(MONEY Magazine) – At Sonic Industries Inc., an Oklahoma-based chain of 1,043 fast-food drive- ins, hunting for a superior location used to be about as scientific as using a divining rod to find water. ''Some of the original owners used to go into a town and count the number of church steeples and the number of bars,'' says Sonic franchisee Ted Kergan, 37. ''If the two were more or less equal, it meant the town was a good spot -- not too many people staying home reading the Bible, not too many drunks.'' Trouble was, the church/bar ratio worked about as reliably as the divining rod: sometimes it hit the mark; more often, it missed. By 1983, when Kergan was running seven franchises in Louisiana, Sonic sales had slumped 8% to $263 million in only two years, and competitors like McDonald's were snagging most of the best sites. Today, though, Sonic franchisees like Kergan are flourishing -- his 13 Louisiana outlets generated $5.75 million in revenues last year and systemwide sales reached $455 million -- in part because they abandoned the divining rod for the data base. To choose a site today, Kergan sifts through demographic data to find neighborhoods that fit the profile of his best customers: ''blue- collar workers who earn $11,000 to $22,000 a year, drive a pickup truck and don't have more than an hour to eat their lunch.'' He scouts likely neighborhoods by car and sometimes even by helicopter, looking at population density and traffic flow. Then and only then does he start the process of stalking FOR SALE signs. Finding the right location for a small business these days demands as much science as art. Whether you're launching a new company, moving an existing one or merely opening a branch office, you'll need to draw on everything from market research to consumer psychology to find the optimal site. Such information was once too expensive for smaller firms to afford. Today, though, you can get much of it free from the chamber of commerce and other public or civic groups, or at prices as low as $100 from private demographic research firms like Urban Decision Systems of Los Angeles or National Planning Data in Ithaca, N.Y. To be sure, data gathering is no substitute for common sense, and you will have plenty of legwork to do on your own. When used properly, however, demographic research can function like a safety net -- not necessarily guiding you to the perfect location, but at least steering you away from a choice so poor that it could spell disaster. ''And that,'' adds Terry Munoz of Equifax National Decision Systems in San Diego, ''could save you from one of the worst mistakes a small business can make, which is trying to operate in the wrong spot.'' If you have the luxury of locating your business anywhere in the nation, you might want to study the series of tables that begin on this page. They pinpoint which of the 313 largest metropolitan areas rank tops in such things as low-cost office space or a strong economy (try Iowa City, Iowa and Fort Collins, Colo., for example, to find a ready corps of well-educated workers). On the other hand, if you are like most businesspeople -- including 80% of those who launch start-ups -- you'll stay right in the town where you now live. Choosing a location, then, will be an exercise of microresearch that takes place in your own backyard. Your first step is to learn all you can about your best customers -- either who they are or, for first-time owners, who they will be. Don't mistake them for your steadiest customers. The regular who stops by a convenience store every day for a doughnut and a cup of coffee may not spend half as much as the harried father who rushes in once a week to buy two $11 boxes of Pampers. Your aim should be to figure out the basic demographics and habits of your clientele so you can seek locations where they are plentiful. If you already run a business, two of their most important characteristics -- their spending habits and addresses -- may already be in your back invoices. Or you can gather this information directly by asking customers to fill out a short questionnaire. If you're launching a new company, you'll have to substitute guesswork for some of this research. But you can at least visit firms like the one you plan to open and eyeball the clientele. Once you know who your best customers are (or will be), start looking for neighborhoods where lots of them live. You will probably want to locate your business in or near such a spot. Here's where a little demographic research can help. Start your quest at the chamber of commerce, city planning commission, economic development agency or local office of the U.S. Census Bureau. These groups often have valuable demographic data -- average family income, length of residence, age of house and so forth -- for each of your city's census tracts (one tract contains roughly 4,000 people). Such data, available free or at a nominal cost of $10 or so, may give you clues on picking the choicest location. A hardware store, for instance, might benefit from moving to a neighborhood where relatively well-to-do young families are moving into older homes, on the presumption that many of them will want to do major renovations. If you are willing to spend a little extra money, you can turn to private demographic and life-style data-base firms for some of this information. The seven biggest ones are: CACI (800-292-2224), Claritas (703-683-8300), Donnelley Marketing Information Services (800-866-2255), Equifax (800-866-6510), National Demographics & Lifestyles (800-525-3533), National Planning Data (607-273-8208) and Urban Decision Systems (800-633-9568). For $100 or so, most will furnish basic demographic data on some or all of your metro area. For another $150, they'll