October 22, 2014

Most Profitable Small Businesses By Industry

If you are thinking of starting a small business, you might care about potential profits. While your skills as an entrepreneur and the quality of your business idea certainly influence what you will earn, so does the industry in which you operate. In fact, as figures from business data aggregator Sageworks Inc. show (see chart below), small business profitability varies a lot across industries.

Using its proprietary database of private company financial statements collected from accountants and financial institutions that supply information on their clients, Sageworks’ analysts provided me with a list of the most and least profitable industries in 2011 for businesses with $5 million or less in sales.

As the table below shows, the most profitable industry was “other financial investment activities,” with an average net profit margin of 16.9 percent, while the least profitable was” land subdivision,” with an average net profit margin of -12.4 percent.

While the number of industries is too few to draw any firm conclusions, I think they suggest a pattern. You need a license or a lot of training to enter many of the most profitable industries (e.g., law, medicine, accounting, dentistry, real estate).

Because more people can enter the least profitable industries, competition may be driving down small businesses’ profit margins in those industries.

Keep in mind that net profit margin is just one measure of the attractiveness of an industry to small business.

As I have shown before, the industries with the highest margins don’t have the highest average profit per business. In fact, Internal Revenue Service data show a correlation of only 0.09 between the industry’s average annual income for an S Corp and the industry’s average net income as a percentage of sales for a similarly organized company.

Nevertheless, knowing high and low margin industries is probably useful to people thinking of starting a small business.

most profitable small businesses

5 Comments ▼

Scott Shane


Scott Shane Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool's Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: and The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By.

5 Reactions

  1. Thanks for your always interesting data, Scott.

    It looks to me that getting an education is first and foremost.

    Science and math.

    That’s what the nation’s schools are focusing on, pre-college.

    They need to do a better job of it, though.

    The Franchise King®

    • I agree, Joel. I don’t the the high schools today do a good job of preparing children for college in the areas that are really important. They pretty much get pacified and baby feed while in high school and then they get a major shock when they enter college. High schools should really raise the bar and quit being, in my opinion, lazy.

      Ti

  2. Remember these figures are for reported income. Many of these businesses such as bars and restaurants deal with large amounts of cash. This can be somewhat misleading if one is using this information in order to decide where to invest your money.

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