The Results are In: Texas is The Best Place to Start a Business in 2020

February 13, 2020
Posted in: Uncategorized

Starting and running a small business is no easy feat. On the road to success, entrepreneurs will be faced with many challenges – no matter how long they’ve been in business. From trying to keep up with or surpass their competitors to keeping their businesses’ working capital at optimal levels, some of the challenges can be difficult for entrepreneurs to overcome. 

Location is an important factor in running a business and some states make it easier for small businesses to thrive. If you’ve just been bitten by the entrepreneurial bug or have been running a business for years and realizing mediocre profits, you may want to consider moving. Unless you already live in one of the states that Forbes considers to be the best in the U.S. for operating a business, you’re likely to fare better by relocating. Relocating to one of these states won’t guarantee your business’ success but it just might make it more likely by alleviating some of the challenges. 

In this article, we’ll take a look at why Texas makes the list of the best places for operating a business. We’ll also discuss the methodology involved in the selection process.  

 

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The Methodology Used

 

In CNBC’s study, they also found Texas to be worthy of a place on the list of the best states in which to operate a business. CNBC staff scored all 50 states across ten categories based on the qualities they consider to be most important in attracting business. The results weren’t based on staff opinions; the states’ actual performance was measured.  Each state’s economic development marketing materials were analyzed and a weight assigned to each of the ten categories. If states frequently cited a particular category as a selling point for doing business, that category was given more weight. For example, if states frequently mentioned “economy” in their economic development marketing materials, the Economy category carried more possible points.

States then received a letter grade in each category as a way of measuring their performance. Each state’s overall ranking and ranking within each category was based on the number of points scored. 

Here are the categories used in the study and the weighting for each:

 

Workforce (450 points)

States were rated based on their workforce’s level of education, the number of available employees, and how many college-educated workers leave the state. Since workers with backgrounds in science, technology, engineering, and math (STEM) are in demand, the concentration of each state’s STEM workers was taken into consideration.

To determine workforce productivity, each state’s economic output per job was measured. The effectiveness of each state’s worker training programs to find jobs for program participants was assessed. Union membership and right-to-work laws were considered since a unionized workforce generally isn’t favorable to businesses.

 

Economy (375 points)

To be a contender on the “best states for business” list, a state needed to show that its economy was both solid and diverse. Factors such as economic growth, job creation, and the health of the residential real estate market were evaluated. Each state’s credit ratings, budget, and pension and retiree health care obligations were measured. Because of its ability to greatly impact the economy, the number of major corporate headquarters in each state was considered. 

 

Infrastructure (350 points)

The strength of a state’s infrastructure is determined by how easy it is to access people and markets. The vitality of each state’s transportation system was measured by the value of goods shipped via air, waterways, roads, and rail. Access to air travel in each state, the quality of its roads and bridges, and the time it takes workers to get to their jobs are factors that were looked at. Each state’s utility infrastructure, which included the condition of drinking water and wastewater systems, was evaluated. 

 

Cost of Doing Business (350 points)

State-sponsored incentives can lower the cost of doing business, so these were looked at along with the competitiveness of each state’s tax environment. Since utility costs can pose a major expense for businesses and vary greatly from state to state, these were factored into this category. The cost of labor and costs to rent office and warehouse space was considered.

 

Quality of Life (325 points)

As an entrepreneur, you want your business to be located in an area where there is an abundance of qualified workers. To attract qualified workers, an area has to be considered a great place to live. The states were rated on such factors as the crime rate, the quality of health care, the quality of health insurance coverage, and the overall health of the state’s population. The states’ commitment to inclusion was measured by reviewing statewide anti-discrimination policies, as well as the ability of local jurisdictions to establish their own standards.  For an area to be considered a great place to live, it also needs to have an adequate number of local attractions, parks, and other recreational venues. Each state was evaluated based on the availability of these.

 

Education (175 points)

Because companies want a readily available pool of educated workers to draw from, the number of higher education institutions in each state as well as long-term trends to support higher education were considered. Colleges and universities in the area not only give companies a place from which to recruit talent, but they can serve as partners in research and development. To assess the quality of K-12 education; test scores, class size, spending, and technology infrastructure in the schools were looked at. Life-long learning opportunities in each state were also given consideration.