prepare a custom report that shows which neighborhoods would be most promising for your business. If you are opening an Italian restaurant, for instance, Equifax can tell you how often people in each census tract dine in ethnic eateries -- and how much they spend. Several of the firms help you home in on desirable customers by subdividing residents according to their buying habits and preferences. Claritas, for example, has assigned every zip code in the nation to one of some 40 colorfully named life-style groups. If, say, you were looking to start a beverage store that specialized in imported beer, you might search out zip codes like 95132 (San Jose) -- part of Claritas' ''Young Suburbia'' group. Residents there show a strong preference for foreign over domestic brews. But Claritas might steer you away from zips like 22190 (Waterford, Va., part of ''God's Country''), where the average age and income are similar to those of 95132 but where people prefer the good old American stuff. Claritas will charge you $500 or so to produce a customized report along these lines. Be warned, though, that you cannot rely solely on research reports in your hunt. Demographic information is sometimes out of date; the 1990 census is still being processed -- final figures won't be out till next year -- so the number you get today may be a projection based on decade-old data. Moreover, warns Peter Francese, publisher of American Demographics magazine, much information at the block-by-block level comes from computer estimates, not hard numbers. So you must always double-check the data yourself. That's what Minneapolis real estate consultant Dexter Marston did when seeking a site in Riverside, Calif. five years ago. A demographic report from a commercial firm showed the population within a three-mile radius of the site was 45,000 people. ''But we could see with our own eyes that figure was too small,'' Marston says. He did some investigation on his own -- things like checking with the post office to see how many new addresses had been created, and looking at aerial photos to count the number of rooftops -- and concluded the true population was nearly twice that high. You must also keep in mind how large the trade area will be for your firm. That's the region around your shop from which you draw 60% to 80% of your customers. The trade area for most small businesses is about three to five miles in radius. But it can be much larger or smaller; for a radio-dispatched computer repair company, for instance, it could be 20 or 30 miles wide. The trade area is important because it tells you how near you need to be to your best customers. Ideally, you should seek a location that includes the maximum number of choice neighborhoods within your trade area's radius. Once you have several locations in mind for your business, begin winnowing them down. Visit city hall or the planning office to see whether zoning regulations would keep you out (retailers and restaurateurs: pay particular attention to regulations governing signs). Also find out if planned roads or developments could affect your choice. When Barbara Kurowski was founding a messenger service in the western suburbs of Chicago in 1987, for example, she learned that a new toll road was slated to open in '89. Kurowski was able to snap up a 2,000-square-foot office in Willowbrook, just five miles from the new road, for only $10.50 a square foot -- about 40% less than for comparable access to existing arteries. Now that I-355 is open, her Best Messenger Service Inc. is grossing $800,000 a year. Next, rule out spots that your competitors already control. The simplest way is to check their addresses in the Yellow Pages or your industry's business directory. Database firms can help in this phase of your research too. If you are opening a fried chicken outlet in Boston, for instance, you could order a map of existing fast-food restaurants in the metro area from Equifax for $350. But make sure the information is up to date. Equifax updates its restaurant data base from phone books and business directories every year, which is adequate. But if the data are more than, say, two years old, then you might as well forget about them. You should now have narrowed your search to one or two neighborhoods. If so, start looking at individual properties. Scan through commercial real estate listings in the classified section of your newspaper or seek out a commercial real estate broker. If your business caters to the retail trade, where . location is critical to sales, you should look at five sites or so before renting. If you're a wholesaler looking for warehouse space, you might be able to get away with inspecting three or fewer. In either case, sit down at the end of your visits and rank the properties according to basic real estate criteria like the ones listed below: -- Cost vs. value. Which site offers the best market for the price? In a mall, for example, you can count on anchor stores to draw shoppers, but you pay for it. A nearby strip shopping center may attract sufficient customers at 10% to 30% less in rent. And if you are starting a business consulting firm, you may be able to get by with not-so-posh digs if clients rarely visit your office. -- Access and traffic patterns. Are there major streets nearby? Can customers -- or your employees -- drive in and out easily? Is the traffic flow sufficient? Don't rely on data from the mall developer or broker. Instead, gather your own data and do on-site research. That's what Robin and Andre Young, owners of Sincerely Yours stationery shops (1990 revenues: $1 million), did before opening their store two years ago in the Galleria at Southpointe mall in Mount Lebanon, Pa. The Youngs (pictured on page 