Do you want to make sure you get top dollar for a business you’re trying to sell? Then you need to know how to value a business. Or, are you considering buying a business, and need to know EXACTLY what it’s worth, so you pay that price for it and not a penny more? If so, you’ve come to the right place. In this article, I'll make sure you're armed with every bit of knowledge you'll need. That way, you'll be able to determine how to value a business like a pro. My highly actionable advice could end up saving you THOUSANDS of dollars of your hard-earned money in business valuation. There are SO many questions to ask when you’re trying to find the value of your business. That’s true whether it’s one you already own, or, one you’re considering buying. Here are a few questions about business valuation that might be swimming around in your head: How the heck do I value a business anyway? How much is MY business worth? What’s the exact process for valuing a business? I’ve heard there’s more than one method. Which one do I use? Now, getting answers to these questions won’t be as easy as ordering an Iced Caramel Cloud Macchiato from the Starbucks drive-thru. But it isn’t rocket science either.

The Challenges of Valuing a Business

Let's get into the specifics of how to value a business you own or a business you're thinking about buying. But before we do, it might be a TERRIFIC idea to go over how you determine the value of ANYTHING. To do that, I’ll have to dust off my copy of Economics 101. There’s going to be disagreement between buyers and business owners as far as price and business valuation goes. Buyers want a low one, while business owners want a high one. So, a compromise is inevitable. The more demand there is for a business, the higher the price will be. The price for anything is determined by a Supply and Demand Curve. Look at this one: You arrive at the optimal market price for an item based on supply and demand by figuring out the precise point at which supply equals demand. To do that, you’ll need to create a graph with the supply and demand lines written on it. Where these two lines intersect is what is called “economic equilibrium,” or the market price for the good or service. Of course, the real value of a good or service is the price a buyer is willing to pay and one that the seller is willing to accept. For example, suppose we have a can of sweet peas. Let’s say it costs a company 75 cents to manufacture a can of peas. This cost includes things like:

• Harvesting
• Drying (that’s because they weigh less, so they can more shipped more cheaply)
• Shipping to the processing plant
• Reconstituting them by adding water
• Adding green dye (SURPRISINGLY ENOUGH!)
• Putting them into cans

However, no matter what price he slaps on the can, it will only sell if he can find a buyer willing to pay that price. The buyer could care less about the costs of getting that can to the shelf so he can buy it. He'll only plunk his hard-earned money down for the peas if he thinks they’re worth it.

What Else You Should Know

This example powerfully illustrates the one thing that’s too often overlooked when pricing a good or service. And that is, value is often (to use an ancient cliché that also happens to be one of the very best “Twilight Zone” episodes ever made), “in the eye of the beholder.” There must be on the part of the buyer to buy the thing. That's because a desire is the gasoline that fuels the economic engine that runs the world. This desire can either be based on needs. Or, it can be based on wants.

A Tale of Two Cars

Increasingly in today’s world, more consumers are prioritizing wants over needs. Here’s an example. All cars basically do the same thing—get you from Point “A” to Point “B.” That’s it. A simple function. Even though both cars basically do the same thing, there’s a HUGE difference between the price of a Ford Fiesta and a McClaren P1. As a matter of fact, about $1,334,740. Most buyers would consider the P1 to be sexier than the Ford Fusion. In fact, probably about a million times more so. This desire jacks up the price of the car. The ONLY way anything has value in the marketplace is if a buyer is willing to buy it. And, at the price that the seller wants. The importance of “want” when it comes to determining value cannot be emphasized enough.

The Power of Emotional Attachment

Real estate is an excellent way to demonstrate this concept. Some of the priciest real estate you could get your hands on happens to be in New York City and San Francisco. Here are real estate prices in New York: And here’s what they look like for San Francisco: However, there’s a certain segment of the population who would not live in either of those two cities. No matter how low the price happened to be. And even if you paid them to live there. The same is true for sellers. I recently watched an episode of “Better Call Saul.” In it, Everett Acker (played by the great Barry Corbin), refuses to sell his house to Mesa Verde Bank and Trust. They want his piece of land so they can put a call center on it. First, they offer him market price for the home. And an additional $18,000. Then, they increase their offer to market value PLUS $45,000. But no matter how high the offer goes, Acker won’t budge. That’s because he’s lived there since the 70s. And, he’s emotionally invested in his home. So, because the price is subjective, it can be difficult to determine the price. People get attached to things, which tends to skew their perception of the thing's actual value.

