Six businesses that always FAIL – why you should avoid them

9 min read

Introduction

I’m going to tell you exactly the worst business sectors that you should invest money in, start or grow in. And I’m doing this from a position of experience.

I’ve traded businesses myself, employed people, and I’ve made some made some mistakes. I’ve made some big wins, too.

That’s why I want to wrap that up in this blog – so you know what you should avoid with a ten-foot barge pole.

The funny thing is, I’m writing about sectors I’m already trading in, and what I’ve done to tweak them so they become better businesses.

When you can get a good model, you can scale that up and then rinse and repeat. Take the McDonald’s model, for example. They know it works, so they go again and again.

We want to find the right models so we’re setting ourselves up for profitable businesses.

Let’s get into it.

Number One: Restaurants

This is one of the worst sectors I’ve come across.

There are some unicorns – as in, restaurants which do make money. But as a rule of thumb, I think it’s a really terrible business sector.

Banks don’t like them because the failure rate is absolutely huge, with low revenue per employee.

Sectors that are “high revenue per employee” are usually a lot more profitable.

For example, if you’ve got £1 million in total revenue and you’ve only got two staff, that’s £500,000 of revenue per employee. There’s a good chance you’re going to be super profitable.

But that’s not true for restaurants. You could do £1 million turnover at a restaurant to share between 30 or 50 staff.

You might say, “Why have so many staff?”

That’s because you can have a lot of people just working part time hours. On Friday, Saturday and Sunday, you could be going gangbusters. But from Monday to Thursday, it could be like the Mary Celeste.

That’s something you don’t want in a business. We want nice, boring, predictable cashflow. I don’t like high CapEx costs - capital expenditures used by companies to upgrade or maintain assets like property.

Say you’re setting up a restaurant, and it’s cost you £1 million. You’ve got to pay that off over a period of time, through depreciation.

Then say your restaurant makes between five and ten percent profit. Out of that, you’ve got to pay back the loans or the capital that has been deployed to set the restaurant up.

You pay that off over five or ten years, but loads of competition is opening within the sector. There are so many restaurants which are going to steal some of your pie, even if you’re better than them.

That means you’ve got fickle customers.

It’s a sector where the customers are so fickle that they want to try what’s new in town. It’s really hard to build loyalty compared with other sectors.

One final challenge with this sector is the high rates of turnover tax. You’ve got business rates, VAT, insurance premium tax and the rest of the cocktail of taxes. This means the government is taking more of your turnover than you’re actually keeping in profit.

But here’s the twist: I own a big ice cream parlour.

Yours truly outside my Rossi’s parlour in Southend, Essex. (Credit: Ben Shahrabi)

Why does that make money and do better than most in the sector?

• It’s big enough. If you open a restaurant, make sure you’ve got capacity. If not, you can’t leverage the management, overheads, catering team, or marketing.

• Preferably, you should ensure you own the building, so you haven’t got ever-increasing rents.

• Try to find legacy businesses. It’s better to buy one that’s been around for hundreds of years, as everyone knows it. That’s what I bought – a 100-year-old ice cream parlour that’s big enough, where the overheads were really low, and there was very little competition. That gives us that unicorn status – while most are just getting by, we’re making profits, paying down our loans and refurbishing the place.

Number Two: Dog-walking, cupcake-making and party planning

Three very “low barrier to entry” sectors.

When you start in a business, you want to be as “high barrier to entry” as possible. That protects you against competition.

Anybody can pick up a dog lead and become a dog walker. That leaves you vulnerable. Customers won’t want to pay much if so many people can do it.

You’re effectively swapping time for money. Any business which does that but cannot be scaled to be a commercially profitable enterprise (which works without you in it) should be avoided at all costs.

Yes, it’s attractive because you don’t need money to start the business, but it’s not attractive because nobody wants to buy it when you sell.

You’re effectively just building yourself a profitable job, and no one wants to buy one of those.

My advice is to be as high barrier to entry as possible.

Number Three: Boutique Clothes Shops

So many people have the illustrious idea of opening a stupid little shop. But what you could end up with stupid little results.

I don’t want you to put your effort, time, and energy into something that’s not going to yield good results.

Retail is very difficult. The big boys really struggle with it.

You might think your little shop idea is sure to work, but face facts: high streets are dying.

So, if you want to be a really good little shop, you’ve got to make sure you’re in a massively high footfall area and your overheads are really low.

You’ll be holding loads and loads of inventory. You’ve probably got no experience of what inventory to hold and you’re therefore going to sit on lots of stock.

Stock is cash. I know because I hold £1.6 million of cash for one of my other businesses, and holding stock can really cause you cashflow problems.

I hold over a million pounds in stock. (Credit: Michael Chudley)

One way you could make boutique retail work (although I still don’t like it) is making sure you’re in a niche.

Remember, there’s riches in niches.