28) chose the site partly because it was accessible to I-79. ''Many of our customers come from West Virginia and Ohio,'' says Andre. ''So we wanted to be sure it was easy for them to reach us.'' But they also got in touch with the state transportation office in Harrisburg, Pa. to find out how many cars passed nearby. And they stood in front of the mall during lunch and dinner hours for five days, counting how many turned in. -- Physical characteristics. Is the building attractive and well maintained? Does it have ample parking? Will your retail outlet be visible from the street? If you are in need of warehouse space, is it sufficient? If a problem should crop up -- such as a burst pipe or an electrical short -- how quickly will the management make the necessary repairs? -- Leasing terms. With many regions in a real estate slump these days -- rental rates for commercial office space have dropped about 12% on average over the past two years -- you are likely to find plenty of bargains. Concessions of as much as 30% are common on existing office space in some cities (see the table below). Of course, market research and demographics alone cannot make the decision for you. Give your instincts plenty of play. But if your intuition is balanced by the right kind of information, you're less likely to go wrong. Then you can enjoy choosing many more sites in the future as your business grows. STURDY ECONOMIES These metro areas boast the nation's most diversified economies. Cities with a broad mix of industries are usually better able to shrug off an economic downturn than those that lack diversity, and therefore they may be more resistant to recession. 1. PHILADELPHIA 2. BALTIMORE 3. CHICAGO 4. TAMPA/ST. PETERSBURG 5. LONG ISLAND, N.Y. 6. OAKLAND 7. ATLANTA Source: DRI/McGraw-Hill SMART WORKERS These metro areas -- most of them college towns -- lead the nation in the percentage of high school graduates in their populations. In all of them, roughly 94% of people age 25 and over have a high school diploma or better, ensuring a broad pool of relatively well-educated employees. IOWA CITY, IOWA FORT COLLINS, COLO. COLORADO SPRINGS CASPER, WYO. LAWRENCE, KANS. PROVO/OREM, UTAH MADISON, WIS. Source: Woods & Poole Economics SMALL IS BEAUTIFUL These metro areas, many near coasts and all heavily residential in character, are the ones in which small businesses (those with 50 or fewer employees) constitute the greatest percentage of all businesses. Nationwide, small companies account for a hefty 77% of all companies. REDDING, CALIF. 88.4% ATLANTIC CITY 88.2 NAPLES, FLA. 88.1 LONG ISLAND, N.Y. 87.9 MONMOUTH/OCEAN, N.J. 87.7 Source: Office of Advocacy, Small Business Administration PLUMP PAYCHECKS The highest estimated 1991 per capita incomes can be found in these metro areas. Retail businesses that sell mostly to people with substantial disposable incomes tend to do well in such affluent locales. STAMFORD/NORWALK, CONN. $34,087 SAN FRANCISCO 30,483 BERGEN/PASSAIC, N.J. 30,475 LONG ISLAND, N.Y. 30,124 MIDDLESEX/SOMERSET/HUNTERDON, N.J. 29,476 SAN JOSE 29,234 ANAHEIM/SANTA ANA, CALIF. 29,042 ( WASHINGTON, D.C. 27,446 LAKE COUNTY, ILL. 26,586 ATLANTIC CITY 26,483 Source: Woods & Poole Economics YELLOW FEVER These are the Yellow Pages categories that showed the greatest percentage gains -- or losses -- in number of business listings nationwide from 1990 to 1991. What's in? Protecting the environment and -- naturally -- fax- transmission services. Out? Refrigeration and air conditioning. GAINERS FAX-TRANSMISSION SERVICES +47.7% MOVING SUPPLIES/EQUIPMENT RENTAL +41.3 CONVENIENCE STORES +41.1 ENVIRONMENTAL/ECOLOGICAL SERVICES +40.5 YOGURT +27.9 COLLECTIBLES +27.1 ASBESTOS-REMOVAL SERVICES +26.5 RECYCLING CENTERS +26.3 LOSERS HOME-PLANNING SERVICES -20.6% COMMERCIAL REFRIGERATION EQUIPMENT SERVICES -20.4 VIDEO RECORDERS -19.0 ROOM AIR CONDITIONERS -15.8 MICROWAVE OVENS -15.3 Source: American Business Information JOBS A-POPPIN' These cities, all located in either Florida or California, will experience the greatest percentage gains in total jobs between 1991 and 1996. Such robust job growth is a leading indicator of a growing economy. FORT PIERCE, FLA. 21.2% ANAHEIM/SANTA ANA, CALIF. 19.2 OCALA, FLA. 18.7 WEST PALM BEACH/BOCA RATON, FLA. 18.5 FORT MYERS/CAPE CORAL, FLA. 17.4 OXNARD/VENTURA, CALIF. 16.8 ORLANDO 16.7 Source: Woods & Poole Economics CALLING ALL CUSTOMERS These metro areas, dominated by sunbelt cities, will see the greatest total population growth from 1991 to 1996. More people mean a larger potential pool of new customers, a benefit to retail and service businesses. LOS ANGELES/LONG BEACH 521,537 * ANAHEIM/SANTA ANA, CALIF. 470,536 ATLANTA 361,302 WASHINGTON, D.C. 327,865 DALLAS 302,323 RIVERSIDE/SAN BERNARDINO, CALIF. 243,791 HOUSTON 235,139 TAMPA/ST. PETERSBURG 234,896 PHOENIX 227,785 LONG ISLAND, N.Y. 213,658 Source: Woods & Poole Economics WHERE RENTS ARE HOT -- AND NOT These cities boast the most -- or least -- expensive central business district office space among 50 of the nation's largest metro areas. Established urban centers like New York, Chicago and L.A. dominate the high-priced cities; sunbelt areas like Boca Raton, San Antonio and Tucson offer the best bargains. Prices are for existing (not newly constructed) buildings. COSTLIEST Price per square foot Typical discount NEW YORK CITY $32 to $48 10% to 15% CHICAGO $27 to $38 30% to 35% LOS ANGELES $24 to $40 10% to 15% SAN FRANCISCO $24 to $37 5% to 10% WEST LOS ANGELES $24 to $36 10% to 15% CHEAPEST DENVER $8 to $12 None BOCA RATON, FLA. $8 to $25 20% to 40% FRESNO $9 to $17.50 0% to 5% SAN ANTONIO $9 to $11 None TUCSON $10 to $18 5% to 10% Source: Grubb & Ellis Market Trends TABLES BY JUDY LYON DAVIS AND LAUREN SINAI