What Types of Small Businesses Are Most Profitable
We often hear statistics and reports about the percentage of "small businesses" that succeed or fail. Unfortunately, "small business" is a vague term that covers a lot of territory. Technically, everything from local pizza shops to accounting firms to gas stations to chiropractors offices qualify as small businesses. So it's fair to ask: what are the best types of small businesses to start? Which are most profitable? And why do some always seem to be more lucrative than others?
Today, we analyze six of the most profitable types of small businesses as ranked by Forbes in April 2010:
Of all the different types of small businesses ranked by Forbes, none was shown to be more profitable than certified public accountants. With an average pre-tax profit margin of 17.1%, small accounting firms really rake it in. There are a few excellent reasons. First, pricing power. The types of consumers and businesses that need accounting services need them all the time and regardless of whether there's a recession or not (in order to satisfy regulators or the IRS.)
Accounting is also a low overhead business -- the same office space and supplies can generally accommodate few or many clients at similar cost. Plus, repeat clients are virtually guaranteed (provided you do good work) since changing accountants is a major hassle. The downside? Accounting -- like many of these businesses -- requires years of training and special expertise.
Chiropractors come in just behind accountants for profitability, boasting an average pre-tax margin of 16%. While Forbes laments that "some question the medical value of their service," it's no mystery why chiropractors can turn such a high profit. Back pain is one of the most common and painful ailments in all of America. A 2008 Newsweek article on The Price of Back Pain said:
"In 2005 Americans spent $85.9 billion looking for relief from back and neck pain through surgery, doctor's visits, X-rays, MRI scans and medications, up from $52.1 billion in 1997, according to a study in the Feb. 13 issue of the Journal of the American Medical Association (JAMA)."
Before opting for surgery, most people with back pain pay at least one or two visits to a local chiropractor to attempt less invasive treatments. Given that some 15% of all adults reported back pain as of 2005, it's no surprise why chiropractors are consistently flush with business.
Tax preparers and non-CPA bookkeepers achieve an impressive average pre-tax margin of 15.5%. Like CPAs, the driving force behind these consistently high numbers is the permanent, ongoing need for a tax preparer's services. So long as there is an IRS (and an income tax) there will be individuals and businesses who would rather pay a professional than prepare their own returns.
And much like a CPA, overhead is low while customer loyalty and repeat business is high. Most people will not abandon a tax preparer who has done good work for five or ten years to potentially save a few hundred dollars with an unproven competitor. Luckily, the skills needed to become a tax preparer are nowhere near as involved as becoming a CPA. College courses are available, and a simple license test is all that's necessary.
A dentist's office is another one of the most profitable small businesses to run, with an average pre-tax margin of 15.4%. The key, Forbes says, is "operating scale" or the fact that a dentist's office can service several patients at the same time. Of course, there are some obstacles. Much of the equipment needed to get a dentist's office operational is extremely pricey. Dentistry school isn't cheap either.
CostHelper.com explains that prospective dentists can expect to pay anywhere between $44,000 to $212,000 to complete the program. Private schools can cost up to $68,000 per year.
The benefits? Mainly, the fact that many customers pay for dental work out of pocket rather than through insurance. That empowers dentists to wield more pricing power than the average doctor or hospital.
It's rather easy to see why mini-warehouses and self-storage units enjoy an average pre-tax profit margin of 12.3%. When you get right down to it, such facilities have almost no ongoing costs. Other than perhaps a mortgage for the land and building they occupy and some minimal administrative staff, all a self-storage business does is store other people's belongings. Fancy office space, sky-high utility bills, human resources teams, in-house lawyers... in most cases, none of these costs come into the picture.
Thus, the average self-storage facility can simply rent space to consumers and pocket a handsome profit with very little overhead to consider.
Optometrists (better known as eye doctors) operate at an average pre-tax margin of 12.2%. The source of their profits is the fact that optometrists prescribe a wide range of costly eye-related materials: eyeglasses, contact lenses, vision therapy, and low-vision aids, among other things. Whether they operate out of private practices, clinics or hospitals, an optometrist typically profits quite well from his or her pricey education. PayScale.com ranks the national average pay (including salary and benefits) of an optometrist at $77,930 to $105,678.