Choosing the right place can mean the difference between success and failure for entrepreneurs
Adam Rousselle needed to move. His firm, then based in Doylestown, Pa., uses sophisticated technology to identify trees that threaten to take down power lines, and demand from power companies was surging. By last summer, he expected to increase Utility Risk Management's eight-person staff with dozens of new engineers, programmers, and mathematicians. But 25 miles outside Philadelphia, his 3-year-old, $10 million company was too small a player to attract that much talent that quickly.
So in July, Rousselle relocated to the ski town of Stowe, in Vermont, a state with roughly the same population as Bucks County, Pa. He now has the attention of Vermont Governor Jim Douglas and other leaders in government, industry, and academia, all eager to bring technology jobs to a state heavily reliant on tourism. It's attention his small firm didn't get in Pennsylvania. "The governor came to welcome 18 people who came to my job fair," Rousselle says. He now plans to hire 26 people before the end of February.
Each year, entrepreneurs start or expand some 650,000 small companies, according to data from the Small Business Administration. Choosing the right place can mean the difference between profitability and failure. But few small business owners put the same care into locating their companies that Rousselle did, consultants who specialize in site selection say.
State Incentives a Plus
Large corporations typically pay professionals high fees to find the best location for new plants, offices, or stores. But the cost can be prohibitive for small companies, ranging from $50,000 to $125,000 or more. Small firms may hire consultants for key projects, but they more often work with local economic developers, says Mark Arend, editor of Site Selection, a trade publication covering the industry."
Rousselle considered three states besides Vermont to relocate Utility Risk Management: Michigan, Florida, and elsewhere in Pennsylvania. In the end, he says, the labor force, financial incentives, and support from state officials made Vermont the best fit. In addition to mobilizing state leaders to recruit for the company, Utility Risk Management will benefit from an estimated $380,000 in cash incentives through the Vermont Employment Growth Incentive program. Rousselle says he can get up to $5,000 per employee each year to train them in specific skills his customers want. And, he says, he can offer lower salaries than he needed to in Bucks County and still be competitive in the labor market.
The choice won't be as clear cut for most small business owners. Many factors affect whether a place is a good location for a particular business, including the labor force, tax rates, distance from suppliers and distributors, access to transportation, and the local market for the company's products or services. "Is there a perfect location? There is no such thing," says Anatalio Ubalde, co-founder of GIS Planning, a San Francisco company that analyzes geographic data for economic developers. "Is there a better location than another one? The answer is yes."
ZoomProspector Offers Free Help
GIS Planning launched a site three months ago called ZoomProspector.com, designed to help entrepreneurs find and evaluate potential sites based on what attributes of a place matter most to their business. Other Web sites like City-data.com provide local information, but Ubalde says ZoomProspector's proprietary data, much of it collected from the company's economic development clients, offers small business owners access to the same information large companies use when they decide where to site new locations. ZoomProspector is free for users and makes money by selling geographically targeted advertising, Ubalde says.
Most small companies aren't simply looking for the cheapest place to do business, Ubalde says. Instead entrepreneurs tend to ask where they can find the best workers,, as Rousselle did. That's why cities like New York and San Francisco remain attractive despite their high costs, Ubalde says.
Aside from the labor pool, tax rates differ significantly from state to state, and they may be more important for small businesses with few employees. S-corporations and other companies that don't pay corporate income taxes can benefit from states that have low personal income tax. Moving from California to Washington state, for example, could save a small business owner 9% or 10% of taxable income, according to data from the Tax Foundation, a nonprofit Washington, D.C. research group.
Haphazard Approach Not Uncommon
Areas with low taxes often also have lower costs, and the combination can entice entrepreneurs who are priced out of places that are more in-demand, says Tax Foundation economist Josh Barro. "If you're looking for a place where you can start your small business with reasonable costs, you might not be able to do it in New York or New Jersey, but you might be able to do it in Florida," he says. (For a look at the Tax Foundation's list of 25 states with the lowest projected tax rates for 2009, flip through this slide show.)
Those small businesses in a position to create jobs can appeal to local economic development groups for help. Blaine Kern, CEO of forensics lab Human Identification Technologies, found an expansion site in September in Kirkesville, Mo., through Site Selection Network. The Mission Viejo (Calif.) company offers a free service that distributes proposals from companies to 162 economic development groups, who pay for membership in the network. Kern plans to hire between 100 and 200 workers there over the next five years. His current lab, in Redlands, Calif., has fewer than 20 employees and around $7 million in revenues. "If you look at our ability to lower price point and increase profit margin, the labor pool in Missouri is about 41% less expensive when it comes to salary," he says. That's savings on top of refundable tax credits from the state.
Small business owners have long taken a haphazard approach to choosing a location, says ZoomProspector's Ubalde, which puts them at a disadvantage. That might be a minor drag in good times, but in a downturn it can mean the difference between survival and failure. "For some businesses it's the difference of literally millions of dollars each way in affecting the bottom line," Ubalde says.