I’d Buy THAT for a Dollar

In the real world, we know that people can be enticed into buying something because the price is simply too good to pass up. For example, with a significant portion of the population, if you offered to sell them a West Village (a fashionable neighborhood in New York City known for its beautiful architecture and chic, artistic offerings) mega-mansion for the unbelievably low price of $1.00, there would be almost no one who would refuse you. So, price is a powerful motivator. There’s no denying that fact. Even if they don’t really want the item, there are few who can pass up a good deal when they see it. Most people know “great value” when they see it. Nobody needs to tell them! Whether you’re buying a house or a can of peas, the active market determines price. If people think an item’s price is too high, they’ll flock to a lower-priced alternative. Over time, this causes the price of goods to fluctuate until it achieves economic equilibrium.

How Negotiating Affects Price

However, buying a house is much different than driving down to your local Kroger’s to buy a can of peas. It cost thousands of times more, so there’s a lot more risk involved. You’re not going to haggle on the price for the can of peas. Everybody who buys a can of peas at the same store will pay the same price for that can. However, negotiating the price of a home is not only allowed—it's expected. Because of negotiation, there’s going to be more variation in the price of a house than the price of a can of peas. Now, you can easily find the average price of a home in a geographical region by checking out tax assessor websites for listings of recently sold homes. Or, call a real estate agent and ask for a list of recently sold properties in the neighborhood you’re looking at. You could even use a website like this: For example, if 20 houses sell during the same month and they’re comparable, then a quick calculation will tell you the average price for a home in that neighborhood. Now, this is all well and good when the market is active. Inactive markets are another story. This is where there are either no sales or no comparable sales.

When Comparisons Become Meaningless

If these 20 homes sold over five years instead of a more limited period, there would be no way to compare one sale with another. That’s because the sales were spaced out over a long time, and comparison becomes meaningless. The same issue pops up with business sales. The problem is even worse because there are far fewer sales of a business in a location than home sales. And because of this, looking at comparable sales to determine value when thinking about buying a small business is less useful. However, because realtors are used to comparing properties when determining value, they continue to use this same method when trying to figure out how much a business is worth. The real problem with this is that there’s no practical way to compare one company with another. A hair salon is a whole LOT more different than a machine part manufacturer. Even if you compare one kind of restaurant with another, there are still a lot of differences between the two.

A Tale of Two Cafés

For example, in the area where I live, there are two vegan cafés. Now, you might think that since both are vegan, that you can easily compare one to another when you’re trying to figure out what the price of a vegan café is in the area. But you’d be wrong. That’s because one café took over space formerly occupied by a late-night dive restaurant. You know the kind of place: The kind you go to in the middle of the night after having one too many Long Island Iced Teas at your favorite bar. The vegan café retains a bit of this grungy charm. It's located in a somewhat rough part of town, right next door to a minor league baseball park. The second café occupies space that used to be a street-front slaughterhouse and restaurant specializing in buffalo meat (which is a funny place for a vegan diner to occupy). It’s ten times ritzier than the first joint. And, it’s located in an upscale part of the city, right next to several colleges. Here’s what its website looks like: Now, even though the two cafés are vegan establishments, saying that their value is going to be comparable is a silly exercise in futility. SO, DON’T EVEN TRY IT, MISTER!

