The best (and worst) states for business

Last month CEO Magazine produced its annual ranking of the best states in which to do business, and, as with previous surveys, our region does very well.

The best place to do business in the United States is Texas, followed by No. 2 Florida and, in a tie, No. 3 North Carolina and South Carolina, according to Chief Executive’s 2018 “Best and Worst States for Business.” CEOs ranked Indiana No. 5, rounding out the top five states.

The worst place is No. 50 California, bested only slightly by No. 49 New York, No. 48 Illinois, No. 47 New Jersey, No. 46 Connecticut and No. 45 Massachusetts.

Seem familiar? That’s because those are the exact same positions each of these states has occupied in each of the last four years in our annual poll of CEOs about business climates.

The entire ranking includes TN & GA in the Top 10, at #6 & #7 respectively.  Those at the top tend not to change much because they have a consistent philosophy about how to approach the business climate, and they don’t see significant leadership changes.  There’s a similar dynamic at the bottom of the list as well:

Meanwhile, the high-tax, high-cost environments created by the bottom states also tend to be self-reinforcing. Mostly, those places are kept afloat economically by legacy advantages such as strong education and healthcare systems, as well as by the fact that in-demand, digitally skilled millennials enjoy living in their cities.

But states like Massachusetts risk eroding even those advantages as the cost of living skyrockets in big cities and traffic and other annoyances mount. … The situations of bottom feeders could get worse before they get better, in part because of a particular effect of federal tax reform on high-tax states—like the basement dwellers. “The exit numbers of companies and owners are going to be higher,” McGuire says, “because people won’t be able to deduct as much in property and income taxes. They’re being taxed into oblivion.” Also, the coasts are losing some of their perceived edge in talent and lifestyle amid sharply higher costs of living—and facing steadily increasing digital capabilities in the heartland.

“It’s getting to the point now where if you’re a digital marketing specialist, you can move to Nashville or Omaha and have three or four opportunities,” says David Hall, vice president for investments at Revolution LLC, a Washington, D.C.-based seed fund. “Before it was so scattered. You’re seeing the density of the tech and startup ecosystem build on itself and create great network effects within a region.”

This is the most recent item in a long run of stories describing a geographic analog to the process of creative destruction.  Those states who spray “startupicide” on the economy –  suffocating regulations, inflated business taxes and fees, lawsuit-friendly legal environments, and political classes uninterested in business concerns, if not downright hostile to them – lose economic clout as people and capital migrate to other states with more favorable environments in which to work and live.

This migration of economic clout within the US has been more subtle than the California Gold Rush or Irish Potato Famine but is just as significant.  Some states are chasing away their earners, workers, and entrepreneurs; this is their tax base.

The growth corridors of the high-tech South would have a mercantile-like advantage but for the fact that employers can (and do!) simply move in order to thrive under our growth-oriented tax policies, lower public sector debt burdens, stronger job creation, excellent climate for entrepreneurs, and a superior overall business climate.  (The actual climate happens to be conducive to a great quality of life as well.)

Related stories:

• The best climate for entrepreneurs, Part III
• No late hits on entrepreneurs
• The Southeastern growth corridors
• California suggests suicide, Texas offers the (Bowie) knife

Which is better for an entrepreneur: an LLC or a C corp?

We have written from time to time on the question of which legal structure is best suited to private growth companies looking to raise outside growth capital.  Not surprisingly, there is no one right answer to the question, but recent tax legislation should compel entrepreneurs to give serious consideration to the C-corporation structure.

This article in last week’s Business Observer contains important news about the potential tax benefits of a C-corporation for entrepreneurs and their investors.

However… just as people shouldn’t decide to have children for the tax benefits, we advise founders to not view tax considerations in a vacuum when choosing the legal structure for their businesses.  They need to think hard about the long term goals for the business and seek expert advice on the optimal legal structure.

