Types of Businesses That Often Fails

Many entrepreneurs, about two-thirds, never start their businesses due to fear of failure. To increase your chances of success, it’s crucial to analyze data. This article will highlight businesses with both high and low failure rates, guiding you toward a more promising venture.

By Brad Nakase, Attorney

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Table of Contents

1. Gym Business: High Failure

2. ATM: More Complicated Than Expected

3. Dry Cleaning Businesses: A Waning Sector

4. Hotels: More Than Meets the Eye

5. Amazon FBA: A Risky E-commerce Endeavor

6. Retail Stores: Facing Steep Challenges

7. Restaurants: Navigating a Path Fraught with Obstacles

8. Trucking and Transportation: A Lucrative Field

9. Senior Care Centers: An Unexpectedly Stable Market

10. Real Estate Rental Properties: Stepping Stone to Wealth

11. Laundromats: A Surprisingly Lucrative Venture

12. Conclusion: Choosing a Business Path Wisely

Gym Business: High Failure

Gyms experience a notably high failure rate, with about 79% closing within their first year.

Challenges for Gym Owners

Despite the allure of starting a gym with minimal requirements, such as a small space for a CrossFit box, many owners falter by treating the venture as a hobby rather than a business. This often leads to neglect in critical areas like finances, marketing, and pricing strategies.

Keys to a Successful Gym Business

Wealth generation often involves catering to affluent clients, a strategy that can be challenging in the gym industry. However, successful models like Gold’s Gym and Equinox have shown it’s possible by offering different value propositions. Gold’s Gym and Planet Fitness rely on subscriptions from members who rarely attend, while Equinox charges premium rates for its services. Ultimately, choosing a business model outside the gym industry might be more profitable.

ATM: More Complicated Than Expected

People often pitch ATM businesses to me, attracted by the seemingly low startup costs and simplicity. However, the numbers just don’t work out in its favor.

The Economics of the ATM Business

An ATM typically handles four to six transactions daily, averaging $100 each. With a 1 to 2% commission, earnings average $260 per day for each machine. The catch is the frequent need to replenish cash to prevent theft, which demands regular, time-consuming visits.

The Operational Hurdles

The expenses don’t stop there. ATMs themselves are costly investments, taking an average of seven years to recoup the initial purchase through business profits.

Dry Cleaning Businesses: A Waning Sector

The appeal of owning a dry cleaning business diminishes as demand plummets, highlighted by a significant drop in establishments. This trend likely stems from the declining use of suits and the rise of remote work, reducing the need for dry cleaning services.

Environmental Costs Are a Deal Breaker

Another major deterrent is environmental remediation. Many dry cleaners face contamination issues, with cleanup costs potentially ranging from thousands to hundreds of thousands of dollars, depending on the severity and location. Considering the environmental implications and the financial burden of remediation, investing in a dry cleaning business seems unwise, especially when the profit margins are not significantly high and societal trends are shifting towards more eco-friendly practices.

Hotels: More Than Meets the Eye

Hotels might seem like straightforward businesses, but in reality, they’re complex real estate ventures. Here’s why they’re challenging:

The Financial Hurdles of the Hotel Industry

Hotels typically earn $120,000 annually but face expenses of around $105,000, resulting in a 2% loss. They rely on tax benefits from real estate depreciation to turn a profit, highlighting that without accounting maneuvers, these ventures often aren’t profitable.

Operational Challenges

Running a hotel demands constant availability for customer service, a prospect not everyone finds appealing. The business complexity increases with necessary constant maintenance and staffing. Moreover, the hotel industry has seen significant consolidation, with fewer companies now controlling a larger market share. For independents, this environment is tough, and franchising, a common route, can consume a substantial portion of revenue, leaving slim profit margins.

Amazon FBA: A Risky E-commerce Endeavor

Despite the allure of easy profits from Amazon’s Fulfillment by Amazon (FBA) program, the reality is starkly different. The challenges are significant:

Amazon’s Dual Role as Competitor and Platform

Amazon poses a unique risk by being both the largest platform and a competitor. It also allows entry to numerous low-cost competitors and uses sellers’ data against them, creating a precarious position for sellers relying solely on this platform.

Detachment from Customers

Selling on Amazon FBA means you have no direct contact with customers, severely limiting engagement and loyalty building. This detachment is a significant risk, as maintaining customer relationships is crucial for business success.

Financial Realities

Only a small fraction of Amazon sellers achieve substantial income, with the vast majority earning modest sales totals. The platform’s dynamic nature and the potential for sudden algorithm changes further exacerbate the risk, undermining long-term stability and success.

