The Overlooked Incentive Risk in Mergers & Acquisitions

Mergers & Acquisitions Are Built on Rigorous Analysis

Deal teams carefully evaluate revenue synergies, operational costs, tax structures, financing strategies, contingent liabilities, and integration risks to understand the economics of a transaction before closing.

Yet despite this level of scrutiny, one area is frequently under-evaluated: state and local incentives. Material incentive value can sit outside the transaction model even though it may affect both risk and future cash flow.

For many organizations, incentives represent meaningful value through property tax abatements, discretionary grants, workforce development assistance, job creation programs, statutory tax credits, exemptions, and refunds. While these incentives are often modeled simply as financial benefits, they may carry contractual, statutory, performance, and reporting requirements that can materially affect whether that value survives a transaction.

When state and local incentive programs are not evaluated as part of the transaction process, organizations may unknowingly assume value that will not remain fully realizable, expose themselves to compliance or recapture risk, and overlook opportunities to preserve or enhance value.

Transactions Can Create Unexpected Incentive Risk

A common misconception in M&A is that incentive value automatically follows the business after a transaction closes.

In reality, whether an incentive survives a transaction may depend on the structure of the deal, continuity of the legal entity or taxpayer, assignment provisions, successor requirements, change-of-control provisions, and the rules governing the underlying program. Many agreements require notification, approval, or additional review before benefits can continue under new ownership. Some programs may require the acquiring company to reaffirm commitments or demonstrate continued eligibility, while others may limit the transferability or allow benefits to be reevaluated or terminated.

The consequences of overlooking these provisions can be significant. Incentives may be delayed, reduced, suspended, or lost, and prior benefits may be subject to recapture or clawback if commitments are unmet or required conditions are not satisfied.

Deal teams should understand how much incentive value remains, whether the buyer can continue to realize that value under the contemplated transaction structure, whether historical compliance supports the benefit being modeled, and whether potential exposure or unrealized benefits should be reflected in transaction economics.

Even when agreements remain intact, risk does not end at closing. Post-acquisition integration activities often affect the facts and assumptions on which incentives were originally awarded. Facility consolidations, employee transfers, payroll or employing-entity changes, workforce realignments, asset relocations, changes to wage or benefit structures, and revised capital investment plans may all affect eligibility or performance under existing programs.

As a result, an organization may successfully execute its integration strategy while unintentionally creating incentive-related compliance issues. In many cases, the problem is that incentives were never incorporated into due diligence or integration planning.

For organizations operating across multiple states, the complexity increases further. Incentive programs vary significantly by jurisdiction, with different eligibility rules, transfer and assignment requirements, compliance obligations, reporting requirements, and enforcement practices. What represents minimal risk in one state may create substantial exposure in another.

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Risk Is Only Half the Story

While incentive-related risk deserves attention, focusing solely on risk overlooks an equally important opportunity. A merger or acquisition can create value in three ways:

• Preserving existing benefits
• Identifying unrealized or recoverable value where program rules permit
• Evaluating new opportunities created by post-transaction investment, hiring, relocation, consolidation, or expansion

Changes in ownership, growth plans, operational strategy, or capital investment priorities may create opportunities to revisit existing agreements, renegotiate commitments, or pursue additional benefits. Integration-related expansions, facility investments, workforce growth, or relocations may qualify for programs that were not previously available or considered.

Organizations that assess incentives early in the due diligence process are often better positioned to preserve existing value, identify unrealized benefits, and evaluate additional opportunities before key integration decisions are finalized. Those that wait until after closing frequently find themselves focused on remediation rather than optimization.

Why Timing Matters

The difference between protecting value and losing value often comes down to timing. A focused incentive due diligence review should answer several fundamental questions:

• What incentives exist?
• What value remains?
• Who currently owns or claims each benefit?
• Is the company compliant with existing commitments?
• Does the contemplated transaction trigger consent, notice, assignment, recapture, or eligibility provisions?
• What assumptions in the post-close integration plan could affect future benefits?
• Does the transaction create new incentive opportunities?

Answering these questions creates the foundation for a complete inventory, quantified exposure, and an integration plan that treats incentive value as part of the deal economics rather than a post-close administrative issue. 

Early review also allows the deal team to determine whether, and when, engagement with state and local stakeholders may be appropriate, taking transaction confidentiality and required approvals into account, and to evaluate whether changes resulting from the transaction could support additional incentive opportunities.

Once a transaction has closed, however, many of those options become more difficult to pursue. By that point, key business decisions have often already been made, and any leverage to influence outcomes may be reduced.