “willful or repeated” infractions.

Another benefit of a health and safety due diligence assessment is that it not only allows for the understanding the current level of regulatory compliance with applicable OSHA regulations, but provides an estimated cost to bring the facility into full OSHA compliance. Below are a few examples of the OSHA-required programs that may be included in a health and safety due diligence assessment:

• Emergency action plan
• Personal protective equipment hazard assessment
• Respiratory protection program
• Control of hazardous energy
• Process safety management
• Confined space entry
• Hazard communication
• Chemical-specific programs (for lead, formaldehyde, silica, etc.)

OSHA-required programs require development and implementation of written procedures, employee training, recordkeeping, and other requirements to be in full compliance.

Recently, health and safety due diligence assessments have expanded to include an evaluation of other programs that have impact on preventing expensive occupational injuries, such as behavioral-based safety, safety management systems and human factors programs.

TRC Case Study

TRC was involved with one case that is illuminating. It involved a client who was interested in purchasing three chemical blending facilities in the U.S., each with 80-150 employees.

During the review of the documents, it was discovered that written OSHA programs were recently developed, and employees were recently provided with safety training – an indication that regulatory compliance was not institutionalized. It was also apparent that documents and records were prepared solely for the sale of the business.

During the database review, the business was noted as having a recordable injury rate of 44 – meaning a whopping 44 of 100 employees suffered occupational injuries or illnesses that year. The average recordable injury rate for this industry was 8.1, so this business had an injury rate that was five times the industry average. That equates to hundreds of thousands of dollars in excess direct and indirect medical costs annually.

During the site visit, numerous safety issues were noted, and it was learned that no one at any of the facilities had health and safety as their primary job function.

Overall, millions of dollars in potential regulatory and safety liabilities were identified.  The buyer lowered its bid, purchased the business and applied the savings to improve safety, reduce injuries and improve OSHA compliance.  Had the buyer not performed a health and safety assessment of the business, it would had to have incurred these costs out of pocket, which would have negatively impacted its bottom line and profit projections.

Summary

Given the stiff OSHA penalties for violations, the high costs of workplace injuries and the remedial costs associated with improving safety performance, buyers should consider health and safety due diligence assessments on the same plane as environmental due diligence assessments for active businesses transactions. Proactive health and safety assessments can help identify expensive costs before the offer is made thus avoiding a costly nightmare after the closing.

Learn more about how TRC can help you with health and safety assessments and other aspects of environmental, health, safety and sustainability management.