Retail Stores: Facing Steep Challenges

I advise against investing in retail stores due to their remarkably high failure rates.

The Downturn of Physical Retail

High rents and a shrinking customer base, increasingly preferring online shopping over brick-and-mortar stores, contribute to the challenges facing retail locations. This shift in consumer behavior signals a tough road ahead for physical retail ventures.

Financial Pressures on Retailers

Retail operations often deal with ‘negative float,’ meaning upfront payments for inventory that may not sell for months, if at all. This uncertainty in inventory management and the upfront capital required make retail a risky and cash-intensive business model. With a 90% failure rate in the first year and less than 50% of businesses surviving past four years, the retail sector’s stability is questionable.

Restaurants: Navigating a Path Fraught with Obstacles

Restaurants present another challenging business landscape, with high failure rates and significant initial investment costs.

High Failure Rates and Competitive Landscape

With nearly 70% of restaurants failing in their first year and 85% within four years, the sector is fiercely competitive and financially demanding. Operational costs, including food spoilage and labor, add to the difficulty, while the struggle to maintain customer loyalty without direct contact information further complicates success strategies.

Strategic Considerations for Restaurant Owners

Despite these challenges, not all restaurant models face the same level of risk. Fast-food joints, for example, tend to have lower failure rates compared to full-service restaurants. Successful operation in this industry requires exceptional management skills and innovative strategies for customer retention and cost control. While owning a part of a restaurant can be profitable, it demands astute operational expertise and an understanding of the industry’s risks.

Trucking and Transportation: A Lucrative Field

The trucking and transportation sector, particularly last-mile delivery, is thriving with a success rate of 75%. This growth is driven by the surge in online shopping, requiring efficient delivery services to consumers’ doorsteps. Entrepreneurs have opportunities to own routes or provide last-mile delivery services for companies like UPS or local stores. The demand for these services is skyrocketing, with last-mile delivery costs constituting 55% of total shipping expenses and the market value projected at $84.7 billion.

Navigating the Trucking Industry’s Complexities

The trucking business faces challenges such as the high cost of vehicles and finding reliable drivers. Yet, the advent of autonomous driving and alternative business models like courier services offer diverse opportunities. Despite potential thin margins, for a skilled operator, this industry holds promise, supported by positive market data.

Senior Care Centers: An Unexpectedly Stable Market

Senior care centers boast a low failure rate, attributed to government support and demographic trends, including the aging baby boomer population and increasing cases of Alzheimer’s and dementia. These factors allow for higher charges for specialized care.

Entering the Senior Care Market

Starting in the senior care industry can seem daunting due to the high initial investment required for large facilities. However, smaller, home-based senior care options provide an accessible entry point. These require proper zoning and certifications but can offer personalized care to a smaller group of seniors. Despite the financial viability and growing market, valued at nearly $10 billion with an 8% growth rate, ethical dilemmas, such as the potential need to discharge residents due to financial constraints, pose significant concerns. This business suits those with a strong constitution and a dedication to caring for the elderly.

Real Estate Rental Properties: Stepping Stone to Wealth

Andrew Carnegie highlighted that a significant portion of millionaires have built their wealth through real estate. Rental properties, in particular, offer a pathway to wealth accumulation, leveraging tax benefits and enjoying a high success rate of over eight percent. With forty-five million Americans renting homes and an increasing trend towards renting, the market is vast. Landlords can potentially earn an average of $102,000 annually, with the opportunity to increase earnings significantly by managing multiple properties. This sector represents a robust investment opportunity with a substantial, growing demand.

Laundromats: A Surprisingly Lucrative Venture

Laundromats boast a high success rate, estimated average of ninety percent, due to their relatively low startup costs, long-lasting equipment, and steady customer base. Despite a decreasing number of locations, competition remains manageable. Adding extra services like vending machines, ATMs, and wash-and-fold services can significantly increase revenue. However, successful management involves understanding both customer needs and operational efficiencies, including employing technology for smoother operations and minimizing staff requirements. Investing in laundromats can be a profitable venture if managed wisely.

Conclusion: Choosing a Business Path Wisely

The choice between businesses with high failure rates and those with better odds of success is crucial. This decision is about more than just picking winners; it’s about contributing to the fabric of communities like Main Street in Austin, Texas, where small businesses thrive on serving others. These endeavors require dedication, hard work, and a commitment to building rather than just consuming. For those aspiring to make a positive impact and achieve financial success, selecting the right business is a significant first step.

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