What buyers and sellers often overlook and how to manage it.

Negotiated incentive agreements such as tax credits, grants, abatements, and workforce incentives can play a meaningful role in the overall value of a transaction. In many cases, these benefits are factored directly into pricing, underwriting assumptions, or post-close operational planning. However, these agreements are rarely straightforward. They often include detailed compliance obligations, technical legal provisions, and ongoing reporting requirements that may not automatically align with a change in ownership. As a result, when a business is bought or sold, these incentives can quickly shift from being a source of value to a source of risk if they are not properly evaluated and addressed.

One of the most significant challenges involves assignment and transferability. Incentive agreements are frequently negotiated with a specific legal entity based on its anticipated economic activity, such as job creation or capital investment in a particular jurisdiction. Because of this, many agreements may contain provisions that restrict, or outright prohibit assignment without prior written consent from the granting authority. In some cases, a transaction that results in a change of control, even if the legal entity itself remains intact, can trigger a default or termination under the agreement.

Buyers often assume incentives will carry over seamlessly, particularly in equity transactions, but this assumption can be misplaced. Without confirming transferability and obtaining any required approvals in advance, the anticipated benefit of the incentive may be reduced or eliminated entirely. Additionally, it is sometimes unclear whether any clawbacks could be a liability of the buyer.

Notice requirements present another area where both buyers and sellers frequently encounter issues. These provisions tend to be highly specific and time-sensitive, yet they are often overlooked during diligence. From the seller’s perspective, many agreements require formal notice to the granting authority upon the occurrence or even the anticipated occurrence of a transaction. This may include notice of a pending sale, a change in ownership, or a potential failure to meet performance obligations. If the seller fails to provide this notice in accordance with the agreement, it can trigger penalties, suspension of benefits, or even a full claw back of previously received incentives.

Buyers, on the other hand, are often subject to their own set of notice and compliance requirements following closing. Even where an incentive agreement is assignable, the buyer may need to formally assume the agreement, update the granting authority on future business plans, or certify continued compliance within a defined period. These post-closing obligations are not always intuitive, and may not be fully captured in transaction documents unless specifically addressed. A buyer who neglects these requirements can inadvertently invalidate the incentive, even if all substantive performance targets are otherwise being met.

Beyond notice provisions, compliance history is a critical but sometimes underappreciated risk factor. Incentive agreements are typically contingent on achieving certain economic milestones, such as creating or maintaining a minimum number of jobs, reaching specified capital investment thresholds, or operating within a jurisdiction for a defined period. While a seller may represent that it is compliant, there is often a lag between actual performance and formal review by the granting authority. This creates the possibility that a business could be out of compliance at signing, even if noncompliance has not yet been identified or communicated. In such cases, the buyer may inherit an economic risk due to the non-compliance. This may be the result of failing to achieve stated goals in the agreement or a failure to comply with required compliance reporting. The buyer may inherit a liability that was not fully visible during diligence.

Clawback provisions sharpen this risk by defining the circumstances under which incentives must be repaid. These provisions can be triggered by a variety of events, including failure to meet performance targets, early termination of operations, unauthorized assignment, or failure to comply with notice requirements. Determining who is responsible for a clawback in the context of a transaction is often a central point of negotiation. Sellers are expected to bear responsibility for noncompliance that occurs prior to closing, particularly if it relates to undisclosed issues or inaccuracies in representations. Buyers, in turn, typically assume responsibility for compliance going forward, including the risk that future business decisions may impact eligibility for incentives.

However, the allocation of clawback risk is rarely this simple in practice. Many agreements may include pro-rata repayment formulas, which tie the amount of repayment to the degree of non-compliance over time. This can make it difficult to draw a clean line between pre- and post-closing responsibility. As a result, transaction parties often rely on a combination of indemnities, escrows, and purchase price adjustments to address these uncertainties. For example, a portion of the purchase price may be held in escrow to cover potential clawback exposure, or the parties may negotiate specific indemnities tied to known compliance risks. In some cases, buyers may also agree to operate the business in a manner that preserves the value of the incentives, effectively sharing the risk with the seller.

The structure of the transaction itself can also influence how incentive agreements are treated. Asset sales, for instance, are more likely to disrupt eligibility for incentives because the original legal entity that entered into the agreement may no longer hold the relevant assets or operations. Equity transactions may offer greater continuity, but they are not immune to issues, particularly where agreements define a change in control as a triggering event. More complex structures, such as carve-outs or partial divestitures, can create additional ambiguity around which entity retains the benefit of the incentive and whether the underlying performance obligations can still be satisfied.

Given these complexities, it is essential for both buyers and sellers to approach incentive agreements as a core component of transaction diligence rather than an ancillary consideration. This begins with identifying all relevant incentives and carefully reviewing their terms, including assignment provisions, compliance requirements, notice obligations, and clawback mechanics.

It also involves engaging with granting authorities when necessary to clarify expectations and secure approvals. Most importantly, transaction documents should clearly allocate responsibility for both pre- and post-closing obligations, including who is responsible for providing required notices and who ultimately bears the economic risk of any clawback.

Ultimately, incentive agreements can enhance the value of a deal, but only if they are preserved and managed properly through the transaction process. The most significant risks are often not obvious at first glance; instead, they arise from technical requirements and operational details that can be easy to overlook. By addressing these issues proactively and with a high level of specificity, buyers and sellers can avoid costly surprises and ensure that the anticipated benefits of incentive agreements are fully realized.

A&M Tax Says

Incentive agreements can provide significant value to businesses that pursue them and can enhance the value of a business in the event of a sale. This value may be lost if businesses do not ensure compliance and notice requirements are satisfied. The biggest risks often are not the headline terms, but the operational details: missed notices, technical noncompliance, and unclear responsibility for clawbacks. Treating incentives as a core diligence workstream, not an afterthought, can prevent costly surprises and protect both buyers and sellers long after closing.

Engaging with granting authorities can be a critical risk‑mitigation step, particularly where a transaction is imminent, and prior communication has not occurred. In situations where a deal is closing on an accelerated timeline, early outreach (even preliminary or informal) can help clarify whether a change in ownership triggers consent, notice, or re‑certification requirements, and whether the authority is open to expedited approval or post‑closing remediation. Without this engagement, parties often rely solely on contractual assumptions that may not align with the authority’s interpretation of the agreement. Where timing does not permit full consent prior to closing, proactive dialogue can at least surface potential concerns, align expectations, and inform deal protections such as escrows, indemnities, or post‑closing covenants designed to preserve incentive value or manage clawback exposure.