Legislative Coordinating Commission (LCC) Study

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Summary

As authorized by legislation ML2010, Ch. 347, Art. 1, Sec. 33 (Exhibit 1), the Southwest Marketing Advisory Center (Advisor) was retained by the state’s contacting agent, the Legislative Coordinating Commission (Client). The purpose of this research, as stated in the RFP, was to determine the impact of state regulations on the climate for new business enterprise start-ups. Advisor was to determine whether the extent and magnitude of Minnesota regulations is a constraint or benefit in attracting new business enterprises compared to surrounding states. Issues considered important to Client and Advisor included the time required to complete the process, related costs, ease of navigating through the requirements and the resulting overall perceptions of those who completed the process.

Major Findings

• All states involved in the study furnished websites designed to assist in a business start-up. All were perceived as incomplete, requiring an individual to make direct contact with a variety of agencies within the state government for clarification.
• The most frequently cited source of help during the start-up phase was “other small business owners.” This source was mentioned by 52% of respondents. SBDC offices were the second most cited at 28%.
• To determine differences in costs for starting a business, five specific businesses were selected that were leading start-ups in all five states. Costs within each of the five states varied based on the size of the business and the geographical area within the state where the business was to be located. The higher costs often were related to securing a liquor license when required. When considering the total cost of starting a business, most of these licensing costs are minimal, although a significant difference between states is evident for specific business types. The range shown reflects taking the minimum cost on all aspects of the process for a specific business as well as the maximums. The sum of this process is reflected in the range shown in the table. A more exhaustive breakdown of these totals appears in Exhibits 15-19.
• The vast majority of start-ups required only one to six months to satisfy state legal and regulatory requirements. Minnesota had basically the same percentage of respondents indicating this time requirement for starting their business as the other states involved in the study. For time requirements in excess of six months, Minnesota had the highest time requirements for some respondents as shown in Exhibit 34b.
• The more populated the state, the more subdivisions existed within governmental agencies with employees demonstrating a more limited overall knowledge of the entire process, requiring greater effort to secure necessary information. This increased effort is defined as additional phone calls, repeat phone calls to verify accuracy of previously received information and searches for information from those who had previously completed the process.
• When Minnesota state employees were either unwilling or unable to answer specific regulatory questions, the caller was often referred to specific websites containing the actual regulations involved. Callers often found these regulations confusing and difficult to understand. This then required additional telephone calls to the same agency in an effort to gain clarification of the regulation.
• Minnesota and Wisconsin had lower percentages of respondents (72% and 73% respectively), indicating that licensing, permits and required inspections were easily obtained from the state. Those disagreeing with the statement were also higher in these two states. Note that 100% of South Dakota respondents felt that these were easily obtained.
• The primary research completed by the research team seeking information on business start-ups revealed a close correlation to the survey results when ranking states by ease of securing information necessary for a business start-up. Only Iowa and Wisconsin were reversed in the order listed shown in the chart above. This shows a close correlation to the survey results.
• None of the states seem to be gaining a strategic advantage in attracting small start-up businesses by offering tax incentives. South Dakota had 11% of their respondents indicating they received some form of tax break for locating their business within the state. All of the other states were in the single digits for percentage of start-ups receiving any form of tax break.
• The attitudes of survey respondents concerning the difficulty of determining related regulations to their start-up process has improved over the years. Three time periods were analyzed for attitudes: businesses started before 1985, those started between 1985 and 1999, and those started from 2000 to present. On a 10-point scale (with 10 being the most positive), those rating the start-up process as a “10” has increased from 4.2% to 9.2% to 11.2% respectively in Minnesota. Although these numbers are low, it does indicate a positive trend in the perception of the process required to start a business.
• The overall level of satisfaction with the business start-up process appears similar between states when viewed as a group. Differences between specific states are significant. Overall satisfaction with South Dakota is significantly higher than either Minnesota or Wisconsin.
• Based on survey results, business start-ups in Minnesota and Wisconsin did not appear to object as much to the number of requirements and regulations as they did to the perceived cumbersome process of securing the necessary information in order to comply. The overall satisfaction percentages of the start-up process by survey respondents basically correlated with our primary research findings with the results shown in the accompanying chart.
• Regardless, it appears that regulations and requirements in Minnesota are not detrimental to it being the leader in the five-state area for new business start-ups. Between 2004 and 2008, Minnesota experienced the largest increase in number of total small businesses (less than 500 employees). Conversely, during the business downturn between 2008 and 2009, Minnesota had the largest number of small business closures compared to the other four states in the study.
• The leading consideration for selecting a location for a business start-up was the proximity to their hometown, somewhat reducing the impact of any regulatory or other requirements mandated by a specific state as having a bearing on their location selection process.
• Costs associated for starting a business in Minnesota compared favorably with the adjacent states. When comparing the costs, Minnesota and North Dakota had the lowest percentage of start-ups requiring $5,001 or more. Those businesses able to start-up with $0 to $500 initial investment found Minnesota to be comparable to the other states in the study.

