Many economic incentives are complex but can provide significant value with some creative strategizing. State and local governments offer tax incentives to businesses to create new jobs, often requiring that the recipients prove they have hired “net new” employees over an established time period. In the current economic environment, it could be advantageous for you or your clients to consider a strategic acquisition.
But what happens when new employees sign on as the result of a business acquisition?
Acquisitions offer companies unique and significant opportunities for future growth. They can also mean operations may be reduced, moved or closed altogether if the acquiring company does not see value in the acquired business.
This makes acquisition decisions, and the results, extremely important to new and existing employees.
Like all economic incentives, the interpretation of acquired employees as “net new” employees depends on the state’s legislative statute. Some states will allow for employees to be considered as net new as they are new to the Federal Employer Identification Number of the acquiring employer.
Other states will consider employees of the acquired company as existing employees within the state and therefore will not include them in the “net new” count. Most of these states have specific provisions in their state laws that exclude any employees who worked in the same industry or location from the net new count.
Consider the following example of how incentives through an acquisition might work: An electronic components manufacturer struggling to keep up with new business growth and customer demand may seek out a competitor to enter into an asset acquisition deal. The acquiring company agrees to purchase the assets of the business (building, machinery, etc.) and then needs to determine where to place the newly acquired assets. After considering several options and working with the state’s economic development office, the acquiring business is offered a new job creation tax credit for the jobs that are net new to the acquiring business. The job creation incentives total $900,000 for the acquisition and include future job growth commitments of nearly $7,000 per new job. Talk about bottom-line impact.
Opportunities in crisis
In this year of COVID-19, acquisitions have become more important than ever. Some companies are weathering these uncertain times, whereas others are making the difficult decision to close their doors. Other businesses may realize they don’t have the bandwidth internally to grow and expand and are looking for a more robust company that could help them reach that position.
The pandemic has already caused thousands of small businesses to shutter their doors for good, leaving employees out of work and with an uncertain future. Growing companies looking to make acquisitions can keep these jobs alive with the added benefit of receiving tax incentives for maintaining key employment opportunities.
As we begin to see light at the end of this tunnel, businesses should use all government tools possible to retain jobs and seize opportunities for growth. Though it’s an untraditional way of looking at incentives, support for acquisition projects accomplishes the core of what economic incentives aim to do: attract additional investment, help businesses grow and improve the overall quality of life in the community.
Trent Sorbe joined First International Bank & Trust (FIBT) in 2023 as the institution's first chief payments officer. He previously held senior positions at four nationwide payment card issuers as well as the FDIC.
Jaspaul Saini is a principal analyst in Celent's North American insurance practice. He is a seasoned technology executive with extensive experience in leveraging data analytics and emerging technologies to drive digital transformation in the insurance industry. Jaspaul's areas of expertise include: enterprise data strategy, cloud data platforms and modernization, master data management and data governance, business intelligence (BI) and advanced analytics, insurance core systems transformation, martech, technology assessments and roadmaps.
His previous roles have included head of the data and analytics practice at Exavalu, insurance solutions principal for HCL; data consulting director at EY and Capgemini; and AVP of data and business technology integration at Zurich North America.
Jaspaul has a MSc in IT from the University of Warwick (UK) and a Bachelor's degree in electronic engineering from Birmingham City University.
Alex Boand is the managing director of correspondent group sales at Pennymac
By allowing acquiring companies to take advantage of new job creation credits and incentives, states create an environment where jobs and investment remain in their home communities. Credits and incentives encourage further investment in their communities, as the cost savings realized from the incentive benefit are reinvested at a faster rate into the acquired location. This then adds further opportunities for investment and net new jobs.
Acquisitions can be a win-win for both companies acquiring new employees and those being acquired. With the uncertainty created by our current economic climate, businesses and governments should consider every opportunity for an additional edge. Take advantage of planned growth and job retention efforts by exploring new hire economic credits and incentives.
