I’d put a recent survey by WalletHub, 2018’s Best & Worst Small Cities to Start a Business, in this category.
Its top three small cities to start a business were Holland, Mich.; St. George, Utah; and Aberdeen, S.D. 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 and other places on the list wouldn’t spring to mind.
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Why? Of the Top 20 cities listed, only three have a higher median household income than the overall U.S., and just barely. Most are well below the median income, leaving households with little money to spend on 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 them, 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.
(A WalletHub analyst, Jill Gonzalez, responded in part: “It’s important to note that the report was compiled from the perspective of a small business owner who’s trying to start a business in these small cities, thus we awarded higher points to the cities with lower labor costs” — that is, cities with lower median annual household incomes, she said.)
(She said the survey took in many other considerations as well and they were scientifically weighted. WalletHub compared 1,261 cities according to their business environment and access to resources and business costs, the company website explains. Eighteen factors under those broad categories were then applied, according to the survey methodology.)
So many surveys look at the wrong factors. They generally lean heavily on issues such as low taxes, low cost of rent and 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 its second headquarters.
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?
1. 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.
2. 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.
3. Infrastructure. You need to be able to get your goods to market, and that takes airports, roads, bridges — in good shape.
4. 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.
5. High household income. You need people in your local market with enough disposable income to support your local business.
6. 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.