Careful due diligence is needed when seeking incentives

Financial incentives provide a competitive advantage to businesses. Local officials understand the importance of attracting new businesses and are willing to provide economic development incentives. But how does an existing business compete for the same attention and financial investment from local leaders?

“While new business attraction grabs the headlines, savvy officials are aware that approximately 80 percent of new jobs are created by existing businesses,” says Graham Allison, president of Graham A. Allison & Associates LLC, an affiliate of Clarus Partners.

He says local officials regularly hold ‘retention and expansion’ visits with companies already in the community to identify their needs and discuss growth opportunities.

However, not all companies seize their chance for help.

“Many of these local businesses invest in new jobs, equipment and infrastructure without determining if they are eligible for incentives, and the opportunity passes them by.”

Smart Business spoke with Allison about the incentives available to companies, when they can be used and what to consider before pursuing them.

In what situations do companies have the leverage to negotiate for incentives?

In general, the larger the investment and the number of jobs created, the greater the likelihood of a more robust incentive package. Companies have the most leverage when there is interstate or international competition for the project and when incentives are a key factor in the decision to expand.

The opportunity for incentives arises from investment in new jobs, equipment, technology, infrastructure, and brick and mortar. Rather than exerting leverage, companies can look to create a public-private partnership in which both the community and company benefit.

What kinds of incentives should be requested?

Discussions around incentives typically refer to municipal or city-level incentives. Yet, there are numerous types of incentives at the local, county, state and federal levels. CEOs should make expansion decisions based on all the information at their disposal.

There is a bit of art and science to negotiating incentives. Each program has its own goals and mission to aid in job creation, along with specific compliance requirements. It’s important that companies avoid asking for an incentive that cannot be utilized.

Who from the company should be represented during incentive negotiations?

This can be done multiple ways — an anonymous site selection project or direct discussion with state, county and local officials by the CEO and his or her team of advisers. It is also helpful for CEOs and CFOs, as well their accountants, to work with incentives specialists who can help maximize the opportunity to gain incentives. Economic development incentive specialists can help save time and effort when determining eligibility for incentives and help drive the negotiation process to positive outcomes.

What can businesses that are looking for incentives do to get what they’re after?

Businesses should do their homework. Most incentive programs have strict, codified covenants that require diligent compliance reporting to avoid claw-back of incentives. It is important to know going into a negotiation if the business will be eligible to receive incentives at all based on the level of investment and jobs created. A consultant can take you down a relevant path.

Financial incentives can have tremendous positive impact to the bottom line. While local officials are generally willing to provide incentives, they are not without strings. Prior to making any major expansion or investment, it is important to know if the cost of gaining incentives justifies the efforts to obtain them. A professional who is well-versed in the process can help to create the most advantageous outcome that is a win-win for communities and the business.

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