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The Art of the Deal

Company executives must not only know how incentives will affect their business plan; they must also know how to negotiate for incentives and manage their fulfillment.

Nov 07
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3. What happens if projections are too high and the company misses the goals set? Too low and surpasses the goals set?

An executive should realize how important it is to forecast the most accurate project numbers possible. It is understandably a difficult task to undertake; however, most states like to see five-year projections of capital investment and new jobs.

When mapping out forecasts, keep the incentive programs in mind. Know what the penalties are and what the company will ultimately be judged against. For example, consider tax credit "Program D." Program D requires accurate prediction of job creation for the next five years. While capital investment predictions must be made, the Program D monitoring requirements rely exclusively on new job creation; therefore, capital investment should not be of too much concern for this program. With Program D, if the new job projections are too high and the company falls short of the goals originally set, the program regulations dictate that the company will receive a prorated incentive amount based on actual job creation numbers.

On the contrary, consider tax abatement "Program Q." The Program Q application requires five-year capital investment and job-creation predictions. Program Q rules state that the company must achieve two-year employment and investment goals within a two-year time period. If the company is delinquent in goals by the end of the first year, missing the mark is not taken too seriously as long as by the end of the second year the company has caught up to original two-year predictions. If the company has not achieved its two-year goals, Program Q's regulations defer to a previously signed clawback agreement. This means that a portion of the incentives granted will have to be paid back to the governing body. Alternatively, when considering projections that were too low - i.e., the company exceeds original numbers - there is usually no recourse. The company will only receive incentives on the original numbers predicted for the project.

It is important to understand that incentives are funded with government dollars; as such, there are countless rules governing the incentives, legal documents and agreements that must be signed, as well as extensive documentation and reporting requirements. All of this leads to the issue of accountability. States and local communities want companies to be serious about their projects and will support those projects only if it makes good business sense for them to do so. The trend is such that if a company falls short of goals, states and communities are asking for money to be returned.

To conclude, an executive should be confident with the project numbers, both capital investment and new jobs estimated for the next five years. If a capital investment is being made or new jobs are being created, an executive should not be afraid to ask for incentives based on those projections. Offered incentives should be clearly stated in writing, with actual assigned amounts from the governing body.

An executive should know about the incentives to the point where he/she can understand how they will impact the company business plan. He/she should feel comfortable about assigning incentive management to one person who will be responsible and accountable. Finally, consider that incentives experts may be able to negotiate more appropriate and meaningful incentive packages, as well as ease the burden of incentives fulfillment if the company does not have the time or personnel to be responsible for incentives management.

Jenny Massey is the senior project manager for Bingham Economic Development Advisors (BEDA) headquartered in Indianapolis, Indiana. BEDA provides comprehensive economic development services for businesses and communities nationwide.

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