Report Summary

The purpose of this research was to determine the impact of state regulations on the climate for new business enterprise start-ups. The question this research attempts to answer is whether the extent and magnitude of Minnesota regulations is detrimental to attracting new business enterprises compared to the surrounding states.

Methodology

Two independent approaches were used in gathering the results for this study:
1) five researchers performed primary research on each of the five states, attempting to gain information necessary to open a small business, and 2) a total of 15,000 businesses started since 1985 were surveyed in the five states being studied. The survey was executed to determine if those previously establishing businesses in the five states had similar results to those experienced by the research team. The findings of the research team coupled with in-depth interviews with small business owners enabled the development of the survey instrument. The completed instrument was then tested with several small business owners to insure the correct interpretation of the questions was occurring. The survey was then distributed. This approach permitted comparing the attitudes and impressions of those who had previously been through the process with the first-hand experiences of researchers performing primary research on the requirements necessary to open a business in each of the states involved in the study. These two independent processes enabled comparisons to determine the validity of the information gathered through each method. Strong correlation occurred between the two methods of gathering information.

The use of the term “regulations” throughout the report is broader than the classical definition of the term.
If the study limited its scope to only those police power regulations (those that control entry into a business or profession), then the picture of what is required for starting a business would be too limited resulting in a false impression of the actual process involved. An example of a police power regulation would be if you are operating a filling station, your pumps must be periodically inspected for accurate delivery and display a seal to that effect. An example of a requirement would be applications must be secured, completed and submitted online with hard copy submissions being rejected and returned. As a result, the use of the term, “regulation” throughout the report includes not only elements related to the classical definition, but to all requirements that must be fulfilled to satisfy various departmental procedures that have evolved over time. Many of these requirements have evolved as part of the bureaucratic process associated with expanding governmental functions and are not regulations as stipulated by the state legislature.

The first step used in searching for information on starting a business is the Internet.
Instinctively, the research team and those business owners interviewed, first used a search engine such as Google to find information on how to start a business in a specific state. Web searches were necessary to begin the process of assembling all of the locations needed to gain a complete picture of regulations and related requirements for starting a business. A single website source of information would have greatly reduced the time and effort required to gain an understanding of this process. Entering, “how to start a business in Minnesota,” in the search engine resulted in a site entitled, “Starting a Business in Minnesota,” appearing on the first page of search results. This was the DEED site that offered some information, but was not a complete source. “How to” searches will generally always deliver hits on the first page of the search with sites specializing in that function. To take full advantage of this type of search will require a more comprehensive website being furnished under a “how to” title. Expansion of the DEED site will result in a more comprehensive and meaningful delivery of needed information that appears within the first ten websites listed.

Minnesota resources were fully examined and used in the primary research process
and attempts were made to replicate these support sources in the other states involved. Minnesota’s, “A Guide to Starting a Business in Minnesota,” offers an abundance of information for anyone needing basic orientation on general business practices in the state. A similar publication devoted to strictly the start-up process illustrating a step-by-step process could possibly eliminate many of the problems currently being experienced by those pursuing the process. This current publication does not afford the reader with that type of information.

Within Minnesota, the strongest single source of support the research team found were the various regional offices of the SBDC. This was not as evident in the other states since those SBDC offices were unsure of our motivation in seeking the information. Additionally, several small business owners in Minnesota were interviewed in depth concerning their personal experiences with the start-up process along with seeking the views and opinions of various state leaders familiar with the business start-up process. All of these sources proved invaluable in providing a strong orientation to the research team and for designing a comprehensive survey instrument that was distributed to 15,000 businesses started in the five states under study since 1985.

Respondents to the survey did not have significant negative feelings about the number or type of regulations required. However, they did have complaints concerning the process necessary to secure needed information in order to totally comply with the state’s requirements. Minnesota specifically ranked low related to: 1) having a comprehensive easy-to-understand website that explains the business start-up process, and 2) having sufficient individuals who could effectively answer questions over the phone related to regulations and other state requirements.