 

 

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Technology & Innovation (175 points)

Innovative companies want to operate in a state that values innovation and has the infrastructure needed to support forward-thinking entrepreneurs. Each state was rated on the number of patents issued, as well as the number of research grants in health, science, and agriculture.

 

Business Friendliness (175 points)

Although legal and government regulations are an unavoidable part of operating a company, no business owner wants to be bogged down by an excessive amount of them. The legal and regulatory climates of each state, as well as the overall economic autonomy for businesses and individuals were evaluated.

 

Access to Capital (75 points)

To have easy access to funding sources, some companies prefer to operate from a state where capital is more readily available. Venture capital investments by state and traditional bank financing activity for small and mid-sized businesses were looked at.  

 

Cost of Living (50 points)

When it comes to everything from housing to food, the wages a company pays its workers go further when the cost of living is low. High cost of living can adversely impact a company’s profit margins since labor costs will increase as workers demand higher wages to keep up with inflation. The Consumer Price Index (CPI) was measured for all states.

 

Data Sources

 

The state rankings were primarily based on data available in the public domain. Most of the information was obtained from federal government databases. When government statistics weren’t available, neutral data sources and those representing diverse ideologies were sought. Along with the most recent Comprehensive Annual Financial Report issued by each state, data from the sources listed below was used to rank the states. 

 

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How Did Texas Stack Up?

 

Before reviewing Texas’ rankings in the study, let’s first look at the state’s overall economic profile. With a population of 28.7 million, The Lone Star State has an unemployment rate of 3.5% (as of May 2019)   and shares spot #26 with Maryland, New Jersey, and Rhode Island.  

According to the Bureau of Economic Analysis, for the second quarter of 2019, at a rate of 4.7%, Texas had the fastest gross domestic product (GDP) growth. The GDP is a measure of all the goods and services produced in an economy. So, Texas enjoys a strong economy and with a Moody’s/S&P bond rating of “AAA, stable”, the state enjoys a stable one as well. Texas is considered to be creditworthy with a strong capacity to repay investors.

The large corporations that call Texas home are Exxon Mobil, (based in Irving, with 2018 revenue of $279.3 billion and 71,000 employees) and H-E-B Super Market Chain (based in San Antonio, with 2018 revenue of more than $21 billion and 100,000 employees).

Now, here is how Texas was rated in the study:

 

Workforce – Score of 321/450

  • 2019 Rank:   4th
  • 2018 Rank:   7th
  • Letter Grade:  A-

 
EconomyScore of 295/375

  • 2019 Rank:   4th
  • 2018 Rank:   1st
    Letter Grade:  A+

 
InfrastructureScore of 216/350

  • 2019 Rank:   8th
  • 2018 Rank:   1st
  • Letter Grade:  A-

 
Cost of Doing Business – Score of 214/350

  • 2019 Rank:   19th
  • 2018 Rank:   18th
  • Letter Grade:  B+ 

 
Quality of LifeScore of 132/325

  • 2019 Rank:   37th
  • 2018 Rank:   31st
  • Letter Grade:  D 

 
EducationScore of 73/175

  • 2019 Rank:   39th
  • 2018 Rank:   37th
  • Letter Grade:  D

 

Technology & InnovationScore of 123/175

  • 2019 Rank:   10th
  • 2018 Rank:   9th
  • Letter Grade:  A- 

 
Business FriendlinessScore of 105/175

  • 2019 Rank:   17th
  • 2018 Rank:   21st
  • Letter Grade:  B- 

 
Access to CapitalScore of 71/75

  • 2019 Rank:   3rd
  • 2018 Rank:   3rd
  • Letter Grade:  A+

 

Cost of LivingScore of 39/50

  • 2019 Rank:   12th
  • 2018 Rank:   11th
  • Letter Grade:  B+

 

Texas received an overall score of 1,589 which landed them in 2nd place for 2019, right behind Virginia. In 2018, Texas held the first place spot. In the 2019 study, the state scored very well in all categories except for Quality of Life and Education.  Why is this?

