We're all familiar with the handful of states that consistently come out on top when it comes to ranking those best for business. Whether it is taxation, work force quality, or a pro-business attitude, certain states continually stand out above others.
However, for any business looking to launch, relocate, or expand into a new area, knowing which states have won accolades is only a starting point. Every company needs to do its homework to determine the best state and the ideal community for its business.
This entails taking a close look at the operating activity and the needs of the company and analyzing key costs in different areas of the United States.
The process includes assessing a multitude of factors, from infrastructure and labor needs to tax scenarios and transportation and shipping/logistics costs - each factor plays a critical role in determining where to base operations.
Avoid Knee-Jerk Reactions
A company should not be too quick to locate in its home state or make a knee-jerk reaction based on others' rankings. Often many of the lists of so-called "best states for business" rely on limited criteria to determine rankings; a company needs to take a more holistic approach to find the best state to meet its needs and cost-reduction objectives.
For instance, a state that is recognized for lower taxes may still prove cost-prohibitive for the average company because of high property costs or the cost of qualified labor - the biggest expense for most companies. It all comes down to analyzing the business' operating model and assessing the full spectrum of key costs in different areas of the nation.
Of course, finding the best place to locate a business goes a step further than looking at state-level attributes; a company needs to find the ideal community that will support the growth of its business. The site selection process may start by looking at which states have "the best" business climates, but the decision-making process is further narrowed to consider how a particular community meets the critical needs of the business. Let's look at an example:
When Danfoss Turbocor Compressors, Inc. sought to relocate its operations from Montreal, Canada to the southeastern United States in 2006, it made sense to consider Florida for its location - but even more importantly, for its reputation as a state that invests in green businesses.
The manufacturer of oil-free compressors wanted a location that would be closer to the markets it serves and allow it to operate in the most cost-effective and efficient manner as possible. The company also sought close access to high-tech resources (vendors, etc.) and an ongoing source of highly qualified employees. Once Florida was on the table as an option for Danfoss, the search process continued to find the ideal community that would best serve the critical needs of the company.
One Florida community in particular, Tallahassee, stepped up in a number of ways that demonstrated it would be a good home base for Danfoss. To meet Danfoss' high-tech labor needs (i.e., a large number of engineers and skilled technicians), the community worked with Tallahassee Community College to create a special program for sheet metal operators that would aid Danfoss in training and recruitment. Tallahassee also built a facility to the company's specifications and leased it back to Danfoss at a subsidized rate. Lastly, beyond fulfilling Danfoss' need to be in the Southeast, the community provided attractive cash incentives that proved it would be a good partner for the long-term growth of the company.
Questions to Ask
Following in this line of reasoning, below is a list of sample questions to help guide the decision-making process when looking for a location at which to grow your company:
• What are the labor needs of the business? Since the cost of labor is the biggest expense for most companies, it is important to carefully assess labor needs to find the area that will provide the most cost-effective, qualified labor. What education and skill levels are required? Can employees' skill levels be matched in an area that may have had recent plant closures, resulting in a number of qualified employees available for work?
If there is a need for highly trained employees, it may make sense to identify an area with a nearby community college and develop a relationship to aid ongoing training and recruitment. It is also important to look at areas that are capable of recruiting into the community to avoid turnover issues. Finally, companies should seek out a location where they will be an employer of choice and an integral part of the community to ensure long-term success.
• Does proximity to clients or vendors matter? If the majority of a business' clients or key vendors are located in a particular region, it may make sense to locate the business in close proximity in order to reduce travel or shipping expenses or to provide better (in-person) customer service.
• Does the business need to be located near a port or rail system? With rising fuel costs, more companies are looking for ways to scale back transportation and shipping of products.
• How will the local tax situation impact the business? Even states that boast they are "no-tax" locations (e.g., no corporate income tax) do have taxes that will affect your business in one way or another. It is important for a business to know all the applicable taxes it will face, from franchise taxes to sales and use taxes.
• What are the business' property requirements? The cost of property varies dramatically depending on location. Costs to build a facility can range from $80 to $230 per square foot depending on where you build. Even if a company is leasing property, the original building costs are reflected in the lease rate. Therefore, companies should begin by outlining the amount and type of space required to operate the business.
• What is the quality of life in the area you are considering? Before locating a business, a company should ask if the area is recognized as a "nice place to live" beyond a good place to operate a business. Employee retention and future recruitment depend on offering a good quality of life.
Identifying the best place to locate a business is a major decision. The process may begin by taking a look at the "best states for business," but should ultimately take into consideration the diverse needs of the individual company. Location alone can determine if a company is profitable or not. There can be a cost differential of as much as 30 percent or more depending on where the business is located. Knowing what questions to ask and examining the full spectrum of operating costs will ensure that the company makes the right move to a community that is a good match. This will help both parties - community and company - to recoup their investments and maintain employment objectives for the long run.