The Goodwill Factor

Finally, you’ll need to consider "goodwill" when trying to figure out how much a business is worth. Goodwill is the intangible assets of a company. Assets of the tangible variety are easier to understand. For example, let’s consider a manufacturer that makes phone cases that uses plastic to build her cases. The value of this raw material is wicked easy to figure out. However, suppose that this maker has a highly secret, super-efficient, patented process for making these cases. Trying to ascertain the monetary value of this technological trade secret is going to be challenging to determine. Yet, this process is a significant asset of the company because it supercharges its competitive advantage. Intangible assets are often overlooked when someone is conducting a valuation. That’s because they’re:

• THOUGHTS
• IDEAS
• CONCEPTS
• EXPERIENCES

And other things that might seem nebulous and indefinable, but which rake profit in for the company. How the heck can you slap a dollar amount on items like this? It’s well near impossible—even for professional consultants who have been doing this kind of thing for decades.

B.Y.O.A. (Bring Your Own Assets)

Sometimes, a potential buyer of a small business isn’t acquiring an intangible asset. Instead, they’re contributing an asset to the company they're buying. For example, say you purchase a company because you absolutely adore their product. However, you’re not so crazy about their production facility.  That's because it's seen better days and doesn't have all the technological bells and whistles that your own facility has. These are processes you spent years developing. And without all the high-tech wizardry you perfected over the years on your own products, there’s no way you’ll be able to competitively price the good. So, you start making the gadgets at your own factory. You just made the value of the small business you bought skyrocket into the stratosphere because of the intangible assets you added to it. These examples illustrate why there are so many challenges in determining the value of a small business. Next, we’ll look at formulas you can use to help figure out how much a company is worth. However, keep in mind that each one will only give you a rough idea because of all the subjective factors we just talked about.

Business Valuation Formulas

There are several methods for determining the value of a business. Here’s are some of them:

Asset-Based Method

One of the easiest ways to for business valuation is something called the asset-based method. As you might guess from the name, what you do is add up all the business assets. Although they’re going to be mostly tangible assets, there might be a few intangible assets you’ll have to take into consideration. Here’s how it’s actually done: After you list all the assets, you’ll next have to list all the liabilities. These are things like debts and accounts payable. Then to come up with a ballpark figure for the value, subtract the liabilities from the assets. Here’s an example. [su_note] A company has the following assets:

• $20,000 CASH
• $130,000 BUILDING
• $25,000 FLEET VEHICLES
• $25,000 INVENTORY AND MACHINERY

Total assets are $200,000. Now, let’s list their liabilities. These are:

• $85,000 MORTGAGE
• $17,000 WORKING CAPITAL LOAN
• $40,000 ACCOUNTS PAYABLE

[/su_note] The company would have a total asset base of $200,000. Total liabilities would be $142,000. Thus, the company would have a value of $58,000. Of course, these numbers are a snapshot of a specific moment in time. The only problem with that is that business valuation is always fluctuating. For example, what if the day after this snapshot was taken, the company was lucky enough to snag a much-coveted account. And, this brand spanking new client paid a hefty retainer fee. Admittedly, this sudden influx of both new business and cash will increase the value of the company. Almost every day, something could happen that could either increase or decrease the value of the business. So, it’s hard to keep track of a company’s ever-changing value when asset-based valuation is all you use. That’s why most experts recommend using it only as a starting point. Revenue Model Valuation Method Next is the revenue model business valuation method. This method is comprised of several different approaches, all lumped in together because they determine the value of a business based on its income. What’s great about this strategy is that it reflects actual business operations. What could be a better metric of the value of a business than that? It’s easy to see why this might be a better method to figure out how much a small business is worth than the asset-based approach. And really (when you come right down to it) this is simply a valuation based on the sales of a company. So how does this system work? Well, the details are where the weaknesses of this methodology can be seen. Let’s look at an example: Say a hair salon has been open for 20 years. Their yearly revenue currently happens to be $250,000. The owner makes a profit of about $75,000. A formula solely based on sales would take the $250,000 and say this is the business's value. However, these figures deserve a little more scrutiny. Let’s say the $250,000 is the smallest gross revenue the company has earned in its two decades of existence. This means that cash inflows are declining over time. Is that an excellent value to place on the small business? It probably isn’t, if revenues are going to continue to drop each year. That’s why a revenue model valuation (although it has certain advantages over asset-based valuation) might not tell the whole story.

