I want to shed light on the worst small businesses to buy or sell and to unveil which industries you might want to avoid. To ascertain which industries were among the worst I studied the default rates of SBA 7(a) loans made between 2010-2019. This dataset included 545,751 businesses funded by banks nationwide using the SBA 7(a) loan program. Based upon the results of my study I noted that some industries had significantly higher failure rates than others.
The worst businesses to buy or sell based upon the SBA 7(a) loan charge off data include computer and office machine repair shops (19.31%), electronics stores (12.26%), limousine services (12.73%), clothing stores (~10%), and residential remodelers (9.40%). The first few industries mentioned have succumbed to technological advances. For example computer repair stores are unnecessary as the price of computers has fallen so drastically the public is not likely to spend money on repairs. Electronics stores, clothing stores, and other brick and mortar retailers are being replaced by online shopping. The demise of limousine services is likely due in part to Uber and Lyft. With more degradation surely on the way from autonomous vehicles like Waymo and Tesla. The charge off rate for the worst industries ranged from 9.40% for residential remodelers to almost ~20% for computer and office machine repair (see table – 1).
While computer repair and certain retail industries were very risky hosiery and sock mills, and sheer hosiery mills were the worst businesses with a default rate of 100%. But if you have an appetite for risk you mighy consider purchasing a business in a high-risk industry. I tend to think that even within risky industries there are opportunities to be found as you might be able to purchase these businesses at lower multiples of cash flow than a safer business. I recall the renowned investor Warren Buffett started his empire with the purchase of Berkshire Hathaway (a textile mill).