 

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Quality of Life in Texas

 

Although the study conducted by CNBC resulted in Texas receiving a low grade for the Quality of Life category, in the same year U.S. News & World Report ranked Austin, Texas #1 among the 125 Best Places to Live in the USA. U.S. News analyzed the 125 metro areas based on quality of life and the job market in each metro area, as well as the value of living there and people’s desire to live there.  Austin received an overall score of 7.6/10 and also ranks #11 in the Best Places to Retire

As the state’s capital and Texas’ fourth-largest city by population (per 2018 census), Austin’s music, 250 parks, and cultural institutions are a draw and there is an abundance of music venues for residents to enjoy. Austin is rich in history and home of the LBJ Presidential Library at the University of Texas at Austin and banner musical festivals like Austin City Limits and South by Southwest. 

Residents can get away from the city by hiking, riding a bike, jogging, or kayaking in one of the city’s many parks. Sports fans will enjoy cheering on the University of Texas Longhorns or tailgating at football games. Austin plays host to the X Games and Formula One races at Circuit of The Americas. The culinary scene in the city offers a diverse dining experience with everything from food trucks to five-star restaurants. 

Austin is one of the fastest-growing metro areas in the country which is great for the local economy. Residents also enjoy not having personal or corporate income taxes and a low state and local tax rate. However, the median price of a single-family home is well above the national median.

Getting around Austin can be challenging due to their traffic congestion problem, which can be remedied with flexible work schedules and careful selection of a neighborhood to live in. The city also has the highest speed limit in the country (85 mph). The public transit system consists of more than 80 bus routes and a 32-mile rail line.

Austin-Bergstrom International Airport provides easy access to air travel as it’s just a few miles from downtown and has around 300 daily flights. There are also Amtrak trains and intercity buses that service the metro area.

Demographically, Austin is comprised of a wide range of people, from students and single professionals to families and retirees. However, the city isn’t really geographically diverse. There is an evident geographical separation based on income. The east side of Austin is inhabited by lower-income residents while the west side boasts scenic views and is considered to be the center of Austin affluence. 

Austin residents with children typically live outside of the city. Parents are willing to brave the congested traffic to have their kids participate in the wide range of kid-friendly events and activities that take place in downtown Austin. Activities like free museum days, outdoor festivals and natural attractions keep little ones entertained.

Also on U.S. News’ list of the 125 best places to live in the U.S., Dallas-Fort Worth (the third and fifth largest cities in Texas) ranked #21 with an overall score of 7.0/10. Houston (the largest city in Texas), ranked #30 with an overall score of 6.8/10 and San Antonio (the second-largest city in Texas) ranked #34 with an overall score of 6.8/10). 

Did CNBC get it right when giving Texas a grade of “D” in the Quality of Life category? Hmm.

 

Education in Texas

 

When considering the quality of education in Texas, the “D” grade may have been deserved.  In the financial site, WalletHub’s ranking of the 50 states by educational attainment, school quality, and gaps in achievement between genders and races, Texas ranked #39.  Twenty metrics including university rankings and the number of adults with high school diplomas were used in the selection process.

Texas did well in the Quality of Education category, which measured such things as average university quality. In this category, the state placed in the 19th spot. 

However, Texas’ overall ranking was adversely affected by its dismal showing in the equally-weighted Educational Attainment category. The state ranked 43rd, which was attributed to its low percentage of high school diploma holders. 

To remedy the situation, the Texas Legislature is looking for ways to increase funding for the public school system. As it stands, municipalities are carrying more and more of the monetary burden causing Texas residents to be dissatisfied with the state’s handling of its educational system. 

 

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Best Cities in Texas for Business

 

Texas is a huge state with a population of 28.7 million as of the 2018 census. The vast population and the number of visitors the state receives each year highlight the primary reason why Texas is a great place to start and run a business. 

There are many cities in Texas that are ideal for operating a small business. In this article, we won’t list all of the great cities that are good for business (there are too many to mention). Instead, we’ll provide a sample so you get an idea of what Texas has to offer.

 

Addison

Addison, a small city just north of Dallas, has an abundance of meeting facilities, hotels, and offices that support a different section of the Dallas-Fort Worth area. The average business revenue in Addison exceeds $40 million, making it a great place to do business.

The city also offers many of the same business initiatives as those offered in Dallas — especially tax exemptions and other initiatives that are within the state’s jurisdiction.