The author of the article (Pamela Schuneman,  C.P.A.) first argues that the prospects of federal tax reform may tip the scales towards choosing a C-corp:

Now, with tax reform on the horizon and a push to lower the corporate tax rate, current tax savings on C Corporation earnings could be substantial if the corporate rate drops to 15% and the top individual rate only drops to 33%. That’s an 18% difference — $18,000 more on $100,000 of income.

It’s a little more accurate to say the corporate rate drops “closer” to 15%, which compares favorably to an LLC structure where investors are taxed at their individual income tax rates on income that is “passed through” to investors.

Next she explains that a 1993-era tax provision governing a type of capital gains, originally scheduled to expire at the end of 2010, has been made permanent.  And this change, in our view, is a potential game changer.

The gain exclusion for Sec. 1202 was originally set [now made permanent – ed] at 50% for stock acquired [in private C corps – ed] on or after Aug. 11, 1993, increased to 75% for acquisitions after Feb. 17, 2009, and expanded to a full 100% exclusion for acquisitions after Sept. 27, 2010.

The 2010 law also removed of one of the main drawbacks of this tax provision – the alternative minimum tax preference.

In a nutshell, Sec. 1202 allows taxpayers (other than corporations) to exclude from federal income tax 100% of the gain from the sale of qualified small business stock (“QSBS”). The amount of gain excluded is limited to the greater of $10 million or 10 times the adjusted basis of the investment.

There are requirements to qualify for the tax break, which we outline below.  But first we’d like to share one more excerpt from the article to emphasize the importance of this legislation to founders and their investors:

For example, Tom and Jane decide to start a software development business. They purchase stock for $10,000 each and have a 50-50 ownership interest in the C Corporation. The stock is eligible for Sec. 1202 treatment if held for five years. In six years, they sell the stock of the company to Google for $10 million. They each have a $4,990,000 gain on the sale of the stock and their tax on the transaction is zero.

Of course we see this as a positive development for the high-growth companies responsible for all net job growth in our economy.  Reasonable people will disagree on what tax rates should be.  But can we at least agree that there are some forms of investment activity which promote economic growth, and that those forms ought to be encouraged, perhaps with favorable tax treatment?

RELATED STORY:  Warren Buffett and after tax returns

If a company’s stock is qualified small business stock (QSBS) then the Internal Revenue Code (§1202) provides a tax break on the equity investments.  To qualify as QSBS and for the 0%  federal tax rate on gains from the sale of QSBS, the following requirements must be met:

1.)  Original issue.  The taxpayer recognizing the gain must be an individual, partnership, S corporation or estate and must have acquired the stock at original issue from a US domestic C corporation.

2.)  Five-year holding period.  The taxpayer must have held the stock for more than five years prior to selling the stock.

3.)  After September 27, 2010. The taxpayer must have acquired the stock at original issue after September 27, 2010, in exchange for cash, property other than cash or stock, or services.

4.)  $50 million Gross Assets Test.  The aggregate gross assets of the corporation that issued the stock cannot have exceeded $50 million at the time of (including immediately before and after) the issuance of the stock to the investor.

5.)  Active Business Test.  During substantially all of the taxpayer’s holding period of the stock, at least 80% of the issuing corporation’s assets must be used by the corporation in the active conduct of one or more qualified trades or businesses.  (Certain types of businesses, including some pure service businesses like consulting firms or doctor practices, don’t qualify, but many businesses do.)

6.)  No significant redemptions.  The issuer of the stock must not have engaged in specific levels of buybacks (redemptions) of its own stock during specified periods (typically one year) before or after the date of issuance of the stock to the taxpayer.

The amount of gain eligible for this 0% rate is subject to a cap, however. Section 1202(b)(1) states that the aggregate amount of gain for any taxpayer regarding an investment in any single issuer that may qualify for these benefits is generally limited to the greater of  (a) $10 million, or (b) 10 times the taxpayer’s adjusted tax basis in the stock. For a taxpayer who invests cash in the QSBS, basis would generally be equal to the cash purchase price.

