Best and worst states to run a small biz

Want to know the best place in America to lay down a bet on the future success of your business?

Appropriately enough, the hands-down winner is Nevada, a state better known for another kind of gambling. Why? A pro-business regulatory environment, affordable housing and, I suspect, a good year-round climate have combined to make the Silver State a mecca for fast-growing startups.

by Philipp Harper

(Thanks to Tristin Flint at http://www.computer-er.com for forwarding this.)

I know this because I’ve parsed and sifted and sorted and compared a whole bunch of data assiduously collected by some very talented researchers. Then I applied my own simple and unscientific spin to come up with Microsoft bCentral’s list of the 10 best and 10 worst states in which to be an entrepreneur.

In a moment, I’ll present the rankings, along with some specific cities within the favored states that you might want to consider calling home because they’re affordable as well as dynamic. First, though, let me give credit where it’s due.

Where the rankings come from

The research I’ve pored through comes from two reports, both released in July 2002: "Small Business Survival Index 2002: Ranking the Policy Environment for Entrepreneurship Across the Nation" and "Entrepreneurial Hot Spots: The Best Places in America to Start and Grow a Company, 2001."

The "Survival Index" is a product of the Small Business Survival Committee,http://www.sbsc.org/ an advocacy group based in Washington, D.C. The "Entrepreneurial Hot Spots" were identified by Cognetics, http://www.cogonline.com/ a Waltham, Mass.-based firm whose main research focus is America’s fastest-growing small companies. Cognetics founder David Birch introduced the term "gazelles" into the business lexicon a few years ago to describe these entrepreneurial speedsters.

Get Bank of America checking.
Now, a bit about how the two reports were put together. Then I’ll tell you how I synthesized them.

The Small Business Survival Committee’s index identifies 20 different ways in which government imposes costs on business and then measures the performance of the 50 states and the District of Columbia in each area. The factors being analyzed include:

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Taxes. Fully 14 of the 20 criteria involve taxes of one sort or another. In addition to taxes on personal income, capital gains, property, sales and estates, the index also weighs taxes on Internet access and gasoline, unemployment and health-insurance tax rates and whether states require super-majority votes in order to impose or increase taxes.
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Electricity costs. Every business uses electricity, and how it is regulated or taxed by a state can have a significant impact on a business’s bottom line.
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Workers’ compensation costs. The higher a state’s workers’ comp rates, the less friendly it is to labor-intensive business.
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Total crime rate. Businesses have a powerful disincentive to establish themselves or expand in states that cannot adequately protect life and property.
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Right to work. Right-to-work laws generally mean labor unions cannot enforce work stoppages.
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Number of bureaucrats. It almost goes without saying that more bureaucrats mean more burdensome regulations.
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State minimum wage. The minimum wage set by some states actually is higher than the federal minimum.

Each state is assigned a numerical score in each category, and then an aggregate score. The lower a state’s total score, the friendlier it is to small business.

By contrast, the Cognetics measures entrepreneurial activity, as opposed to government interference. To do this, Birch and his company measure two things:

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Significant starts. This is the percentage of all firms in a state or metro area made up of companies started in the last 10 years that currently employ at least five people.
2.

Young growers. This is the percentage of young businesses in a given area that are exhibiting fast growth, as defined by a growth index that captures both percent and absolute growth — meaning that neither small or large firms are at a statistical disadvantage.

To come up with a hybrid ranking that takes into account both regulatory environment and entrepreneurial activity, I simply added the rankings assigned by the Small Business Survival Committee and Cognetics for each state. The lower the score, the higher the composite ranking.

The top 10 and bottom 10

Using that computation, here’s the top 10:
1. Nevada
2. Florida
3. Texas
4. Alabama
5. (tie) Virginia, Arizona
7. Tennessee
8. Colorado
9. South Carolina
10. Georgia
Close behind: New Hampshire, Delaware, Maryland, Utah

And the bottom 10:
50. Iowa
49. Maine
48. New Mexico
47. New York
46. Montana
45. North Dakota
44. Nebraska
43. Vermont
42. (tie) West Virginia, Rhode Island, Hawaii
On the bubble: Minnesota

For the record, this composite ranking diverges somewhat from those by the Small Business Survival Committee (SBSC) and Cognetics.