 

Austin

As mentioned earlier, U.S. News & World Report ranked Austin #1 among the 125 Best Places to Live in the USA. Forbes and Kiplinger Finance Magazine named Austin as the number one city for small businesses. Finance Magazine acknowledged the city as a leader in growth. 

Austin places a great deal of weight on the development of small businesses, music, and cultural arts. Growth for their business community is also an area of focus. 

Initiatives that support small businesses in Austin include: 

  • Grant for Technology Opportunities Program
  • Small Business Assistance
  • Zero Waste Events
  • WaterWise Hotel Partnership
  • Small Business Energy Rebates
  • Business Expansion and Relocation Assistance
  • Community Preservation and Revitalization
  • Commercial Recycling Rebate Program

Austin also supports non-profit organizations through:

  • Cultural Funding
  • Non-Profit Home Sales
  • Grant for Technology Opportunities Funding

 

 

Dallas

 

 

Dallas

Here are some of the chief reasons why businesses tend to flourish in Dallas:

  • Centrally located – Dallas is connected to several railroads and interstate highways. It’s close to the DFW International Airport which has access to 46 international and 141 domestic cities. Major business centers like Toronto, Chicago, Los Angeles, New York, and Atlanta are nearby.
  • Tax-friendly – Texas doesn’t charge state, local, personal, or corporate income tax. There are also many foreign trade zone initiatives to help businesses further reduce other tax obligations. 
  • Workforce – More than 80% of Dallas’s workforce have completed high school and more than 30% have a college degree.
  • Business incentives – For both new and established businesses, Dallas offers many incentives to reduce the cost of doing business. Some incentives are offered by the state and county:
  • Job Training
  • Texas Industry Development Program
  • Historic Tax Incentives
  • Foreign Trade Zone
  • Municipal Management Districts
  • Public-Private Partnership Program
  • Tax Abatements
  • Texas Capital Fund Real Estate Development Program
  • Tax Increment Financing
  • Texas Enterprise Fund
  • Emerging Technology Program
  • Rural Municipal Finance Program
  • Sales and Use Tax Exemptions
  • Texas Leverage Fund
  • Renewable Energy Incentives
  • Texas Enterprise Zone Program
  • Ad Valorem/Property Tax Exemption
  • Texas Economic Development Act
  • Economic Development and Diversification In-State Tuition for Employees
  • Tax Abatement
  • Texas Capital Fund Infrastructure Program
  • Foreign Trade Zone
  • Industry-friendly – The following industries tend to thrive in Dallas: 
  • Media
  • Food Manufacturing
  • Instruments
  • Building Design
  • Construction
  • Furnishing
  • Telecommunications
  • Transportation (Manufacturing and Assembly)
  • IT Services

According to the Dallas Economic Development, small businesses generate approximately 80% of the business in the city and employ almost 40% of the workforce. The opportunities for small businesses in Dallas are promising.

 

Fort Worth

Fort Worth provides support to businesses by offering the following incentive programs: 

  • Chapter 380 Economic Development Program Grants
  • Public Improvement Districts (PIDs)
  • Neighborhood Empowerment Zones
  • Brownfields Development
  • Tax Increment Financing Districts (TIFs)
  • Tax Abatement Program
  • Enterprise Zone Program

Fort Worth also offers many opportunities and resources for business development and growth to new and established businesses:

  • Idea Works FW
  • The Office of Building Diversity
  • TECH Fort Worth
  • The Fort Worth Business Assistance Center (BAC)

 

Houston

 

Houston

Houston’s Office of Business Opportunity is committed to supporting small, local businesses as well as major corporations. Another resource for small businesses is the Build Up Houston program. This program aims to help businesses become more successful. 

The program provides information in the following areas:

  • Estimating and Bidding
  • Bonding and Insurance
  • Business Development Strategies
  • Marketing and Sales
  • Strategic Planning
  • Project Management
  • Accessing Capital
  • Government Contracts
  • Finance and Financial Management
  • Human Resources

To generate more jobs within the city, Hire Houston is another program the city promotes. The concept behind the program is the encouragement of businesses within the same community to support each other in the ultimate goal of job creation. Businesses within the city are encouraged to hire from within the city before recruiting from other areas. 