The business start-up process incurs many indirect costs that were difficult to determine but need to be considered when analyzing the need for various requirements and regulations. The more populous states of Minnesota and Wisconsin apparently have such a myriad of departments and requirements that an individual pursuing the start-up process has to devote what is perceived as an excessive number of hours to chase down all of the detail necessary to pursue the start-up. Retracing their steps countless times to glean necessary information has definite associated costs in time and lost productivity. While these costs are difficult to measure, they are real and can have a dampening effect on the process.

Introduction

Purpose – Concern has been expressed for several years that Minnesota was more demanding on business start-ups and completing those requirements was more difficult than what was experienced in other states. Unfortunately, all of the evidence offered was anecdotal with no specific primary research completed to either discount or substantiate this claim. With the continuing exodus of manufacturing to offshore locations and the ever-present national unemployment, the Minnesota Legislature decided to take definitive action to gain evidence, including quantitative data, which would empirically either substantiate or discredit the view that Minnesota had more restrictive regulations for new business development than surrounding states.

The Southwest Marketing Advisory Center (Advisor) was retained by the state’s contacting agent, the Legislative Coordinating Commission (Client) as authorized by legislation ML2010, Ch. 347, Art. 1, Sec. 33 (Exhibit 1). The purpose of this research was to determine the impact of state regulations on the climate for new business enterprise start-ups. Advisor was to determine whether the extent and magnitude of Minnesota regulations is a constraint on attracting new business enterprises compared to surrounding states.

Approach to the Study – A team of five Advisor’s staff members pursued independent research on each of the five states involved in the study: Minnesota, Iowa, North Dakota, South Dakota and Wisconsin. They were to determine each state’s requirements to start a business enterprise. They posed as small business entrepreneurs seeking information on the requirements for beginning a business in that state. Their primary research activities were carefully documented to assist in a state-by-state ranking process for each step required to successfully comply with regulatory requirements. Simultaneously, in-depth interviews were conducted by other researchers with informed individuals familiar with the purpose of the study to gain additional insights into the full intent of the legislation authorizing this research study. Current small business owners were also interviewed to capture their experiences in complying with state regulations as they started their businesses.

To validate the primary research findings of the research team, Advisor sought a second method of determining the perceptions of those who have attempted to qualify through state regulations. A survey was designed based on the information gained through the efforts of the research team, the interviews with various authorities and the interviews with small business owners. The completed and tested questionnaire was then mailed to all known operating business start-ups since 1985.

There are several reasons only those businesses that are still active were approached for their perceptions of the regulations involved with starting their enterprise: 1) the views of successful businesses will be more honest in their perceptions of the start-up process; they managed to establish themselves regardless of how hard or how easy it was to complete the regulatory requirements, 2) businesses that fail will often tend to blame anything or anyone other than their inability to effectively start a business, 3) failed businesses did not fail due to the start-up process; they previously succeeded with that step with failure occurring later, 4) elimination of this classification from those surveyed should result in a more realistic view of the regulatory process, 5) to pursue a representative sample, a consistent population had to be accessed; securing a listing of all existing businesses started since 1985, permitted accessing a uniform group in a target population, 6) securing a listing of businesses that have failed in the same time frame would be virtually impossible to secure; there would not be a reliable source of such a list since there is not a tracking system in place for non-existent business enterprises, 7) the survey of existing businesses was not a sole source of data for this research; it was designed to add validity to the findings of the primary research team’s results. The results correlated well between the two independent methods of gathering data.

Report Organization – The first section will cover the methodology used in the study. The reader will have a clearer understanding of the results if the reasoning behind the methods is fully explained. This includes discussions pertaining to the initial approach, previous research examined, SBDC interviews, other relevant interviews, primary research on starting specific business types and the survey development process.

The second section will analyze the results achieved from the direct research completed by Advisor on: 1) the general regulatory requirements by state, and 2) the specific regulations for five common business types in each state. These results are sub-divided into logical areas of concern and are accompanied by appropriate charts and tables to more fully illustrate the findings for ease of understanding.

The third section will provide the results of the mailed survey sent to all businesses established in all five states since 1985. This section will conclude with a general discussion of what these findings appear to indicate to the State of Minnesota. All of the exhibits mentioned throughout the report appear in the Appendix in the fourth section, following the listing of all references. Many of the procedural issues were reduced to exhibits to facilitate the reader’s dissemination of the overall impact of the study. This is designed to assist the legislature to more fully understand the underlying approaches that became apparent to the research team as the effort continued over the 10 months of gathering and analyzing the information.

This information along with a detail of findings section was all given to the client in the form of a written report. A PowerPoint report was also presented.

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