5 Terrible Businesses to Avoid If You Want to Make Real Money

Not all businesses are created equal. Some seem enticing but have fatal flaws that make consistent profitability nearly impossible. Before investing time and money into a new venture, it pays to understand the downsides.

Here are 5 types of businesses that look good on the surface but are actually quite poor ways to make money over the long term:

1. ATM Routes

Owning a network of ATMs sounds lucrative – who wouldn’t want cash flowing in from machines you don’t have to actively manage? But the math doesn’t work.

Key Problems:

• ATMs average just 3-5 transactions per day. At $100 per withdrawal and 1-3% transaction fees, monthly revenue per machine is low.
• Payback period is 5-7 years just to break even on machine costs. Need significant scale to see meaningful returns.
• Maintenance fees eat into profits, as does paying someone to collect cash regularly.
• As digital payments grow, reliance on cash and ATMs will likely decline over time.

Verdict: Insufficient margins and unpredictable future of cash make ATM networks a poor investment.

2. Amazon FBA Businesses

Fulfilling orders through Amazon’s warehouses sounds smart, but relinquishing control to Amazon poses big risks.

Key Problems:

• Amazon can suspend accounts or boot sellers off the platform with little notice.
• High competition as “internet gurus” push everyone to sell on Amazon. Race to the bottom on price.
• Amazon uses seller data to make competing private label products. No loyalty.
• Little pricing control – Amazon bots scrape competitor info and dictate your prices.
• Black market for seller data helps Chinese firms quickly duplicate successful products.

Verdict: Very little upside for individual sellers, and Amazon holds all the cards.

3. Traditional Brick and Mortar Retail Stores

A cute boutique seems fun until the harsh realities of retail sink in. Here’s why retail stores are flawed:

Key Problems:

• Foot traffic declining as purchases shift online. Most growth is in experience-based retail.
• Upfront inventory costs tie up cash. You buy product before selling it.
• Low margins, high rent. Need very high sales per square foot, which requires costly premium locations.
• Tough financials. Inventory has to turn over rapidly. Theft and waste eat into profits.

Verdict: Challenging unit economics and immense ecommerce competition make scaling boutiques incredibly difficult.

4. Restaurants

People may dream of opening the hot new restaurant in town, but the restaurant business is rife with issues.

Key Problems:

• 60% of restaurants fail within 1 year. 80% fail within 5 years. Razor thin margins.
• Intense competition in most markets. In NYC, it would take nearly 23 years to eat at every restaurant.
• Complex operations of forecasting demand, pricing menu items correctly, reducing waste, and controlling theft.
• High fixed costs. Build outs cost $100k-$2M+ upfront, not including expensive equipment.
• Good luck getting funding. Banks hesitate to lend due to many variables and high failure rate.

Verdict: With tiny profit margins and immense competition, restaurants are more lifestyle businesses than scalable ventures.

5. Hotels

At first glance, hotels appear to be stable assets. Look closer and you’ll spot major vulnerabilities.

Key Problems:

• Average hotel sole proprietorship makes only -2% net profit per the IRS. Money losers.
• Hotels operate 24/7/365. Staffing and managing properties is demanding.
• Guest stays are short term. Forecasting occupancy and revenue is extremely challenging.
• Hundreds of employees to manage, mostly low-wage. High turnover.
• Very capital intensive. Huge upfront costs for property, furnishings, equipment.

Verdict: Asset heavy, low margin businesses with fickle demand and grueling management requirements.

Key Takeaways

Be very cautious before investing time or money into businesses with:

• No clear competitive advantage or defensible niche.
• Dependence on a platform you don’t control.
• High fixed costs and overhead but low margins.
• Heavy competition and low barriers to entry.
• Inconsistent and unpredictable demand for the offering.

Of course there are exceptions, but tread carefully. Look for uncrowded playing fields and simple, scalable models instead. Your bank account will thank you.

What terrible business would you add to the list? Share below!