Like all issues tax-related, entrepreneurs need to consult with their tax counsel and accounting firm to determine if their businesses qualify for QSBS status.  If a business does qualify, an entrepreneur must decide whether these potentially significant tax savings outweigh other considerations.  In our view, Congress has now put its thumb on the scale firmly on the side of choosing the C-corporation structure.

Florida Cities Conquer World’s Best City List

Congratulations to Tampa, Orlando and Miami on making the list of the top 100 World’s Best City Brands!  It’s no surprise to us, but it’s nice to see others recognizing great Florida cities!

Why Tampa was named a World’s Best City brand

Posted November 8th, 2016 by Tampa Bay Business Journal

Tampa has made it onto the list of 100 of the World’s Best City Brands, taking the No. 81 spot.

As one of three Florida cities in Resonance Consultancy’s 2017 World’s Best City Brands report, Tampa faced stiff competition from major, cosmopolitan locations across the globe. Resonance compared principal cities that are defined as the largest city in each urban area with metropolitan populations of 2 million and capital cities with a population of 1 million or more.

Miami ranked No. 31 while Orlando was No. 45 on the list.

“Increasingly, reputation, identity and the perceived quality of place determine where talent, capital and tourism flow,” Resonance said in its report.

The top 10 cities on the list are:

1. London
2. Singapore
3. New York
4. Paris
5. Sydney
6. Amsterdam
7. Los Angeles
8. Tokyo
9. San Francisco
10. Toronto

To measure the perceived appeal of a city in which to live, invest or visit, Resonance based its evaluation on six criteria: place, product, programming, people, prosperity and promotion.

In the place category, Tampa ranked No. 59. In this category, Resonance scrutinized the average air quality index; the average number of sunny days; the homicide rate; the number of excellent neighborhoods and landmarks recommended by locals and visitors; and the number of excellent parks and outdoor activities recommended by locals and visitors.

In the product category, Tampa didn’t fare as well. Resonance examined the ranking of the top local university; the number of direct destinations served by the airport; the size of convention center; the number of very good or excellent attractions and amusements recommended by locals and visitors; and the number of very good or excellent museums and fine arts institutions recommended by locals and visitors. Despite Tampa International Airport’s high scores on other travel lists as well as the number of new nonstop foreign destinations it is providing this year and next, Tampa ranked No. 93 on the list of 100.

In the programming category, Resonance compared the number of very good and excellent shopping, nightlife, restaurants and cultural and performing arts experiences recommended by locals and visitors. Tampa ranked near the bottom of the list in this category, coming in at No. 98.

PowerDMS Named to Inc. 5000 List for 6th Consecutive Year

Posted August 19th, 2016 by PowerDMS

BPV completes successful exit from Tower Cloud

BPV portfolio company Tower Cloud has been acquired by Communications Sales & Leasing, Inc (NASDAQ: CSAL) in a stock and cash deal valued at $230 million plus milestone payments.  

Here is today’s write up from the Tampa Bay Business Journal:

St. Pete fiber optics firm acquired in $230 million deal

by Frances McMorris 

St. Petersburg-based Tower Cloud is being acquired by Communications Sales & Leasing Inc. (NASDAQ: CSAL) in a stock and cash deal valued at $230 million.

Tower Cloud, founded in 2006 and backed by private equity investors, operates a fiber optic network in 15 markets in the Southeast United States, with nearly 6,000 route miles connecting large markets and Internet hubs with smaller markets and rural areas.

“Tower Cloud significantly expands our backhaul network and greatly accelerates our entry into the high growth small cell and dark fiber businesses,”Kenny Gunderman, president and CEO of Little Rock, Arkansas-based CS&L, said in a statement. “We continue to grow our wireless carrier relationships across all asset classes and are seeing an increasing number of opportunities arise as carriers densify their networks and look toward the deployment of 5G and related technologies.”

In an investor conference call about the deal Monday morning, Gunderman said, “Tower Cloud is very complementary to our strategy of acquiring and building mission critical communications infrastructure and becoming more and more relevant to the national wireless carriers in particular. The deal makes CS&L one of the largest owners of fiber in the country,” Gunderman said.

