From the October 1996 issue of Entrepreneur

You've heard it said that the key to entrepreneurial success is location, location, location. Perhaps that explains the popularity of what's become an annual event for Entrepreneur and Dun & Bradstreet Information Services (D&B): our yearly ranking of the nation's top cities for small business.

In this, our third survey, there are-as always-some surprises. But before we hit the highlights, a quick explanation of how we chose our winning cities.

Using information gathered from D&B and several government sources, we evaluated cities based on five categories: risk, business performance, economic growth, quality of life and state attitude toward small business. Two particularly important indicators of a city's economy-business performance and state attitude toward small business-were given extra weight.

Risk refers to the chances of a company becoming insolvent in the next one to two years. The lower the percentage of high-risk firms in a city, the higher its ranking. Vernon Gerety, Ph.D., assistant vice president of financial services for D&B, explains that risk includes factors such as a company's financial health, how long it's been in business and how it pays suppliers.

Business performance includes two measures: company failure rates and payment delinquencies. Economic growth is measured based on changes in business incorporations and in the number of nonagricultural jobs. High rates of failure and delinquency lowered a city's ranking, while high growth in employment and incorporations raised it.

Quality of life includes both cost-of-living data and per capita income. Gerety explains that while a higher per capita income may mean a more expensive labor pool, it is also a sign of a high-quality work force.

Finally, state attitude toward small business, based on the 1996 Development Report Card for the States by The Corporation for Economic Development, measured economic performance, business vitality and development capacity. Corporate income tax rates and the quality of small-business support programs offered in the state were also considered.

And, just in case you're wondering why you've never seen "Cleveland/Lorain/Elyria" on a map, we should note that though we refer to our winners as "cities," they are technically Metropolitan Statistical Areas (MSAs), meaning several cities in a region grouped together.

What changes have taken place in this year's rankings? Well, with apologies to John Denver, we're definitely on a Rocky Mountain high. Two years ago, when we did our first survey, not one city in the Rocky Mountain region was among our top selections. This year, six of the region's cities made it into the top 30.

Particular standouts: Colorado, which placed two cities in the top 30 last year, this year boasts three. And Salt Lake City made its first appearance this year, debuting as No. 1 among midsized cities.

Unfortunately for the Western states, particularly California, that growth seems to be coming at their expense. Indeed, the entire Western region placed only one city in the top 30 this year-Portland-down from five in 1994.

On a similar note, Gerety points out that Michigan, which last year boasted four cities among the top 30, this year dropped off the charts altogether. The reason? "The state's attitude toward business changed dramatically," he says. (Do you need a more sobering reminder of how important state support is to a small business' success?)

Perhaps the biggest surprise, Gerety says, is the strong resurgence of Rust Belt cities such as Cleveland and Cincinnati. "Those cities have gone through a big transformation from a manufacturing to a service base," he says. "We're beginning to see the positive effects of that transformation."

A similar transformation may be on the horizon for the Northeast, which made our charts for the first time this year (Boston, Pittsburgh and Stamford/Norwalk, Connecticut).

Will the Northeast be the stage of next year's show? Only time will tell. For now, turn the page to read about the cities that made the grade.