How Accurate is Revenue Model Business Valuation?

So, I just pointed out several flaws in the revenue model of small business valuation. There are so many variables that can affect a company’s revenue stream. For this method to be accurate, you must account for them all somehow. Here’s another variable: there could be stylists who are rock stars. However, they’ve only been with the salon for a year or two. During that time, sales skyrocket because of their extraordinary ability to give everyone exactly the hairstyle they always dreamed of. But now they’re gone. The salon is left with beauticians of a more average sort. Because of this, the revenues of the business drop precipitously. Or, let’s pretend that the business sells machines that do emission testing. In this scenario, several states drastically increased their emission standards. This has the effect of rendering the old devices obsolete. When this happens, automotive repair shops that issue inspection stickers are all scrambling to get their hands on the new machines. This sends the revenues of the company making the machine through the roof. But the next year, sales level off, because all automotive places that issue inspection stickers already have the newer models. As you can see, the revenue-based valuation method's major problem is that it’s only a snapshot of the company at a moment in time.

Discounted Cash Flow

So, that’s two ways to determine small business valuation. Is there another? Turns out there is. But before we go over these other methods including discounted cash flow, let’s look at one of the most prominent investors in the world. You’ve probably heard of him. Warren Buffet. His company, Berkshire Hathaway, has built a HUMONGOUS empire of businesses all over the planet. They include: Mr. Buffet acquired a controlling interest of more than 10% in every one of these companies because he’s a buyout artist par excellence. He wouldn’t have added these companies unless, over the years, he honed his ability to determine value to a razor-sharp point. Here’s the point in the festivities you might be asking: NOW, WHAT THE HECK VALUATION METHOD DOES WARREN USE? Good question. The answer is discounted cash flow analysis. This is a more accurate method than the other two methods we discussed. That’s because cash flow doesn’t use a mere moment in time—it uses a more extended period. Which is usually several years. Most non-discounted methods for determining value are based on financial history. However, you’re not purchasing a book talking about the company’s past achievements. You’re buying their financial performance because you want to benefit from their future cash flow. Now, you might be thinking that past financial success is a good predictor of future economic success. But just like admen in slick financial product infomercials will tell you, you’d be wrong. And that’s because the future is fraught with uncertainty, my friends! When you use the cash flow method, you’ll be comparing the rate of return you'd get on this company to the rate of return for U.S. Treasury bills. To do this, use the formula for the Net Present Value of Money. In this formula, cash flow is the money flowing in and out of the company. R is the discount rate. This can be a percentage. For example, the current interest rate. Alternatively, you can use the weighted average cost of capital for your percentage. This is the rate a company pays to finance its assets. It includes the average cost of a company’s working capital after taxes. N is the time period. You can use however long you want for this amount, whether that’s 5, 10, or 30 years. The number you get after you input all values into the formula is called the terminal value. This represents the growth rate for projected cash flows for years other than the time parameters you’re using. To figure out this value, take the cash flow of the final year. Then, multiply it by (1+long term growth rate in decimal form) and divide it by the discount rate minus the long-term growth rate in decimal form. Say you want to do a discounted cash flow analysis of a business you’re considering buying. First, estimate its future cash flow. To do this, look at the balance sheet for the previous year. This is the amount of revenue that flowed in and out of the business. Let’s say this figure was $750,000 in 2019. Now, you can look at the number for 2018. Say this number is $700,000. Now, we’ll have to calculate the rate of growth. To do that, use this formula. Plugging in the numbers from our example, this would be: GROWTH RATE = $750,000-$700,000/$700,000 = 7.14%. Use this to estimate the future growth rate. Using this number, we extrapolate that our company will grow by this amount for the first two years. And then, in the next two years, we take all factors into consideration and estimate that growth will slow to 6%. You also need to choose a percentage to calculate the terminal value. This number represents the long-term growth of the company. Err on the side of caution with this, so your estimate isn’t overly optimistic. A good guideline is to use current interest rates for this amount. Let’s say it’s 4%. With these figures, you can now calculate the projected cash flow for each year in your timeframe. Lastly, we need to figure out the weighted average cost of capital. Here’s the formula. Let’s say the discount rate for our company is 4%. Now, let’s plug our numbers into the first formula to get the discounted cash flow for the small business: [su_note note_color="#d2dde7"] ($803,550 / 1.04¹) + ($860,923.47 / 1.04²) + ($912,578.88 /1.04³) + ($967,333.61 / 1.04⁴) + ($1,006,026.95 / 1.04⁵) = $772,644.23 + $827,811.03 + $877,479.70 + $930,128.48 + $967,333.61 BUSINESS DISCOUNTED CASH FLOW = $4,375,397.05 [/su_note] So, this is the value of the company using the Discounted Cash Flow Method.

