How Much Profit Does the Average Small Business Owner Make a Year?

I knew I wanted to own my own business from when I was 13. In fact, I started my first business, which was an “advertising business,” at the age of 15.

I put “advertising business” in quotes because it wasn’t much of a business. I suspect the total revenue from my first venture didn’t amount to more than a few thousand dollars, but I was hooked, nonetheless.

There’s something that has always appealed to me about being my own boss and forging my own destiny. In my mind, I’ve always equated it with the thought of driving quickly on a motorcycle on a quiet highway with the song “Born to Be Wild” playing in the background.

I’ve since gone on to start a number of businesses over the years, all with varying degrees of success.

Ironically, if you had asked me why I wanted to start my own business when I was younger, my answer back then would likely have been the same answer as I would give today:

The freedom to choose my destiny and reap the rewards of my hard work.

Ultimately, and in the end, profit follows … Or does it?

What Profit Margins Does a Small Business Make?

There appears to be a wide disconnect between what a small business owner actually makes, and what the general public believes a small business owner makes. The company Reason-Rupe did a poll in 2013 and asked over 1,000 people what they thought the profit margin was for a small business. The results are surprising.

The general public believes that a small business makes up to 36% profit margin when in actuality, the number isn’t even remotely close to 36%.

I’m sure you’ve heard the statistic that over 50% of new businesses fail within the first 5 years of starting. Inside that terrible statistic, there are a number of questions, like why did the company fail and why did the small business ever get started in the first place.

My plan isn’t to tackle the answers to the two above questions, as I’ve addressed those in other blog posts, like here. But if the general public believes there’s such a high profit margin, do individuals enter small business thinking that it’s easy and filled with wealth and riches. 

Is the typical entrepreneur completely disillusioned enough into believing that they’ll make a 36% profit margin when they enter business, only to realize that it’s a lot harder and not nearly as profitable as they first imagined?

I suspect so, and the high business failure rate would likely support that.

So if the typical small business owner doesn’t make a 36% profit margin, then how much do they make?

For starters, small business comprises a very large percentage of the overall workforce in North America.

According to a study by the US Small Business Administration, in 2015 in the US, small businesses employed 58.9 million people, or 47.5% of the private workforce. For clarification purposes, small business is defined as a company with 100 or fewer employees.

From a different SBA survey, 80% of the 28.1 million small businesses in the United States do not have employees.

What Is the Average Revenue of a Small Business?

The average revenue of small businesses with no employees is $44,000 per year, and the average revenue of a small business with employees is $4.9 million.

I extracted the data into the following chart:

The above addresses revenue. The next question is what is the average profit margin.

From an article titled SME Operating Performance on the Government of Canada website, margins for a small business operating between 2004 and 2012 were 7%. You will notice a big variance from the chart in the small business net profit margin ranging from as low as 1.5% to as high as 7%. The information obviously varies from year to year based on economic conditions, but 7% net profit operating margin is a high watermark.

That number, 7%, isn’t very good.

For clarification purposes, the number is how much revenue a company keeps as profit after deducting all costs of doing business, taxes included.

Using a 7% profit margin, which appears to be at the high end, here’s what the average profit looks like for the North American business:

How Much Profit Does the Average Small Business Make a Year?

Given that 80% of the small businesses don’t have any employees, and the average business owner has $44,000 in revenues, it looks like the average 1-person business makes slightly over $3,000 a year. Even if I were to double the 7% number, we’re still only looking at $6,000 a year in profits, which isn’t exactly a banner number.

If you take the weighted average of all of the businesses in each size category, you’re looking at slightly over $50,000 per year. Of course, I’ve made some assumptions, the most important assumption being that the average small business profit margin is 7%.

You will notice that the profit level really only becomes somewhat significant when the business has between 20 to 99 employees, at which point, the average profit margin is $498,680. Growing a small business to north of 20 employees requires a very different entrepreneurial skillset than the startup skillset, which is why so few businesses ever surpass the $1 million mark.

Even at $1 million in revenue, the profits on average are only $70,000 a year, which is barely above the average employee’s salary level. According to the book, Scaling Up by Verne Harnish, 94% of businesses have less than $1 million in revenues.

Using the above information, and extracting data from another study done by both the US Small Business Association and the Government of Canada, here is the percent of businesses that fall into each category:

The bottom line (no pun intended) is that the average business owner is barely making enough profit to make it worth running a business. They would be better off just getting a job.

To Summarize, and answer the question, what type of profit does the average small business make a year, broken down into the categories, you’re looking at:

• 1 employee = $3,800 profit/year
• 2 to 4 employees = $27,090 profit/year
• 5 to 9 employees = $76,600 profit/year
• 10 to 19 employees = $151,480 profit/year
• 20 to 99 employees = $459,680 profit/year
• 100 to 499 employees = $2,854,250 profit/year

I see two primary small business challenges:

Challenge 1: taking the leap from a single sole-proprietor shop to a larger scale

Challenge 2: improving profit margins

These two challenges are unique, of course, and need to be tackled separately. The scaling challenge is far more complex than improving profit margins. Or put another way, improving profit margins is easier to fix than improving revenues.

Given the Stress and Lack of Profits, Is It Worth Running a Small Business?

And that’s the holy grail of questions.

Why run a small business when the chances of success are so slim?

Why run a small business when most business owners would be better off just getting a job?

And these questions bring me back to what I wrote about at the beginning of this post:

There’s something that has always appealed to me about being my own boss and forging my own destiny. In my mind, I’ve always equated it with the thought of driving quickly on a motorcycle on a quiet highway with the song “Born to Be Wild” playing in the background.

• The freedom of choice.
• The freedom to forge one’s destiny.
• The chance of making it big.
• The appeal of large profits and wealth.

In the end, is it all worth it?

Absolutely. And I would do it all over again if I could.

Good luck with your small business and wealth-creating journey.

If you enjoyed this post, you might also enjoy this one:  Profit Isn’t a Disease. It’s the By-Product of a Well-Run Company. If You’re Not Yet Profitable, Fix It or Get a Job.

And this one: How Do You Know When It’s Time to Sell Your Business? It’s Not All About the Money.

You should also consider subscribing to my blog. I publish one article a week on small business and wealth creation.  You can subscribe here.

Also, I published a book during the summer of 2018, “The Kickass Entrepreneur’s Guide to Investing, Three Simple Steps to Create Massive Wealth with Your Business’s Profits.” It was number 1 on Amazon in both the business and non-fiction sections. You can get a free copy here.