As a journalist covering small business, my email inbox is regularly filled with press releases from companies wanting publicity. Often, they’re announcing the result of some survey they sponsored. They’ll hire a polling company, gather some data, and put out a list: Best places to retire, Best places to raise children, Best this, Best that. One frequent survey is “Best Places to Start a Business.” But what really makes a great place to start a business?
I’ve been in the small business world for a long time, and I work with small businesses all over the US—in big cities, small towns, suburbs. I hear from business owners about their struggles and successes. What I notice about these surveys of “Best places to start a business” is they’re almost always wrong.
Take, for example, a survey released April 16 by Wallethub. Their top three small cities to start a business were Holland, Michigan; St. George, Utah; and Aberdeen, South Dakota. Now, these may all be perfectly delightful places to live (Holland has a lovely Tulip Festival in May), but if I were counseling an aspiring entrepreneur on where to start a business, these wouldn’t be places that would come to mind.
Why? Of the top twenty cities listed in WalletHub’s survey, only three have a higher median household income than the overall US, and just barely. Most are well-below the median income, leaving households with little money to spend on anything other than necessities. Residents are more likely to shop at Walmart than a local small business and dye their own hair rather than go to a salon. Not all, of course. But it means a smaller local consumer market. And in most cases, these towns don’t have big corporations to purchase local goods and services.
Why do so many surveys get things so wrong? They look at the wrong factors. They generally lean heavily on issues such as low taxes, low cost of rent, low wages.
Most small businesses depend on their local markets, and low wage markets are very challenging to build a profitable small business. If you’re truly able to serve a non-local, broader market, than being in a low wage, low tax, low rent area may be an advantage. But not for most small companies.
If you want a glimpse of what really matters when starting a business with growth potential, look at the 20 cities on Amazon’s “short list” for their second headquarters.
Surprisingly, many are in high tax, high cost locations. While four are in the top ten lowest corporate tax rate states, six are in the highest corporate tax rate states. Ten are in the highest taxed locations (and probably Toronto). Many of these locations have high sales and property tax rates too.
Now, some politicians have been shouting for years that it takes low taxes to attract businesses. And, yes, I know, Amazon will be getting a sweetheart deal on taxes wherever they decide to locate. But clearly, in this particular case, the most recent and visible example we have of a corporation considering where to move, taxes are not the critical factor.
What does make a location a great place to start a small business or a large corporation?
- Universities. Universities produce two critical components of today’s economy: well-educated talent and new businesses. Universities are increasingly the incubators of new companies, and as those companies grow, they create jobs and small business opportunities.
- Good schools. Every small business needs capable employees. If a location’s schools are badly underfunded and students aren’t learning, you’ll have a tough time finding qualified employees.
- Infrastructure. You need to be able to get your goods to market, and that takes airports, roads, bridges—in good shape.
- Big corporations. Big companies hire workers; workers buy your products or services. And big corporations also hire a lot of small businesses and local consultants.
- High household income. You need people in your local market with enough disposable income to support your local business.
- Relatively high taxes. What? Why? If you need the backbone of a good economy—good schools, roads, universities, airports, not to mention other local services that help insure safety—you need a committed citizenry willing to pay for these benefits.
Copyright, Rhonda Abrams, 2018
This article originally ran in USA Today on April 19, 2018