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.