It turns out that one of the keys to business success is lowering costs. That doesn’t just mean for raw materials, but also for government imposed costs like taxation.
The places doing the best job of lowering those taxes and attracting more business are red states like Texas. In The Wall Street Journal, James Freeman explains how one private equity firm is making money moving software firms from high tax states to low tax states like Texas.
Yesterday I told you that CNBC had classified Texas as the best state for business. This is an example of what makes that so. Freeman calls it the “Red State Business Model.” He writes:
This week the Journal notes that Robert Smith’s Vista Equity Partners has achieved exceptional results by buying software companies and then applying a standard formula for operating them. Miriam Gottfried and Laura Cooper report:
Vista, which has done more than 300 deals, tells investors it has never lost money on a buyout—notable in an industry known for big hits and misses. Its largest fund has consistently been in the top quartile of comparable funds formed the same year, measured by annualized returns after fees, according to data provider Preqin. It now manages more than $31 billion, up from just $7 billion five years ago.How does Vista generate its fabulous returns? The chairman isn’t telling. According to the Journal, “Mr. Smith has kept the details of his firm’s methods largely secret” and the firm’s best practices are “stored on a company server that makes a record every time anyone downloads or prints them.”
But at least part of the secret recipe has now been revealed. The Journal reports:
Former employees say cost cutting is critical to Vista’s model. Some of the companies Vista takes over are located in markets with a high cost of living, such as Southern California or New York City. To tamp down wages and other costs, Vista will relocate part or all of the company to a less-expensive city such as Dallas. Many employees won’t make the move, allowing Vista to hire cheaper replacements. Vista often keeps a company’s headquarters in place and encourages it to expand in lower-cost markets.Of course a big reason living costs are so high in blue states like California and New York (and of course New Jersey) is the cost of government, whether directly imposed via taxes or indirectly via regulation.
The alternative approach—call it the red-state model—seems to be working not only for the companies Vista buys but also for Vista itself. While Mr. Smith has made significant political donations to Democrats, his donations have lately been coming more from Texas than from California. Vista has offices in both, and several years ago moved its headquarters from San Francisco to Austin.
Read more here.