Advice for Investors – The Most Profitable Small Businesses

Jun 17, 2012

profitable small businessRunning a small business is tough; especially one that requires your full attention every single day.  And while there’s nothing wrong with a little “sweat equity,” some people want to remain behind the scenes and let the experts handle the details.  This may mean keeping an existing management team in place or working with an equal partner who will make sure the business operates smoothly.  Or, if you’re really just in in for the investment, it’s possible to remain completely hands-off as a business owner.

With the stock market still shaky and global markets a huge risk; investors would normally turn to real estate, but that’s no longer a safe investment either. Buying a small business seems to allow for much greater profitability if it is done wisely and with a keen sense of what’s “hot” right now.

Forbes recently commissioned a survey based on 300,000 companies, most of which had annual sales of less than $10 million.  In their recent web report entitled “The 20 Most Profitable Small Businesses,” one might find that the entries aren’t very sexy – the 2011 list included real estate appraisers, tax accountants and chiropractors, to name a few.  But these small business contenders have one thing in common – they know how to turn a profit, and keep turning a profit, for long periods of time.

Invest where the need is greatest

When a consumer or business enterprise cannot find the answer to a problem on the Internet – and they lack the skills to do it themselves – they often turn to a professional.  As a small business investor, it’s important to keep this in mind because it applies to almost any business venture.  For example, other small businesses and individuals don’t trust themselves to do their own taxes so they turn to a tax consultancy.  For 2012, Certified Public Accountants rank number one in profitability – with an average pre-tax margin of just over 17 percent.

When an aging boomer population and their progeny of “weekend warriors” cannot come up with a reliable solution to chronic back and neck pain, they seek the most obvious solution – a well-trained chiropractor!  Even a family with two working parents and a grueling schedule of sports and activities can order pre-prepared and healthy family meals to their door – or at least they can stop at restaurants like Chipotle for a cheap quick dinner that’s not fast food.

Consumer-oriented service companies are not the only ones experiencing record growth and profitability.  Many entrepreneurs are looking behind the scenes at profitable companies that no one ever thinks about, such as wired communication carriers, transmission-line operators and other supporting players in our vast communications infrastructure.  The common element that makes these businesses profitable is the way they address a need.

Invest in businesses that require professional certification

Because Forbes aggregates the data for this list over a much longer business cycle, it doesn’t reflect passing trends.  The data is drawn from financial statements and NAIC codes between 2000 and 2012 and each category includes at least 100 companies. One finding is that as our population grows more practical in their buying decisions, the top small businesses reflect that change.  For example, industries that provide “need to have” solutions are much better off in 2012 than those “nice-to-have” solutions.  When considering a small business investment, it makes sense to look at professional services that require formal training or certifications – anything from balancing the books to healing the sick.

What are the biggest perks for professional service companies?  They benefit from consistent demand and low overhead.  Specialization is another success factor because there is less competition and greater value for the consumer.  As a result, some financial services companies are creating specialized business units for college savings, retirement and small business owners.

Bright spots in manufacturing and retail

While the retail and manufacturing sectors remain anemic at best, there are still a few that do well enough to be included on the list.  Medical equipment manufacturers do well because technology is advancing so rapidly and competitive hospitals must keep pace.  And apparently romance isn’t dead because wineries and jewelry stores are still seeing healthy pretax margins.

Out-of-pocket healthcare operations

When it comes to investing in a healthcare related business, think about those that are less likely to be covered by insurance.  Orthodontia, chiropractic, speech therapy, optometry and cosmetic dentistry all have a few things in common – they require less expensive training than general physicians and insurers are less likely to take their “cut” from your profits.  Because more consumers pay for these services out of pocket, they tend to be a much better investment.

When looking to buy or start a business, look for opportunities within the field of professional business and healthcare services.

Image Courtesy of jumpe/