 

Katy

Katy is home to several major retail centers and corporate headquarters, including Igloo. The city offers goods and services to people in and around the Houston area. The major businesses in the city are mostly in the energy industry.

The Katy Area Economic Development Council helps new and established businesses make the most out of Katy’s resources to increase economic growth in the community. The Council also aims to “recruit, retain and expand new high quality, high impact companies, jobs and talent to improve the quality of life and place of Katy area residents”.  Businesses receive assistance in such areas as: 

  • Where to find business property
  • How to expand a business into other areas of the state
  • Training centers for employees

People are drawn to Katy to work and start businesses because of the favorable: 

  • Cost of Living (6% lower than the national average)
  • Quality of Higher Education
  • Arts
  • Shopping
  • Dining
  • Recreation 
  • Housing
  • Healthcare

 

McAllen

McAllen is an ideal location for international trade and distribution as well as a major business hub within the Rio Grande Valley. Future job growth over the next ten years is predicted to be 36.1%, which is higher than the US average of 33.5%. 

McAllen’s Chamber of Commerce offers several programs to help small businesses become established and successful. They also help startup businesses acquire funding.  

 

Midland

There are many reasons for businesses to love Midland. For starters, the city has the third-highest per capita personal income in the state (at $122,247 for 2019). Forbes also ranked Midland in their top ten list of best places to start a business. The city is also renowned for having a lower cost of living and a higher average pay rate.

 

San Antonio

 

 

San Antonio

San Antonio is a great place to start a business for many reasons. Some of the reasons are similar to those of other Texas cities. 

  • Workforce – The city has a strong economy compared to other cities in the U.S.  The unemployment rate is 5% which is 3% below the national average. 
  • Quality of life – San Antonio offers many events and festivals as well as historical sites that attract people from around the world. These tourists support the local economy by supporting the arts, entertainment, and hospitality industries.
  • Business incentives – San Antonio offers many incentives to reduce the cost of doing business.
    • Tax Abatement 
    • Freeport Exemption
    • Foreign Trade Zone
    • Industrial Development Bonds
    • Pollution Control Property
    • Tax Increment Financing

The businesses in San Antonio represent a variety of industries including: 

  • Defense
  • Financial Services
  • New Energy
  • Bioscience
  • Healthcare
  • Aviation
  • Aerospace
  • Advanced Manufacturing

 

Temple

Temple has more than 3,900 businesses which include many corporate headquarters such as McLane and Wilsonart Americas. In 2015, Temple ranked as one of the best cities in Texas to start a business and ranked #2 for one of the nation’s top cities in which to become wealthy.

Temple’s major industries are:

  • Advanced Manufacturing
  • Health & Life Sciences
  • Security & Intelligence
  • Aviation
  • Maintenance Repair Operations
  • Distribution & Logistics

More reasons to consider starting a business in Temple: 

  • The population has increased by 26% over 10 years
  • Median hourly wage is $18.02
  • Tax incentives
  • Cash grants
  • Texas Enterprise Fund 
  • Texas Enterprise Zone Program

 

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Deregulated Cities are Good for Business 

 

With the exception of Austin and San Antonio, cities in Texas are deregulated which allows residents and businesses to choose their own retail electricity suppliers (REPs). They aren’t limited to the local energy supplier (utility) for their electricity needs. This is a plus for residential customers and an even bigger plus for businesses that generally use larger amounts of electricity than the average home. 

For a startup company looking to keep initial operating costs manageable, this is a major factor. There is an extensive supply of REPs to choose from so the competition keeps rates low compared to those in regulated cities. The rate that businesses pay depends on contract length and other factors. Larger companies with greater electricity consumption can often get a better rate.

 

Final Thoughts – Texas is a Great Place to Start a Business

 

As the saying goes, “Everything is big in Texas”. This definitely applies to the economy and business opportunities in the Lone Star State. Coming in at #1 and #2 respectively on CNBC’s and Forbes’ lists of the best cities for operating a business in the U.S ., there is much to appreciate about Texas’ business climate. The economy is strong, the workforce is educated and productive, and local and state governments are committed to supporting businesses within the state through a variety of incentives and resources. Add to that a rich cultural and social scene and Texas is certainly worth considering for both business and living.

 

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