I suspect that the truth may be along the lines that @chyna has suggested, either a reference did not give you the boost you expected, or it may even be a common acquaintance who has bad-mouthed you to the potential employer, and which the employer, for whatever reason, doesn’t want to clear up with you. Always check with your references “one last time” before you actually use them in this way, to be sure that they still know you, for one thing, and that they will speak as well of you as you deserve – or better! – and that their business hasn’t suffered in ways you may not even know about, and things are now being blamed on you after you left long ago.
It may even be a real “incompatibility” in terms of his own business: expected business did not pan out, and he’s not going to expand, create another division, hire new staff, etc.
I would suggest that you handle this in a thoroughly professional manner, along these lines:
1. Write a letter – one page if possible – requesting more detail on the “incompatibility” issue. Ideally, you would like this in a final interview (the purpose of the letter is to allow him time to prepare), but failing that, a written response is acceptable.
2. Acknowledge in the letter that the employer may have private reasons that he does not wish to divulge, issues about his own business, for example, that he’s not ready to make public, and that he may keep that private. However, politely (and clearly!) explain that if the “incompatibility” stems from something that he has “heard about you” that you would appreciate the chance to clear any misconceptions – or falsehoods! – that he may be basing the decision on.
3. Make it clear that you “expect” this courtesy (again, politeness is key), because after all, your reputation is important to you to maintain and protect. You don’t want to go where you may not be wanted – as long as the employer knows “the real you”, and not a false impression based on someone else’s misrepresentation.
4. Recognize that there may be real reasons, based on the truth, that he has changed his mind, and be ready to accept that graciously.
5. Thank him for the consideration, etc.