Come Up with A Range of Values

The best way to come up with an accurate valuation is to use all these methods to come up with a range of values. Combining the asset-based approach with the revenue model valuation method and discounted cash flow will help you get a clearer picture of the business's actual value. As an example, let’s presume there is a restaurant getting ready to be placed on the market. The company has been averaging $200,000 in revenues for the last 10 years. In the previous three years, the owner has not been as involved in the company. So, the earnings are below average. The assets of the company are as follows: [su_note note_color="#d2dde7"]

• BUILDING $250,000
• EQUIPMENT $15,000
• FIXTURES $10,000
• CASH $25,000

The debts are:

• $10,000 MORTGAGE
• WORKING CAPITAL LOAN OF $25,000

In the most recent year of revenue, the company earned $95,000. From the revenue model, the value is $95,000. From the asset-based method, the value is $300,000. From the discount cash flow method, the value is $448,622. [/su_note] The range method then would say that the value of the company would be somewhere between $95,000 and $448,622. The owner and buyer could add in other factors to adjust this range, like their opinion of the small business.

Conclusion

What is the bottom-line in finding a value to a small business? The best answer is that it is complicated. First, value is often in the eye of the beholder. So, value can be subjective, based on personal opinions. Second, there are multiple methods for determining value—whether that’s the asset-based, revenue model, or discounted cash flow method. Each has merit, but each has its faults. This means that there is no perfect method for determining the value of a business. That‘s why the best solution is to use a range of value to place you in the “ballpark” for what a small business is worth. This range provides for more accuracy in assigning value. I hope this article has instilled you with the confidence to make excellent business valuations.

Are you worried about the direction of the global economy?

You’re not alone. Both business owners and employees are feeling a crunch from rising costs. That’s why we’re going to discuss recession-proof businesses.

[su_note note_color="#dbeafc"] We’ll help you understand more about recessions, including:

• Are we in an economic downturn?
• What are recession-proof businesses?
• What industries are recession-proof?
• How do economic downturns impact businesses?
• Recession-Proof Business Ideas: 13 Good Businesses to Start in a Bad Economy
• Benefits of Starting a Business in a Bad Economy
• Conclusion [/su_note]

When you’re done reading this, you’ll have an understanding of recession-proof sectors and be prepared for the next economic downturn. Read from start to finish or click any of the links above to jump straight to the section you need to know more about right now.

Are we in an economic downturn?

According to the Federal Reserve, as of April 5, 2024, we are not in a recession, but economic downturns tend to occur every 6.33 years and typically last between 6 and 18 months.

The last economic downturn was caused by the COVID-19 pandemic and government shutdowns that lasted two quarters. Prior to that, the housing market crash of 2008 resulted in a recession that lasted for nearly two years.

Many people believe that the relatively high rate of inflation, the housing and rent bubble, and the reduction in spending power for many Americans are signs that the economic climate is primed for another economic crisis.

If you’re a business owner, now’s the time to should look at your business model and consider how it will survive and thrive during tough economic times.

What are recession-proof businesses?

