It's Your Move: The Best States To Start Or Expand A Solution Provider Business

On July 31, Massachusetts implemented a new software services tax that solution providers say requires them to collect a 6.25 percent levy on a wide variety of tech services, everything from building websites to updating software on a client's computer.

The tax has the state's channel community up in arms, with some having second thoughts about plans to move into or expand their operations in Massachusetts. "If this tax had passed on Jan. 1, I would have strongly considered moving 20 minutes over the border to Rhode Island," said Allen Falcon, CEO of Cumulus Global, a cloud solution provider in Westborough, Mass., who earlier this year expanded his business.

The controversy over the new Massachusetts tax puts a spotlight on the question of which states are the most attractive -- and which states are not -- for entrepreneurs to start a solution provider business and for existing solution providers to expand.

[Related: Interactive Map: The Best States To Start A Solution Provider Business ]

Taxes, of course, are just one of many criteria entrepreneurs should consider when deciding where to start or expand a business. A state's labor costs, regulations, available pool of educated workers, cost of living, telecommunications infrastructure, business opportunities, and track record for innovation all come into play.

CRN researchers and editors undertook a detailed analysis of the business climate in all 50 states to offer readers guidance about what makes some states better than others when starting or expanding a solution provider business.

The CRN analysis covers a broad range of criteria including a state's labor and energy costs, taxes (including tax incentives, corporate income taxes and property taxes), workforce education levels and pool of experienced workers, regulatory environment, level of innovation (as measured by exports and awarded patents), business opportunity and economic strength rankings, and even lifestyle criteria such as crime rates and percentage of the population with access to the Internet.

In addition, CRN surveyed solution providers earlier this year to learn what criteria were most important to them. Those results were used to weigh the criteria in the state-by-state analysis.

A detailed description of the criteria and methodology of the analysis can be found in the accompanying sidebar to this package.

CRN also cross-referenced its analysis of the 50 states with some of its annual lists, including the 2013 Solution Provider 500, which ranks North American solution providers by annual revenue; the 2013 Next-Gen 250 listing of solution providers focused on leading-edge technologies; the 2013 Tech Elite 250 listing of solution providers with a broad range of vendor certifications; and the 2012 Fast Growth 100 and 50 Up-And-Comers, which ranks the fastest-growing North American solution providers. The 2013 Fast Growth list was being finalized at press time and an update will be added to the interactive map at a future date.

For the complete ranking of all 50 states, see the slide show included in this package.

This report originally ran in September exclusively on the CRN Tech News App, available in the iTunes App Store or the Windows Store.

NEXT: Good Move? The Top Five States

GOOD MOVE? THE TOP FIVE STATES

The results of CRN's analysis, in some cases, are surprising. Most people wouldn't think of Utah as the best place to start a technology business. And yet, due to its low taxes, low labor costs and limited regulations, combined with an educated workforce, myriad business opportunities and prospects for innovation and growth, Utah comes out on top as the best place to start and grow a solution provider business.

"It's a very tech-savvy area," said Ryan Westwood, president and CEO of PcCareSupport, a Provo, Utah-based solution provider founded in 2010. (PcCareSupport is a member of the Next-Gen 250.) "It's a very pro-business state."

Almost as surprising is that the No. 2 state in CRN's analysis isn't one of the technology epicenters such as California or Massachusetts, but Virginia, with its low taxes, limited regulations and sizable pool of educated tech workers.

"We're recession-proof here," said Mary Lieb, president and one of three owners of F1 Computer Solutions, based in Warrenton, Va., about 45 miles west of Washington, D.C. (F1 Computer Solutions is a member of the Next-Gen 250.) Lieb pointed to the region's broad range of government, nonprofit and commercial business opportunities, and to the sizable pool of IT-experienced labor. "We're very fortunate where we are," she said.

Colorado (No. 3), Washington (No. 4) and Maryland (No. 5) round out the top five.

BAD MOVE? THE BOTTOM FIVE STATES

At the other end of CRN's ranking is No. 50, West Virginia, with a limited pool of IT educated workers and very limited business opportunities.

"It's certainly not a metro," said Ben Randolph, sales and field service vice president at Citynet, a Bridgeport, W.Va., solution provider, who acknowledged the state is very different from a Silicon Valley or Washington, D.C., tech corridor. "There is a challenge in West Virginia in finding highly qualified IT personnel. But it is getting better," he added, pointing to a growing number of technology-related companies becoming established along U.S. 79 in the northern part of the state.

