10 Most Profitable Small Businesses in 2018
The economy is booming, and there are plenty of businesses that are reaping the rewards. Whether you want to get a sense of the hottest new industries to invest in, or are interested in highly profitable businesses with staying power, it’s good to keep up with the latest trends. We worked with Sageworks to pull together a list of the Top 10 small businesses (sales under $10 million) that boasted the highest net profit margins. We combined this data with industry projections from the Bureau of Labor Statistics to get an idea of where these sectors are headed and chatted with Sageworks analyst Libby Bierman about what these rankings mean in context. Whether you’re a small business owner interested in the future of your sector, or an entrepreneur doing market research, there are some important insights ahead.
The 10 most profitable small businesses in 2018:
1. Legal Services
Net Profit Percentage Change in 12 Months: 30.1%
Net Profit Margin: 16.8%
What it is: Encompassing all legal practitioners (lawyers or attorneys), legal services refers to businesses that are mainly engaged in the practice of law (including corporate law, criminal law, estate law, patent law, real estate law, and tax law).
Why it’s profitable: Legal services have always been one of the most profitable small businesses, so it’s no shock that the net profit margins are so high. This perennial strength might be due to the relatively steep barriers to entry: a law degree requires a huge investment of time and money. Keeping the talent pool small affects the rates and revenue of these businesses. “Prices for legal services can remain high without downward pressure from excessive competition,” says Libby Bierman.
Outlook: Employment in this field is expected to grow about 8% within the next 10 years, which is about average. However, despite the aforementioned barriers of entry, competition for jobs in this area will be strong — more students graduate from law school each year than there are jobs.
2. Lessors of Real Estate
Net Profit Percentage Change in 12 Months: 23%
Net Profit Margin: 16%
What it is: This category includes businesses that lease property of either residential dwellings, nonresidential buildings, mini warehouses and self-storage units and other real estate property like mobile home sites, vacant lots, or grazing land. An apartment lessor would fall into this category.
Why it’s profitable: Since the rebound from the recession, the real estate sector has performed well. This strength has had a ripple effect across different real estate jobs, including lessors. A recent generational trend may also be responsible for some of this growth. “Millennials are buying homes later in life than previous generations,” says Bierman. “That means they might be driving more foot traffic to leasing offices for apartments and other rental properties.”
Outlook: The future looks fairly rosy right now for lessors of real estate. This sector is expected to grow 10% in the next 10 years, higher than average. Those with an advanced degree in business administration or professional credentials in real estate can expect an edge in finding a job in this field.
3. Land Subdivision
Net Profit Percentage Change in 12 Months: 40.1%
Net Profit Margin: 15.7%
What it is: This industry includes businesses that service land (for example, excavation) and subdivide property into lots for sale to builders. It doesn’t include leasing. Site development contractors are an example of a job that’s part of this sector.
Why it’s profitable: Thanks to the post-recession real estate boom, new-home builds have increased over the past year, Bierman says. That means,the firms responsible for dividing up plots of land have also seen an uptick in business in the last 12 months, she adds.
Outlook: “These numbers have started to dip slightly, so land subdivision businesses might not sustain these profit levels,” warns Bierman. Still, there’s some projected long-term growth in an adjacent field: employment of urban and regional planners is predicted to grow 13% by 2026.
4. Commercial and Industrial Machinery and Equipment Rental and Leasing
Net Profit Percentage Change in 12 Months: 24.7%
Net Profit Margin: 14%
What it is: This field includes the rental or leasing of equipment for mining, construction, air, rail, and road transport as well as maintenance, insurance and repair when included with the rental or lease agreement.
Why it’s profitable: “This isn’t an industry we typically see on this list,” says Bierman. “But overhead as a percent of revenue has come down a little each year, leading to slightly higher margins.” This reduction might be the result of cost-saving programs, or because these businesses have been able to cover their fixed costs more quickly. And the small size of these businesses might represent an advantage over the larger ones. “Local stores might be able to charge a slight premium or react more quickly to the inventory needs of their clientele,” says Bierman. This agility might be contributing to the high net profit margins this industry is currently experiencing.
Outlook: Jobs in construction (a driver of profitability in this industry, due to the amount of rental machinery used in it) is on pace to grow 12% between 2016 and 2026, at a rate faster than average for all occupations.
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5. Offices of Dentists
Net Profit Percentage Change in 12 Months: 26.9%
Net Profit Margin: 13.4%
What it is: The business can be an independent practice of general or specialized dentistry or dental surgery. These practitioners operate private or group practices in their own offices or in the facilities of others, such as hospitals or HMO medical centers. They can provide either comprehensive preventive, cosmetic, or emergency care, or specialize in a single field of dentistry.
Why it’s profitable: Like legal services, dentists offices require a specialized degree. The time and money required for this education and certification means that this field also has high barriers to entry. All those barriers add up to less competition for small offices in the field. And the odds of recouping this investment are good. Since competitive pressure on dentistry services is lower than in other industries, these businesses can charge prices that eventually cover the cost of entry (like a medical degree), Bierman says. Dentistry also benefits from inelastic demand, meaning patients will still shell out the cash to take care of an aching tooth even if their discretionary income dips.
Outlook: Employment for dentists is expected to grow a whopping 19% by 2026. As the population ages and concerns around oral health rise, the demand for dentists will grow much faster than average.