The top 10 states for conducting small business according to the SBSC survival index: South Dakota, Nevada, Wyoming, Texas, Florida, New Hampshire, Tennessee, Washington, Mississippi, Alabama.

The Cognetics top 10: Nevada, Arizona, Utah, Georgia, Maryland, North Carolina, Delaware, Virginia, South Carolina, Alabama.

At the bottom of the heap, starting with No. 50, according to the SBSC: West Virginia, Vermont, New York, Iowa, Rhode Island, California, New Mexico, Minnesota, Maine, Hawaii.

And Cognetics 10 worst, starting with No. 50: Maine, New York, Wyoming, Pennsylvania, South Dakota, Montana, Nebraska, North Dakota, Iowa, Alaska.

Yes, there are notable disparities in the way the two lists treat individual states. For example, while South Dakota is deemed by the SBSC to have the most business-friendly of all state governments, the lack of entrepreneurial activity in that state puts it near the bottom of Cognetics’ list. Clearly, regulatory policy is just one of a number of variables entrepreneurs consider when deciding where to locate their businesses.

Metro areas are ranked as well

So much for the states. It’s possible to further refine your selection of a business venue by considering some available city rankings. Cognetics ranks 50 large metro areas and 25 small ones using the same measurements — significant starts, young growers — it applies to the states.

The top 10 large metro areas according to Cognetics, whose rankings are not available online:
1. Phoenix
2. Atlanta
3. Raleigh-Durham, N.C.
4. Salt Lake City-Provo, Utah
5. Charlotte, N.C.
6. Washington, D.C.
7. Indianapolis
8. Birmingham-Tuscaloosa, Ala.
9. Louisville, Ky.
10. Memphis, Tenn.

And the best of the smaller markets: Las Vegas; Wilmington-Jacksonville, N.C.; Charleston, S.C.; Austin, Texas; Reno, Nev.; Fargo, N.D.; Sioux Falls, S.D.; Green Bay-Appleton, Wis.; Huntsville, Ala.; Lexington, Ky.

Why housing costs make a difference

Forbes magazine and the Milken Institute recently ranked 200 metro areas, based on growth in jobs, salaries and high-tech GDP. San Diego ranked No. 1 and California cities dominated this list. (The list is available online by going to Forbes.com, http://www.forbes.com/ clicking on "Lists" at the top, and then on "Forbes/Milken Best Places" under "Places.")

The Forbes-Milken list is especially valuable because it reminds us that rankings of the best places to do business typically do not take into account affordability. Six of the top 10 cities are in California and boast average housing prices that are way out of line with average income.

I’m able to make that calculation — and you can, too — by using the National Association of Home Builders’ http://www.nahb.com/ Home Opportunity Index, which ranks metro areas according to the percentage of homes that are affordable for families at the median income.

At 50%, housing costs and income are in balance. If more than 50% is affordable for median income people, then housing in the market can be had at a relative discount. Below 50% and a premium must be paid.

Take the case of Las Vegas, for example. It’s located in the No. 1-ranked state for business, according to my research, and it ranks high in both the Cognetics and Forbes-Milken lists of business-friendly cities. But is it affordable?

Yes, it is. According to the NAHB’s opportunity index, more than 70% of the homes in Las Vegas are affordable for people of median income.

Conversely, in San Diego, which ranks No. 1 on the Forbes-Milken list, less than 22% of homes are within the grasp of people who earn the median income.

Housing prices may not be the key variable in deciding where you want to start a business, but surely it’s an important one. And there are others: access to good education, recreation and the arts, to name a few.

http://www.bcentral.com/articles/harper/141.asp