Looking to Buy or Invest in a Small Business? Know the 5 Most and Least Profitable Industries
Knowing how to identify a business's profit margin is key to spotting good opportunity. But it's not always easy to spot a winner or loser. Well at least in most cases.
When your Cousin Ernie suggested you join him in buying a novelty necktie business, for example, he didn't realize that business casual was the wave of the future. That was an easy pass. But what about the restaurant around the corner, with 50 years of success behind it? The place is constantly crowded, with reservations booked two months in advance.
Profit, Profit, Profit
Sustained profit is critical to a company's ultimate success. Of course, other factors come into play:
Current and anticipated market trends
Projected profit margin on the firm's individual products and services
Potential for scaling the business with minimal additional cost
Take all of these factors into account as you assess a business opportunity – whether it's a restaurant with all kinds of buzz, or the place that features custom silk neckties with your dog's pawprint as a pattern.
Here's how to get started on making a better purchasing decision.
Understanding Profit Margin Formulas
What most business owners refer to in shorthand as “profit” is the net profit margin ratio. Here's how to compute it:
The amount of income a business brings in is its total revenue.
The money a company spends to create its products or deliver its services is the cost of goods sold, or COGS.
Subtract the COGS from the total revenue to get the company's gross profits.
Divide the gross profits by the revenue to get the gross profit margin.
Net profit margin ratios are a relatively simplistic calculation – other influences on profit are found throughout different industries with differing business models. A service business that uses a subscription model, for example, will include costs that don't figure into a manufacturing company's profit calculations.
Businesses may also incur indirectly related operating expenses that inform profit calculations. When you subtract these costs from the gross profits, you get the operating profit. Dividing the operating profit by revenues yields the operating profit margin.
Now that you know these working definitions, let's jump into some specific categories and industries:
The 5 Most Profitable Small Businesses
1. Clean up with cleaning services.
Market watchers say the global home-cleaning services industry will grow from $7.5 billion in 2022 to $14.6 billion by 2030. These businesses typically start life with low overhead, so they go into the black that much more quickly.
2. Accounting adds up.
Demand for CPAs is growing, because there aren't enough newly minted CPAs to replace retiring number-crunchers. The Bureau of Labor Statistics forecasts 4 percent annual growth for the industry. What's more, the average CPA, makes $78,000 per year, per BLS statistics, which is $26,000 more than the average college graduate.
3. Food trucks feed the need for returns.
A truck, equipment, food, licensing, and insurance makes for a sizeable upfront investment. But putting down that cash gets you into a market expected to grow from $2.2 billion in 2022 to $6.6 billion by 2028. Additionally, ongoing costs remain much lower than opening a brick-and-mortar restaurant. Keep in mind that since metro areas are saturated, you may have to hit the gas stay on the move.
4. Get schooled in profit with online teaching.
Revenues from live or recorded online instruction are expected to grow 148.22 billion by 2027. Overhead is low once after the initial investment in a fast and stable Internet connection, a pro-quality webcam, microphone, and lighting. Marketing is a large part of the continued overhead.
5. Turn your advice into dollars.
The outlook for consulting is bright, with the sector expected to grow 10 percent by 2032, says the BLS. Management consulting, the most common form, can range from advising on sales strategies to an entire company reorganization. Though no formal education credentials are required, an MBA or other management certifications may bolster your credibility.
The 5 Least Profitable Small Businesses
1. Restaurants.
Running a restaurant isn't for the faint of heart. You'll encounter enormous startup costs, high overhead, and increased competition – 45% of owners surveyed cite competitors as their key challenge in 2024. Passion and talent in the kitchen often wanes in the face of being on your feet all day, logging in grueling hours, hiring and managing talent, and chasing after fickle dining trends.
2. Room for profit at the inn?
Hotels and motels face competition from price aggregators and large chains in an already unpredictable economy. These challenges mean a small hotel can lose about 2 percent annually. Real estate appreciation may take the edge off that low return, but solid assets won't maintain cash flow or fund the payroll this week.
3. Stores struggle with high overhead.
Brick-and-mortal retail stores chart lower profit margins than all other types of businesses. High ongoing costs for renting space and purchasing inventory make retail a capital-intensive undertaking. And as with restaurants, location can make or break a shop. Fierce online competition also swipes at profit margins.
4. Grocery store margins: food for owners' anxiety.
The average grocery store charts a meager 2.2 percent. And as for restaurants and shops (there's a definite trend here) What's eating up revenue? The cost of maintaining large stores with massive perishable inventory cuts into profits for all but the largest of operators.
5. Auto dealership profits can stall.
New and used car prices are strong and expected to stay that way. However, constant investment in inventory mitigates profits and fail to drive enthusiasm.
If you're looking to buy into a business, know that it comes with no guarantee of success. But when you do your homework, you can make more strategic and well-informed choices. That said, it may be a good idea to avoid Cousin Ernie and his latest "guaranteed success."
Did You Know?
New York University’s Stern School of Business tracks margins by sector for the U.S. for businesses of all sizes.
Since 2008, Fora Financial has distributed $4 billion to 55,000 businesses. Click here or call (877) 419-3568 for more information on how Fora Financial's working capital solutions can help your business thrive.
