Your view on profit margin for a small business

[street]

Got a friend that has a small outdoor sport shop that buys used, sells and repairs smaller scale outdoor activity equipment. It is pretty raw hide operation with one employee he gets dirt cheap. He told me the other day he has 7 million dollars that run through the business in the 40 years he has done business.
So, a small business what would you think the margins would be for income verses expenses be. I do know it is a hypothetical question but would 20 to 25% profit to be obtainable? Leaving about 75 to 80% expenses to reach that 7 million dollars over 40 years.

 

[trukfixer]

Got a friend that has a small outdoor sport shop that buys used, sells and repairs smaller scale outdoor activity equipment. It is pretty raw hide operation with one employee he gets dirt cheap. He told me the other day he has 7 million dollars that run through the business in the 40 years he has done business.
So, a small business what would you think the margins would be for income verses expenses be. I do know it is a hypothetical question but would 20 to 25% profit to be obtainable? Leaving about 75 to 80% expenses to reach that 7 million dollars over 40 years.

as a former small business owner in a similar sort of business (small engine & power equipment) 20% is a bit on the low side for gross profit - but if you're gonna stay clean, legit and state/federal audit proof (and completely legal) and insured ("dirt cheap employee" sounds like under the table cash payroll) you're probably looking at closer to 8% to 10% take home
- A lot depends on overhead and expenses, If I'd ran the business (mine) as a hobby , cash only basis, (I.E. Not legit, no taxes, etc.) I'd probably have been seeing north of 30% margins and pocketing most of it.

7 million over 40 years , unless I mis understand, is about $175K a year if you average it out. (I was doing about $250K/year in mine in the best years, and pocketing maybe $12K - $14K a year.. tells you how much the state, feds, licensing, fees, insurance came to.. given my average profit margin was north of 55%)

 

[street]

trukfixer, Thanks. He most like with every expense he had he might have average 50 to 60K a year. That is I'm understanding your scenario?

 

[trukfixer]

trukfixer, Thanks. He most like with every expense he had he might have average 50 to 60K a year. That is I'm understanding your scenario?

yeah , if you're a small rural shop like mine was, 175K a year and being relatively "legal" (IE taxes licenses, etc.) after overhead and stuff, you likely see maybe 15% to 20% net margin a 40% to 60% gross margin EBITA perhaps.. I doubt he'd actually be pocketing 50K a year on a legit business doing 175K a year gross.

 

[street]

Thanks for your input and knowledge first hand.

 

[Qs Laptop]

I'm a small business owner and I'll chime in here. Based on the numbers you cited, $7M over 40 years, or let's call it $200K the past several years (assume much less revenue in the early years) and the fact that he has a "dirt cheap" employee in addition to himself, I'd say that 20% - 25% profit margin is optimistic. I assume you mean net-net profit as shown on the bottom line of an income statement.

Difficult to determine without knowing his cost of goods. Still, two people getting paid off of $175K - $200K per year in revenues? Hard to imagine a 25% net-net profit unless he has another source of personal income and doesn't take an income from this business.

 

[Ronstar]

15% net on an engineering business IIRC

 

[OldShooter]

Not an answerable question without knowing how much the owner is paying himself. As a pro bono small business mentor I frequently saw situations where the owner said he was making money but he was not drawing a salary.

The accounting-grade answer is that an owner should be getting paid twice. First, he should be getting an economic return on the investment he hs made into the business. 25% is a defendable number here; small businesses are risky and the ROI should reflect that. Second, he should be getting paid for the work he does in the business. If he is the general manager of the business he should be earning the market rate for general managers in his industry.

So, forget COGS and margins and just look first at the cash returns that the owner is getting. If he is not getting both a fair return on his capital and a fair wage for his work, the business is not a success.

 

[COcheesehead]

My business ran on about a 60% margin, but I know a number of business owners that thought 30% was good enough.

 

[Surewhitey]

I've been SE for some years now and last year I net $69k from 87k revenue. I run super lean & this doesn't include any deductions. Just gross profit (my take home) from revenue.

I'm probably working half days now on average so it could easily be 6 figures. Unfortunately ~40% taxes eat up a lot after maxing the SEP 401k.

 

[Qs Laptop]

So, forget COGS and margins and just look first at the cash returns that the owner is getting. If he is not getting both a fair return on his capital and a fair wage for his work, the business is not a success.

I can agree with that, but "is the business a success?" was not the question the OP was asking.

 

[38Chevy454]

It is also dependent on how much fixed cost. Your profit is zero until you have covered all of the fixed costs. Then it's variable depending on the further volume, profit margin should be increasing with more income.

 

[Time2]

My wife and I had a small business for 18 years, very low overhead. Mostly selling one seafood item. We grossed about $180k a year with about 50% of that profit. Basically it paid our wages, but, it was still more than we had earned before.

 

[rmcelwee]

The business I had (very, very early internet provider) did not make a single cent until I sold for a profit. I remember people raising total hell a few years ago because the pharmaceutical companies dared to make a 7% profit. My point? I guess it is completely dependent on what type business it is.

 

[ERD50]

How many hours/year is the "one employee he gets dirt cheap"? With minimum wage laws, if that's a full time employee it's not a small expense out of the annual gross estimate.

 

[OldShooter]

My wife and I had a small business for 18 years, very low overhead. Mostly selling one seafood item. We grossed about $180k a year with about 50% of that profit. Basically it paid our wages, but, it was still more than we had earned before.

Sadly, that is referred to as "buying a job." Much more common than people realize.

 

[Time2]

Sadly, that is referred to as "buying a job." Much more common than people realize.

I'm quite aware of that, but it was also when we earned our highest income.

 

[YellowSubmarine]

As a medical instrumentation supplier, our wholesale cost were 15 -25% mark up. But competition and bided contracts often lowered that profit margin. My business made most of the money in instrumentation service, i.e. installation, annual calibration and repairs. Also reconditioning trade in equipment was a money maker. So, used sports gear has lots of potential when reconditioned. Not sure if Play it Again Sports is still around but that maybe a good bench-mark for expectations.

 

[deserat]

Excellent thread...my business, now almost closed, had a 60-80% profit margin BUT that was what I gave myself after expenses...if I needed a tech refresh (new computer or other tech) it might be lower. Engineering consulting-one man shop-nowhere near $7M but funded a nice SEP IRA over a few decades....plus gave me very interesting intellectually challenging work with some fantastic world travel.