“We think that fiber is and will be the most critical component of the communications network going forward and Tower Cloud is an established provider of two of the biggest growth areas within fiber including dark fiber deployments and small cells,” Gunderman said in the call.

The acquisition expands CS&L’s national wireless carrier relationships because more than 90 percent of Tower Cloud’s revenues are from national wireless carriers. The deal also advances CS&L’s diversification strategy by increasing its exposure to the national wireless carriers with long-term contractual revenues.

Tower Cloud’s recent dark fiber and small cell awards with national wireless carriers will accelerate the company’s initiatives, the company said in a statement. Tower Cloud is currently constructing dark fiber routes in Florida and Georgia with total contractual revenues of $175 million.

Last November, Tower Cloud signed a contract with one of the “big 4” mobile carriers to expand its fiber network infrastructure and bring high-speed connectivity and capacity to Augusta, Georgia. It also announced last September that it would expand its fiber network into Jacksonville.

PowerDMS aids Baltimore PD

PowerDMS, an Orlando-based portfolio company of ours, has received widespread local and national news coverage for its efforts to help the Baltimore Police Department ensure officers see, know, and implement critical policies in critical moments.

Here is the story in the Orlando Sentinel, which includes an interview with PowerDMS CEO Josh Brown.

National print coverage included stories in The Washington Post and The Baltimore Sun;  national television coverage included ABC News (“…the department will use web and smartphone applications to help make sure officers read and understand new rules.”) and Fox News (“Baltimore police to use apps for new policies.”)

Baltimore PD’s press conference included a 15-minute live demonstration of PowerDMS, run by the customer.  The local CBS Affiliate has footage of that press conference here.  (Scroll to the bottom of the story.)

This story is also an example of one of the best things about our business:  one of our companies doing well by doing good.  While this happens often, it rarely is highlighted so clearly (and broadly!).

BPV Portfolio Company API Acquired by Upland Software

AUSTIN, Texas, April 27, 2016 /PRNewswire/ — Upland Software, Inc. (UPLD), a leader in cloud-based Enterprise Work Management software, today announced that it has acquired Advanced Processing & Imaging (API), a highly effective content management platform driving workflow in governments and schools across North America. API will be combined with Upland’s enterprise workflow automation solution, FileBound, to create the industry’s most powerful workflow automation and document management platform.

Workflow automation and document management software is a large and growing market. Businesses across industries use workflow automation and document management tools to organize and automate document processes to improve ROI. FileBound is a leader in this industry, providing exceptional solutions in healthcare, education, legal, government and automotive markets. With the addition of API, Upland’s FileBound will expand service offerings in the municipal government and education verticals.

“We are very pleased to welcome Advanced Processing & Imaging and its valued customers to the Upland family,” said Jack McDonald, chairman and CEO of Upland Software. “FileBound and API power some of the most efficient organizations. The combined solution, with fortified strength in education and government verticals, will support even greater customer success.”

“FileBound is committed to driving efficiency and delivering outstanding value to our enterprise customers and resellers,” said Sean Nathaniel, CTO and SVP of Workflow Automation Solutions. “We look forward to ensuring the ongoing success of API’s customers. The combined organization is poised to deliver enterprise-level service and support to API customers, ultimately providing more value.”

“This is a very important milestone for our customers,” said Juan Rodriguez, founder and CEO of Advanced Processing & Imaging. “In combining Upland’s enterprise-level capabilities and the passion for customer experience that both companies share, we see significant value in this acquisition for our customers.”

The transaction will be immediately accretive to Upland’s Adjusted EBITDA per share. Further details regarding the transaction can be obtained in the Form 8-K filed April 27, 2016.

Florida Basks in a Texas-Style Resurgence

In case you missed it in last weekend’s Wall Street Journal, Florida is now “the showcase of America’s red-state prosperity.”  Hit especially hard by the collapse of real estate values in the last recession, the state…

(C)ut a variety of taxes, including those on businesses and property, no small feat in a state without an income tax. [The state government] also slashed 3,000 regulations and shrunk state payrolls by 11,000.