And while some people may think of Hawaii as paradise, it's more like paradise lost for prospective solution providers. Hawaii, in the CRN analysis, fares poorly because of its high labor costs and business expenses (No. 46), taxes and regulatory environment (No. 43), and business opportunity (No. 49).

Wyoming (No. 48), Arkansas (No. 47) and Mississippi (No. 46) complete the bottom five states in the CRN ranking.

"It's not a place where we're loaded with Fortune 500 companies. It's a rural state," acknowledged Gerard Gibert, CEO of Venture Technologies, a Jackson, Miss.-based solution provider that does the majority of its business in that state, with some operations in surrounding states such as Tennessee and Alabama. (Venture Technologies is a member of the Tech Elite 250.)

Wyoming is ranked No. 50 for business opportunities, which makes for a challenging environment for solution providers such as Casper-based ISC. (ISC is a member of the Tech Elite 250.) "The state of Wyoming has a population smaller than the city of Denver," said ISC CEO and co-founder Win Farnsworth. The state is the least populous in the U.S. (about 575,000) and its biggest cities, Cheyenne and Casper, have around 60,000 or fewer residents with lots of wide-open spaces in between.

"You don't have a lot of commercial or enterprise customers," Farnsworth said. ISC is focused on providing its IT services, including network, security, data storage and unified communications, to public schools, state colleges, and state, county and local governments.

NEXT: Finding The Right Balance

FINDING THE RIGHT BALANCE

No state in the union has everything going for it.

Even states such as California and Massachusetts that loudly tout the benefits of their thriving, tech-focused economies, frequently have high labor costs, high taxes and potentially business-stifling regulations, the CRN analysis showed. Conversely, many states that brag about their low labor costs, limited taxes and lenient regulations -- Louisiana and Oklahoma are two examples -- don't have much to offer in the way of experienced workers and business opportunities.

The trick for tech entrepreneurs is to find the states like Utah, Virginia and Colorado that strike the right balance.

Some solution providers already have figured that out. Virginia, for example, is home base for 46 companies on the Solution Provider 500. And the fact that 22 Virginia solution providers are on the Fast Growth 100 and 50 Up-And-Comers, 21 are on the Next-Gen 250 and 15 are on the Tech Elite 250 illustrates how many Virginia solution providers are in the industry vanguard.

"A lot of businesses are locating here," said Andrew Lawlor, CEO and chief architect of Aptaria, a McLean, Va.-based solution provider founded in 2003. (Aptaria is a member of the Next-Gen 250.) While the bulk of the company's customers are commercial businesses, Lawlor said nonprofit organizations are a growth area. "This is a target-rich environment in which to operate a consulting business."

The business advantages of Colorado are no secret to Ryan Fowler, president of Covalent IT, a solution provider based in the Denver suburb of Wheat Ridge. "We started at the peak of the recession and dumped a lot of cash into the startup," Fowler said of the four-year-old company.

So far the gamble is paying off. "It's been a great place to start and to thrive. We've been awarded contracts that we've beaten out huge competitors for," Fowler said.

Entrepreneurs seem to get the fact that West Virginia and Hawaii aren't so great for starting and growing a business: There are no solution providers from either state on the Solution Provider 500, nor the Fast Growth 100 and 50 Up-And-Comers, Next-Gen 250 or Tech Elite 250 lists.

Utah, however, seems to be undiscovered country for solution providers. PcCareSupport is the only Utah solution provider on the Next-Gen 250, and there's only one company on the Solution Provider 500 or Tech Elite 250: Valcom Salt Lake City, based in the state's capital city. There are no Utah companies on the Fast Growth 100 and 50 Up-And-Comers.

But the fact that Utah came up as No. 1 doesn't surprise PcCareSupport’s Westwood. "It has very low labor costs, a lot of great talent, and a lot of people who are willing to take risks, a lot of entrepreneurs," he said. "There's a lot of capital coming into the state, too."

Provo, Utah, recently got a major endorsement from Google, which earlier this year chose the city to participate in its Google Fiber fiber-optic network. There's even a move to brand Utah as "The Silicon Slopes" in a nod to the ski areas a short drive away from Salt Lake City.

NEXT: In Search Of Top Talent

IN SEARCH OF TOP TALENT

Finding and hiring technical talent is top of mind for many solution provider owners -- and a reason why some states are so attractive.

Utah, for example, ranks a respectable No. 17 in the education and experience levels of its workforce. And the state ranks No. 8 for its low labor costs.

"I get highly educated technical talent at low labor costs," Westwood said. In particular he pointed to engineering and business graduates from the University of Utah, Brigham Young University and Utah Valley University. "There's a lot of young, technical talent coming out of those universities. And people who are very business-savvy."

