Remember the dotcom bubble? You know, that wacky window in the late '90s when profitless technology companies scored billion-dollar valuations like bouquets on Valentine's Day. This isn’t 1999, but the tech sector is getting frothy. Hot targets of late: Facebook, Groupon, 3Par, Huffington Post, among others. This time, at least, the beneficiaries are generating some profits--and profits are ultimately the basis for what any company is worth to investors in the long run.
To bring things more down to earth, we decided to assess the profit-making ability of small businesses in a variety of more traditional industries.
With the help of Sageworks, a Raleigh, N.C.-based accounting consultancy and private-company data provider, Forbes assembled a list of the 20 most profitable types of businesses, on a pretax basis. At No. 1: offices of Certified Public Accountants, with an average pretax margin of 16.5%. Offices of physicians (except mental health specialists), which clock an average 10.4% margin, brought up the rear.
The data are drawn from financial statements on nearly 300,000 companies, most with under $10 million in annual revenue, and bucketed by five- and six-digit North American Industry Classification System codes. The figures were gathered between Jan 1, 2003 and Jan 1, 2011, to capture an entire business cycle. To be considered, each category included at least 100 companies. (Banks were excluded from the analysis, as their accounting methods are not comparable to other industries'.)
Here is a list of the 20 most-profitable industries and their average pretax margins:
1. Offices of Certified Public Accountants
Average Pretax Margin, 2003-2010: 16.5%
The most profitable niche of the bunch enjoys a nice mix of pricing power (everybody needs accountants, no matter how the economy is doing), low overhead and marketing scale, thanks to plenty of repeat clients.
2. Offices of Chiropractors: 15.3% Some question the medicinal value of their service. Hard to question their financial performance, though.
3. Freestanding Ambulatory Surgical and Emergency Centers: 15%
Services include orthoscopic and cataract surgery on an outpatient basis; setting broken bones, treating lacerations, or tending to patients suffering injuries as a result of accidents, trauma or other problems that need immediate attention. These facilities include operating and recovery rooms, and specialized equipment, such as anesthetic or X-ray machines. In short: If a big rock falls on your leg, you're going to find a way to fix it--fast. (For more on the economics of the air ambulance business, check out Rescue Helicopters Elevate Profits.)
4. Other Accounting Services: 14.9%
Various accounting, bookkeeping, billing and tax preparation services in any form, handled not necessarily by a Certified Public Accountant. (See #1.)
5. Offices of Dentists: 14.7%
Dentists enjoy operating scale--that is, they can handle several patients at once. Some of the equipment is expensive, but hygienists don't cost much. Better yet, a lot of customers pay out of pocket. That gives dentists more pricing power relative to other medical providers.
6. Tax Preparation Services: 14.7% Who likes paying taxes? Exactly.
7. Offices of Orthodontists: 14.4%
Who likes crooked teeth? Exactly.
8. Offices of Lawyers: 13.4%
Odd that they aren't higher on the list, given their fees. (For more on how to get the best out of your legal counsel, check out columns by Forbes contributor Robert Bovarnick here.)
9. Sales Financing: 13.3%
These companies are popular in a credit crunch. They lend money for the purpose of providing collateralized goods through a contractual installment sales agreement, either directly from, or through, arrangements with dealers. For more on alternative ways that small businesses can raise quick cash, check out Nine Alternative Ways To Raise Cash Right Now and Where To Find Capital Now.
10. Portfolio Management: 12.2%
11. Drilling Oil And Gas Wells: 12%
12. Offices of Optometrists: 11.5%
13. Lessors of Nonresidential Buildings (except Mini-warehouses): 11.3%
14. Offices of Real Estate Appraisers: 11% 15. Lessors of Miniwarehouses and Self-Storage Units: 11%
16. Insurance Agencies and Brokerages: 11%
17. Other Activities Related To Credit Intermediation: 10.7%
18. Investment Advice: 10.7%
19. Offices of Physical, Occupational and Speech Therapists, and Audiologists: 10.6%
20. Offices of Physicians (except Mental Health Specialists): 10.4%
Thirteen of the top 20 categories involve professional services that require years of training and certification, from healing the sick to balancing financial accounts. Three big perks with professional services: consistent demand, relatively low overhead and what economists call "high switching costs." (If someone's been doing your taxes for 20 years, why would you switch?) Little surprise that manufacturing and retail--industries with few economies of scale--didn't make the cut.
Size matters too, even within the small-company universe. Tiny shops may not require a lot of overhead, but at some point--say, a few million dollars in revenue--the relative level of overhead spikes, crimping margins.
To be fair, these numbers are something of a snapshot, as the profitability of a given industry ebbs and flows with the overall economy. (Some industries get permanently disrupted along the way--just ask those of us in the publishing business.) Another thing to remember about profit margins: A business can appear very profitable on a percentage basis but not generate great piles of money--especially if the principals are pulling out every last dollar to cover private-school tuition fees and summer-home mortgages. There are also tax reasons to play with recorded salaries. Many small businesses are structured as "pass-through" entities, such as S corps and limited liability companies (as opposed to C corporations, as publicly traded firms are). That means the income "passes" straight to shareholders, who then pay taxes on it at their ordinary income rate, thus avoiding the corporate tax. (Losses flow through, too, allowing shareholders to offset income from other sources.)
For more on understanding the paths (and roadblocks) to greater profitability, check out The 20 Most Important Questions In Business, The 10 Questions You Should Never Stop Asking and The 10 Ingredients Of A Great Business Plan.