The WSJ article is entitled “Florida Basks in a Texas-Style Resurgence” and those of us fortunate enough to live in the growth corridors of the high-tech South easily recognize the reasons:  growth-oriented tax policies, lower public sector debt burdens, stronger job creation, excellent climate for entrepreneurs, and a superior overall business climate.  (The actual climate happens to be conducive to a great quality of life as well.)

BPV announces two new growth equity investments

PowerChord – St. Petersburg, FL Provider of digital brand management software and services – Ballast Point Ventures has led a $10 million equity investment in PowerChord, Inc. Founded in 2001, PowerChord, Inc. provides a suite of internet brand management and digital marketing services for major brands and their dealer networks in the United States and Europe. PowerChord’s Software-as-a-Service offering allows major brands to maintain brand consistency down to the local dealer level. The Company’s customer engagement platform creates a universal online brand experience for national and international brands with consistent content, data, and messaging at the local dealer level. Today, there are over 9,000 individual dealers on the PowerChord platform. PowerChord is led by CEO Lanny Tucker and Founder and Chief Strategy Officer Pat Schunk. PowerChord will use the proceeds from this minority investment for partial shareholder liquidity, sales force additions, and to bolster its product development and marketing efforts.

The Zebra – Austin, Texas Online automotive insurance agency and comparison platform – Ballast Point Ventures has led a $12.5 million equity investment in The Zebra. Founded in 2012, the Zebra offers a comprehensive automotive insurance comparison platform that allows consumers in all 50 states to compare quotes from more than 200 insurance carriers. The Company’s comparison engine collects user-submitted data via the website and displays the automotive insurance rates from multiple carriers, providing a valuable new tool to insurance shoppers that has earned comparisons to the travel search engine Kayak.com. The Zebra also operates as a licensed independent insurance agency and can currently sell and bind automotive policies in multiple U.S. states. The Company is led by Founder and CEO Adam Lyons and COO Joshua Dziabiak, both of whom were named to Inc. Magazine’s 30 Under 30. The Zebra will use the proceeds from this minority investment to enhance its online comparison platform, expand its insurance agency capabilities and hire new team members.

PDMS-BPV relationship featured at Florida Venture Forum Boot Camp

Yesterday at the Florida Venture Forum Boot camp event at the Citrus Club in Orlando, Josh Brown (PowerDMS CEO), Cathy McKenna (PowerDMS’s auditor for Vestal and Wiler), Jeremy Sloane (PowerDMS’s counsel from law firm Sloane and Johnson), and I had a chance to do a panel discussion moderated by Steve Castino of Vestal and Wiler on the topic of Ballast Point’s investment in PowerDMS in April of 2014 and lessons learned thereafter.

To no one’s surprise, Josh did a great job in laying out the reasons for his company’s success to date and his rationale for choosing Ballast Point as an investment partner.  Josh focused on issues of team-building and empowering employees, even mentioning the famous line from the Founders’ Dilemma as he said that he had to make the decision “Do I want to be rich or king?”  He made the point that he could have tried to build a lifestyle business where he could have been “king,” but he saw the market opportunity and the company’s positioning and made the conscious decision to build an exciting, high-growth company.

To do that, he needed to invest in his team in a big way and bring on a trusted investment partner who could really help him on the team-building and network side.  He had to relinquish some control in order to accomplish these goals of building an exciting, venture-backed company, but he was able to get comfortable with this decision by making a conscious effort on the relationship side to hire people with the highest ethical standards and choose an investment partner that he knew would support the company in good times and in bad.

Josh has let his talented employees flourish in a way that has driven PowerDMS’s growth beyond what he could have accomplished on his own, and that growth has once again landed PowerDMS on the Inc. 5000 list of fastest-growing private companies.  We at Ballast Point are thankful that Josh and the team at PowerDMS chose us as his investment partner, as we have joined them on this exciting journey to build a high-growth, SAAS company in central Florida.