6. Activities Related to Real Estate
Net Profit Percentage Change in 12 Months: 23.7%
Net Profit Margin: 12.8%
What it is: This industry is made up of businesses that provide real estate services (except lessors of real estate and offices of real estate agents and brokers). This includes groups that manage real estate for others and appraise real estate. A real estate investor would fall into this category
Why it’s profitable: The boom in real estate activity is thanks to the healthy market, of course. But these small businesses also reap the benefits that come from low overhead costs. “Since there aren’t any inventory carrying costs or high-tech needs, these businesses can achieve a higher-than-average profitability,” says Bierman.
Outlook: Things are expected to stay strong in this industry through the next eight years. Employment of real estate appraisers and assessors is expected to grow 14%, while employment of real estate and property managers is predicted to grow 10% — both above average for all occupations.
7. Offices of Real Estate Agents and Brokers
Net Profit Percentage Change in 12 Months: 39.5%
Net Profit Margin: 12.5%
What it is: Offices of real estate agents or brokers who primarily sell real estate for others; buy real estate for others; and/or rent real estate for others.
Why it’s profitable: Again, it’s down to the strong real estate market of the past few years. “If you’ve tried to purchase a home recently, you’ve seen how quickly homes are turning,” says Bierman. That rapid turnaround in most markets translates into more sales for the agents or brokers of the sale.
Outlook: The housing market and the economy are the best indicators for this industry’s future outlook. “If the housing market starts to slow down, these profit levels might not be sustainable,” warns Bierman. “The health of this industry is definitely correlated to overall housing sales.” Growth between 2016 to 2026 for real estate brokers is expected to be 6%, which is about average.
8. Accounting, Tax Preparation, Bookkeeping and Payroll Services
Net Profit Percentage Change in 12 Months: 17.9%
Net Profit Margin: 11.7%
What it is: This industry provides financial services, like auditing accounting records, designing accounting systems, preparing financial statements, developing budgets, preparing tax returns, processing payrolls, bookkeeping, and billing.
Why it’s profitable: Accounting firms are another business that benefit from the reality that tax time (and usually changes to tax law) happen every year. The difficulty of passing a CPA exam (a barrier to entry) and low overhead costs let accounting-firm owners charge fees that earn higher-than-average profits, says Bierman. As the saying goes, death and taxes are certain, so it’s no surprise that accounting firms tend to remain profitable year after year.
Outlook: Between 2016 and 2026, employment of auditors and accountants is expected to grow 10%. That’s thanks in part to a strong economy — more workers and businesses means there are more financial records to review and taxes to prepare.
9. Offices of Physicians
Net Profit Percentage Change in 12 Months: 18.9%
Net Profit Margin: 11%
What it is: This industry is comprised of health practitioners that independently practice general or specialized medicine (except psychiatry or psychoanalysis) or surgery. These practitioners operate private or group practices in their own offices (centers, clinics) or in the facilities of others, such as hospitals or HMO medical centers.
Why it’s profitable: The cost of medical school, and the overhead costs keep down the number of entrants to this field. Physicians need to purchase medical equipment, pay for insurance, and find a place to practice. “If you’re not business savvy, your practice isn’t going to thrive,” says Chicago-based pediatrician Amber Price. “The overhead is the biggest issue. You have to be able to ride it out and survive the slow phase without putting yourself in the hole until you hit exponential growth.” Dr. Price was able to cut down on overhead by practicing in a home office. She also operates on a membership-based direct primary care model that cuts out a lot of insurance (another financial drag for independent physicians.) “Their dependency on insurance providers and Medicare programs does make billing more complex than in other industries, but physician offices do earn more pennies per dollar than a lot of other small businesses,” says Bierman. Like other high-barrier industries, the high initial investment means there’s relatively less competition and they can charge more their services. A higher-margin business model means physician offices almost always make the high-profit list.
Outlook: Physician jobs are expected to grow at a faster-than-average 13% by 2026, but that doesn’t necessarily account for growth in private practices. Still, a growing and aging population means that the demand for physicians certainly won’t be going anywhere.
10. Traveler Accommodation
Net Profit Percentage Change in 12 Months: 16.6%
Net Profit Margin: 9.8%
What it is: This industry is engaged in providing short-term lodging in hotels, casino hotels, bed and breakfasts, resorts and motels. These establishments may offer food/beverage services, recreational services, conference rooms, laundry services, parking and other services besides temporary lodging.
Why it’s profitable: The industry on this list doesn’t include larger hotel chains. Compared to bigger hotels, these speciality small businesses have lower operating costs and can provide (and charge for) a more boutique experience. “These smaller accomodations can charge a premium to guests and avoid franchise fees, which protects their profit margin,” says Bierman.
Outlook: Unlike some of the other industries on the list, the demand for accommodation for leisure travel is more elastic, Bierman says. If the economy worsens, profit margins for this industry could change, she says. The job outlook for lodging managers and other hospitality workers is sluggish, with only 4% projected growth. However, the Bureau of Labor Statistics does include larger hotels in their calculations.
Although there are difficulties to starting a business in any sector, the barriers to entry differ significantly between industries. Businesses that relate to medicine or legal matters have high startup costs, but can often recoup these early costs by charging a premium for their services. Other industries on this list have lower startup costs but service demands that depend more on the health of the economy. If the economy weakens, some of these businesses (like the real estate or accommodation for travelers) might see a slump. Regardless, the businesses on this list are not only seeing healthy net profit margins now, but most are expected to continue showing year-over-year growth opportunities well into the future.