The talent pool of technical workers in Virginia also is favorable for solution providers, reported F1 Computer Solutions' Lieb. "It's not really an issue finding the people we're looking for," she said.

"There are more people with technical skills and advanced degrees in this area," said Aptaria's Lawlor, speaking about the northern Virginia region. He's right: The CRN analysis ranks Virginia No. 3 with its educated, experienced workforce. More than 35 percent of the state's adults have a bachelor's degree or higher, ranking it No. 7 among the states. And it's ranked No. 1 in the number of information technology jobs as a share of private-sector employment, an indication that many Virginia companies have significant IT operations.

The availability of experienced workers is one reason why solution providers choose to operate in high-cost, high-tax states such as Massachusetts and Washington.

"There's a good availability of talent in the marketplace," said Cumulus Global's Falcon. (Cumulus Global is a member of the Next-Gen 250.) In addition to the obvious proximity to Boston-area universities such as the Massachusetts Institute of Technology and Harvard that churn out engineering and business management talent, Falcon said the region has a growing number of startup "incubators" such as the Cambridge Innovation Center and incubators at schools such as Babson College.

"There's a lot of smart people here," agreed Bryon Beilman, president of Iuvo Technologies, a Newton, Mass.-based IT solutions and services supplier founded in 2007. But he said that even in Massachusetts, which the study ranks No. 1 for the overall education and experience level of its workforce, hiring people with the right balance of technical and interpersonal skills isn't easy. "Finding the right people is still challenging -- and it's expensive," he said.

PcCareSupport's Westwood noted that Utah not only offers a significant pool of educated, experienced workers, the state's Department of Workforce Services pays him for every employee he adds -- in the range of $3,000 to $4,000, depending on salary. He added, however, that Utah does have high unemployment insurance, in which it ranks No. 20, according to the CRN analysis.

NEXT: In Search Of Top Talent (continued)

Finding top talent isn't easy in Mississippi, said Venture Technologies' Gibert. Unlike in a state such as California, where the job candidate you need may be working at a competitor down the street, "It's not like it's easy to find a high-level engineer working nearby," he said.

Gibert instead focuses on developing talent internally. His staff collectively has earned some 380 vendor certifications, he noted. "If I had to go find somebody, I'd likely have to go out of state."

It's much the same story in Wyoming where ISC focuses on nurturing its own talent in-house, Farnsworth said. "Hiring talent is very difficult. You have to home-grow these people. You can't put out an ad here for a Cisco Certified Network Professional."

Citynet's Randolph notes that a tech cluster has been building in West Virginia's north, including software developers, government contractors, health-care facilities and the FBI's Biometric Center of Excellence in Clarksburg. And that's attracting IT talent to the state.

"Six years ago it was much harder to get a CCIE," Randolph said, referring to a Cisco Certified Internet Engineer. "This is a very fluid, rapidly growing area. I don't think people realize the amount of technology there is here." Citynet, a provider of telecommunications and managed IT services, is building out a fiber-optic network in the northern part of West Virginia.

And even having a large pool of educated, talented labor doesn't make the hiring process much easier. While Colorado's workforce ranks No. 4, in the study, Platte River Networks, a Denver-based solution provider, still has to offer such benefits as fully paid health insurance, 4 percent 401(k) matching funds and four weeks of paid time off. (Platte River Networks is a member of the Next-Gen 250.)

"We have to be competitive in salaries and perks," said CEO Treve Suazo. "Happy employees make for happy clients."

"Hiring is still my biggest heartburn," Covalent IT's Fowler said with some frustration, despite Colorado's No. 4 rank in the availability of educated and experienced workers. "When it comes to technology, finding the seasoned, dedicated person is difficult."

NEXT: The Right Customer Base Is Key

THE RIGHT CUSTOMER BASE IS KEY

Several solution providers interviewed for this story emphasized the importance of a state's business opportunities, one of the metrics used in developing the CRN ranking. In the CRN analysis Delaware, Utah and Arizona are the top three states in that criteria.

"Is the customer base I want to pursue here in this region?" is how Cumulus Global's Falcon put it.

Take Colorado, for example. The Denver area is heavily populated with startups, and small and midsize businesses -- exactly the kind of customers many solution providers look for.

"I would say about 90 percent of the businesses here is SMBs," said Platte River Networks' Suazo. "We see it as a huge opportunity."

