Best and worst business investments

Many people who want to leave the corporate world look at starting their own business, and the first option is often a restaurant, fast-food outlet, or shop.

What many new business owners don’t take into account is that most small businesses fail within five years.

Independently owned restaurants have a particularly high failure rate because of their high initial setup and operating costs.

However, a few businesses have a higher chance of success, including accounting and payroll services, real estate, and rental companies.

In South Africa, the likelihood of business failure is higher than average due to weak economic growth, chronic service delivery failures, and load-shedding. 

It raises the question of which businesses have the highest rate of success and which sectors are prone to failure.

Businesses with the highest success rate

A study by Western Governors University of the 28 million small businesses in the United States have revealed the types of companies most likely to succeed.

• Accounting and payroll services.

These businesses have low overhead costs and minimal recurring expenses. There is also consistent demand for their services, with taxes being paid annually and employees paid monthly, alongside other accounting services. 

• Real estate

Real estate does require significant startup capital, but this also creates a substantial barrier to entry for competitors. Real estate generates consistent and predictable returns.

• Rental companies

As with accounting businesses, minimal overhead costs are required to run a rental business – particularly if existing inventory is used. 

Analysis by Lending Tree supports the above study, with real estate having the highest survival rate of small businesses over one year. 

• Agriculture businesses

Lending Tree said Agriculture businesses have the best survival rate over the long term, with only 30% of them failing in 5 years and half surviving over ten years. 

Three businesses most likely to fail 

While some types of businesses are more likely to survive than others, some are more likely to fail.

The businesses which have the highest failure rate, according to Western Governors University, are:

• Independent restaurants 

Restaurants have high setup costs, high overheads, and require continual reinvestment. On average, two-thirds of a restaurant’s revenue is taken up on costs to keep the business operating, such as food, beverages, and staff. 

Roughly 60% of independent restaurants fail within three years. 

• Bakeries

Bakeries struggle for reasons similar to restaurants. However, they are also highly specialised, which limits their potential customers.

• eCommerce businesses

Companies in eCommerce have the propensity to fail due to the high startup costs of building a website, building up an inventory, and attracting customers. 

eCommerce companies also struggle to be unique and face immense competition from existing behemoths such as Amazon.