Evaluating Business Retention and Expansion (BRE) projects can be confusing. How does an economic developer illustrate the value of a BRE project without shortchanging or overstating the impact? This is why we developed the BRE X-Ray tool that allows economic developers to distinguish the soft tissue from the bone and to isolate the value of existing activity from the expansion. Being able to determine these different values will help you communicate to stakeholders what the benefit of retaining the business in your community will be and also what kind of loss you will see should the company decide to leave.
Let’s start out with a quick BRE refresher: Business Retention and Expansion is important because it allows you to build a relationship with your community’s business people. This relationship can help them, and in turn your community, thrive by understanding how to use the economic development department as a resource. It also will be able to give you an idea of whether a company is planning on relocating. This is important because the majority of business comes from repeat customers, meaning that it is more expensive to attract new businesses to your community rather than meeting the needs of those already there. Further, a BRE program allows you to have an up-to-date picture of your local economy: you’ll know your community’s strengths and weaknesses better and what the political sphere looks like to your business community. This knowledge will allow you to work on your community’s weaknesses and know what positive elements really sell your community to the average businessperson.
Our clients often need to evaluate a BRE project but aren’t quite sure how to present the impact and analyze incentives. Can we acknowledge the impact of the existing portion but focus on the expansion? In the video below, we walk through an example using our BRE X-Ray tool, but if you’re more of a text person – keep reading.
In the table below, you will find some data for an existing medical device manufacturer considering an expansion – adding two new manufacturing lines in the community.
Laying out the data in this way is already helpful. The company has 135 existing jobs and will be creating 500 new jobs in the expansion giving us a total of 635 jobs. If we plug these data about current and expansion activities into our model, we’re able see the impact from each component.
The chart below summarizes the impact of the existing activity and expansion activity over the next 10 years in terms of jobs, salaries, and taxable sales. Focusing on the existing column – highlighted in orange – we can see the 135 current jobs support about 64 spin-off jobs in the community.
The expansion activity is now highlighted in orange in the chart below. We can see the new 500 jobs would create about 237 jobs for a total of about 737 new jobs in the community including direct and spin-off.
If we look at the right-most column we see the combined impact. In total, the company will support about 936 jobs when we include both the existing and expansion impacts.
Next, as we always do, we want to convert these economic impacts into something useful – fiscal net benefits. Using the same column approach for existing and expansion activities, the table below shows the net benefits to be generated by the company over the next 10 years. Let’s focus on the top row – net benefits to the city. The existing activity is expected to generate about $500,000 of net benefits over the next 10 years. The expansion, if it were to take place, would be responsible for about $2.5 million of net benefits over the next 10 years to the city. So, if we wanted to quantify the value of the company’s existing and expanded operations, we’re looking at $3.0 million over the next 10 years. Check out the video to learn more about how the net benefits were actually calculated.
Q: What’s the value of the BRE project – $500k, $2.5 million, or $3.0 million?
A: It depends.
Let’s assume the company has no plans to move the existing operations, the value of the company’s planned activity is most appropriately the “Expansion” column in our x-ray tables. The “Existing” column is helpful context but probably shouldn’t be included in the value of the project.
If the company was going to either expand locally or relocate outside of the community to expand its business, then you would rightly focus on the “Existing and Expanded Operations” column.
The most conservative approach would be to focus only on the expansion even if the project was a true retention deal.
Let’s add another wrinkle and assume the company has requested some infrastructure assistance that will cost the city $750,000. We suggest that the city think of the incentive as an investment and compare that to the return to the city – the net benefits generated by the project. So let’s compare $750,000 against the $2.5 million Expansion net benefits. As shown below, our analysis reveals a 2.6 year payback period and a 33% average annual rate of return.
But what if you were in the all-out retention scenario described above and the value of the business is really the Existing and Expansion value. Easy enough, we can adjust our model to evaluate the incentive using this approach and we see the payback period shortens to 2.2 years and our rate of return increases to 40%.
See the webinar video below to watch the entire presentation.
Banner Photo Credit: FreeImages.com/AdamCiesielski