by Ben Worrell, MBANovember 25, 2020

State and Local Incentives Can Drive EBITDA and Organizational Value

Economic incentives are an often-overlooked tool for private equity groups and portfolio companies to increase earnings before interest, taxes, depreciation, and amortization (EBITDA.) While most private equity firms focus on EBITDA and opportunities to maximize organizational value, the smartest private equity groups also find extra value through state and local incentives. These groups go a step further and emphasize a strategic site selection approach and understanding the impact of state and local economic incentives.

Private equity groups should be prepared to explore incentives anytime a portfolio company is ready to relocate, expand, make capital investments, or add new jobs. These changes can trigger opportunities for potential tax and operational cost savings. The location of an operation is particularly important, as it can have a profound effect on cash flow, operating costs, workforce, and ultimately, the profitability of your organization.

Anytime you purchase a company, increase workforce, or invest in capital expenditure (CAPEX,) you may have an opportunity to reduce costs and/or create value. State and local governments compete for businesses like those in your portfolio by offering incentives such as property tax abatements, tax increment financing, grants, exemptions, and tax credits. Many of these incentives affect operating income and EBITDA. Incentives that do not affect operating income or EBITDA may still provide significant cash flow benefits by reducing income taxes.

So, how can your private equity group develop a strategic approach to site selection and create value across your portfolio?

First, implement a strategic process which allows for review of transactions, CAPEX, workforce decisions, and location selection before important decisions are made. Considering incentives before a project takes place is key. Most economic development incentives require an application before the proposed growth takes place, so planning takes intentional foresight.

Proactively work to maximize incentives and ensure they create value within your portfolio. You likely have future projects which will qualify for incentives, but you can only benefit if you apply. Taking advantage of credits and incentives is an active process which delivers value over time. Do not think of incentives as a one-time transaction, but rather, see them as an ongoing process.

Next, establish good managerial reporting to ensure the effectiveness of your efforts. Strong private equity firms already prioritize tracking financial data, and it should be no different for savings realized through economic incentives. Over time, your portfolio companies can see the value grow.

Finally, it may behoove you to find a partner who is experienced in site selection and economic incentives. Experienced economic development professionals will help you realize the greatest value by tapping into incentives at the local, state, and federal level, and you will want a strategic partner on your side to ensure nothing is left off the table. Working with an expert will help you to identify all opportunities in a timely matter and will inform decisions about how to pursue these opportunities.

Many companies save hundreds of thousands or even millions of dollars each year through state and local incentives. Communities and states actively compete to attract businesses like yours to their location. Find the right partner, and do not miss opportunities to create value.