Fowler likewise estimates that between 90 percent and 95 percent of Covalent IT's customers in Colorado are SMBs. "The [business] environment here is very unique," he said, noting that he's originally from Nebraska where he said there are fewer numbers of small businesses.

Venture Technologies, while based in Mississippi, is looking to surrounding states such as Tennessee, Alabama and Louisiana for more of its future business opportunities. "I don't know that the growth of the company will come from within the state," Gibert said. "We are pursuing a growth strategy in new markets."

ISC in Wyoming is doing likewise, expanding to commercial customers in Colorado and New Mexico, which now account for about 40 percent of the solution provider's business.

But Falcon notes that with cloud computing, collaboration software and remote monitoring tools, it's easier today for a company to serve customers far beyond its immediate geography. And that gives entrepreneurs more freedom to decide where to base a solution provider business. While Falcon's Cumulus Global is in Massachusetts, two-thirds of its customers are outside New England -- one is even in Hawaii.

THE PERSONAL TOUCH: QUALITY OF LIFE

The CRN analysis considered cost-of-living and other personal quality-of-life factors. Virginia comes out No. 1 in that category, a finding that doesn't surprise Aptaria's Lawlor. "It's not Silicon Valley-expensive; it's not New York," he said.

Suazo makes the same pitch for his state. "Colorado definitely has a good quality of life. The cost of living isn't obscene. I know a lot of people who moved from California to Colorado. I'd say about half my neighborhood is from California," he said. (Colorado ranks No. 4 in our analysis for overall quality of life/personal cost of living while California is No. 28.)

Another quality-of-life factor considered in the analysis was the percentage of households with Internet access, a criterion in which Utah is No. 1.

The analysis evaluated states for their overall prospects for innovation and growth, examining such criteria as entrepreneurial activity, the number of patents issued to people and businesses within a state, and the value of a state's exports per manufacturing and service worker. California, not surprisingly, comes out on top in that category.

Beilman spent some time in Silicon Valley before moving to Massachusetts to start Iuvo Technologies. And while he said there are many differences between the two regions, he said Massachusetts does have an entrepreneurial culture. "I'd be willing to bet this area is in the top two or three in innovation." (He's right. The study ranks Massachusetts No. 2 for innovation and growth.)

NEXT: The Tax Burden

THE TAX BURDEN

And then there are taxes and regulations. Some solution providers, when asked about the tax burdens in their states, complain about how they hinder growth. Others seem to shrug their shoulders, taking the view that there isn't much they can do about them.

The CRN analysis found that Massachusetts is the state with the most onerous tax and regulatory burden, followed by Vermont, Rhode Island, New Hampshire and Maine. At the other end of the tax and regulation spectrum is Utah, which has the lightest tax and regulatory burden, the analysis concluded, followed by Alabama, Oklahoma, Georgia and South Carolina.

That's attractive to many solution providers.

"The regulatory burden is lower in Virginia and corporate taxes are lower," said Aptaria's Lawlor. "Virginia has a reputation as being a business-friendly state." (The CRN analysis ranks Virginia No. 8 for taxes and regulations.)

Even some solution providers in the same state don't see the tax burden the same way. Take Suazo at Platte River Networks in Colorado, which the CRN analysis ranks No. 24 in taxes and regulations. "It's not really a problem. I don't feel like we're in California or some of the other high-tax areas."

Covalent IT's Fowler, while saying he's "not over-regulated," noted that many Colorado communities where the company operates have their own taxes, license fees and other expenses. That, combined with staff salaries (Colorado is ranked No. 36 for labor costs), has led Fowler to hire a financial controller. "That tells you something, that I have a 10-person company and I have a full-time controller."

And then there's the dustup over Massachusetts' newly imposed software services tax, one of only four states that impose such a tax (the others being Hawaii, New Mexico and South Dakota).

"I'm not very happy about it," said Iuvo Technologies' Beilman. "It's more administrative steps we have to follow. And I think it's bad for business. Our customers have limited IT budgets."

But is it enough for a solution provider to consider moving elsewhere?

Maybe, if you ask Delcie Bean, founder and CEO of Paragus Strategic IT, a Hadley, Mass.-based solution provider. Bean recently started a second company, Waterdog Technologies, an IT distributor, and is considering yet another startup.

Paragus is closely tied to its customers in surrounding cities and towns and isn't going anywhere. But because of the new software services tax Bean is seriously considering moving Waterdog to another state and starting his third venture outside Massachusetts as well.

"It definitely gives you pause," he said of the hassles and expense created by the new tax. "When you're starting a company, you're trying to get to profit as quickly as possible."