That could be offering specialist clothes for larger or taller people, because people would go out of their way to find you.

Then, you’ve got to make sure you’re known and have a big off-high street marketing campaign to bring people to you. That way, you can think of your retail shop as a showroom, rather than a place to do business.

We’re seeing cars moving into shopping centres, using that passing trade to show people the cars without them actually being bought.

The retail that’s going to work now is experience and showroom-based, where you don’t actually need the shop to drive the revenue. It’s a really difficult business to be in, so I would avoid boutique retail at all costs.

I speak from experience. I used to own three party shops. The rent, rates, staff, fickleness of the turnover – it was one of the most stressful times of my life.

Number Four: Hotels

One of the worst business sectors I’ve come across is hotels. The irony is, I own one.

I bought it knowing they are very difficult to make money from.

They’re hugely capital intensive. You need millions of pounds to set one up. Once you’ve done that, you’ve got guests who come and go, so you’ve not got regularity of customers.

You also need lots of staff, who are generally low-skilled hospitality workers. You’ve got to train them up in a fickle marketplace. The recruitment process is getting harder, as people don’t want to work in these industries as much.

Now, we’ve got a situation where we’ve got third party booking agents, like Air BnB and Booking.com, which actually own the data of your customers.

If you do want to get into hotels, you’ve got to have very deep pockets. In a way, that does make it a very high barrier to entry, but you’ve got a hugely depreciating asset.

You can renovate your rooms but, in three years’ time, you’ll have to do them again. There’s a constant need for more capital to go in, to make you very competitive in a highly competitive marketplace.

WATCH a full breakdown on how I bought my hotel for £2.25 million:

Why do I like them?

Well, for inheritance tax reasons in the UK, you can pass your hotel onto your family inheritance tax-free. They are trading businesses with commercial properties entwined. In the UK, that’s very tax efficient.

You can create multiple revenue streams. When you’ve got an asset like this, you need to sweat it. Yes, we’ve got a very active pub/bar function area and a restaurant - but we’re offering meeting rooms and wakes, and I’m doing all my own seminars here.

So, why have I bought this hotel?

It’s because I’ve tweaked the model to make sure we sweat it more, therefore making it a commercially profitable enterprise. Most hotels don’t do all that stuff, which is why they struggle. They just about get by – whereas we want to be super successful.

Number Five: Marketplace selling and eCommerce

Selling on e-stores that you don’t own.

You know who I’m talking about here – Amazon, eBay, Not On The High Street, Etsy...

What I primarily don’t like about this is, although they have a trusted brand which could elevate your revenues quickly, they own the customer – not you.

They own the email address. That’s one of the biggest no-no’s in business.

There are two things which I think make a business really valuable:

An effective team which runs the business, so it’s a commercially profitable enterprise that works without you in it.

A database of customers is of huge value. I’ve bought companies based on these alone. I want to buy into the customers that know, love, and trust a business.

If you’re selling through sites like Amazon, they own all of that. If they decide to shadow-ban you or just take your product off your website because they can buy it themselves and do it cheaper, that’s the end of your business.

It’s better to grow more slowly and build your own customers using content, marketing, and your own webstore.

That’s why I bought Party Pieces. It’s a brand that’s 35 years old and everyone knows it. People come to our website direct, we get the email addresses, we own the customers, and we’ve got the database. Every day, £10-20,000 worth of wholesale business leaves each day, which gives me the volume to do the “little and often” orders too.

WATCH this video to find out how I bought it:

I am on Amazon and eBay. The problem is, I feel like I’m just moving money around for them. We’ve employed somebody full time to do all our listing, Amazon keeps most of the money, but I am on there because I like the awareness.

If you are going to be on these e-marketplaces, make sure you’re building your own brand. Otherwise, it’s just a disaster waiting to happen.

Number Six: Events

Another awful business to get yourself involved in is events. They’re really “ego businesses”.

But you want to be thinking about this from a business point of view – from a profit and loss point of view.

It’s so tough because you’ve got to get lots of people to buy from you just once. That’s not good business sense.

What’s much better for business is a little bit of money from a lot of people, a lot of the time.

In the events business, you get the money once and that’s it. You’re not building a database, you might come back in a year’s time, you’ve got loads of competition, you don’t own the site the event operates from, and you’ve got to hire stuff out.

Here’s the oxymoron to that.

I own Marsh Farm Animal Adventure Park. In many ways, it’s an events business.

But what are we doing different? What are we doing to improve the business model, for profitability?

We own the site. We sell an event to someone and then we create another event, we own the database and have events happening all the time.

When we invest cash into capital expenditure, we get to reuse that.

We buy assets once and get to use them for years and years.

There are massive tax advantages to owning stuff, rather than renting stuff.

Those are some of the worst businesses I’ve come across.

WATCH my YouTube video all about them here:

Have you managed to make them work? Let me know in the comments.