Recession-proof businesses are companies in industries that tend to perform better than the gross domestic product (GDP) as a whole.

As we experienced during the pandemic, if a small business was considered an “essential service,” it could ride out the tough times because the economic activity that kept it afloat didn’t stop, even when most businesses were not allowed to operate as usual.

What industries are recession-proof?

When a recession hits, some industries and sectors tend to do better than others. There are essential services and products that people still need during economic slumps, including:

• Food
• Housing
• Utility services
• Healthcare
• Disposable goods
• Consumer staples
• Auto repairs

Meanwhile, revenue streams tend to dry up for some companies when widespread economic hardship occurs. Consumer demand for the following tends to decrease during an economic recession:

• New automobiles
• Vacations
• Restaurants
• Large purchases

The economic conditions during each recession will be different, which means consumers cut costs in different areas depending on what the scenario is.

For instance, during the Great Recession in 2008 and 2009, real estate agents were hardest hit because the cash reserves and risk appetite of banks were vastly reduced. In the 1980s, oil embargos caused people to reduce their driving because of gas shortages.

How do economic downturns impact businesses?

When economic uncertainty hits, small business owners will normally experience a reduction of incoming cash flow and be compelled to tighten up their budgets and stop hiring.

When the economic situation gets even worse, they may need to offer cheaper alternatives, lay people off, and, in the worst-case scenario, close their businesses.

Industries that are recession-proof will normally be able to avoid many of the worst-case scenarios because people still need food, clothing, shelter, and other recession-proof products.

Recession-Proof Business Ideas: 13 Good Businesses to Start in a Bad Economy

In the sections below, we’ll discuss industries that do well in recession.

The following businesses are sorted based on the number of searches for each type of recession-proof business. Why? Search volume is a good indicator of the demand for information about recession-proof industries.

Consider the following recession-proof business ideas:

• Affiliate marketing
• Grocery stores
• Food delivery services
• Auto repair shops
• Home improvement and home repair companies
• Property management companies
• Cleaning services
• Accounting services
• Healthcare industry
• Child care
• Information technology support
• Pet care
• Dollar stores

Keep reading to learn about the most recession-proof industries.

1. Affiliate Marketing

According to Kinsta, 56% of affiliate marketers increased their earnings during the recession of 2020, making it the best recession-proof business. If that’s not enough, Authority Hacker expects affiliate marketing to be a $27.78 billion recession-proof industry by 2027.

Affiliate marketing is the most commonly searched for recession-proof business. It doesn’t require an inventory, and you make commissions on every sale.

You might need to refer people to recession-proof services like bookkeeping services and rideshare services to keep your income flowing, but there are plenty of great affiliate marketing offerings.

Learn more about affiliate marketing through our interview with affiliate marketing master Matt Diggity.

2. Grocery Store

Grocery stores are another of the most recession-resistant business models. The food industry is never going to end because we have to eat to survive.

According to Forbes, people spend about 14% of their income on food, and the percentage of that spending that goes to fast food and restaurants has declined from 45% to 40%. That means people are grocery shopping more.

Check out our interview with Punardeep Sandhu, a serial entrepreneur who owns a grocery store.

3. Food Delivery Services

According to Bloomberg Second Measure, delivering food spiked during the pandemic. Given this industry hasn’t been around long enough to survive multiple recessions, it might not be as recession-resistant as the chart suggests.

That said, a business owner could focus on offering the same services for grocery stores to help protect against sudden reduced cash flow.

Find out how Adam Haber started his courier services working with Amazon.

4. Auto Repair Shops

According to the Denver Post, auto mechanics saw a 16% increase in revenue during the 2008 financial crisis, making it a fairly recession-proof business. These support services benefited from the lack of available loans during that time.

Meanwhile, repair shops saw a decrease in business during the pandemic because people drove 13.2% less.

Find out how Lucky Sing started his repair business in 2016 for just $20,000.

https://www.youtube.com/watch?v=chhmCdYt0iQ

5. Home Improvement and Home Repair Companies

During the Great Recession, the home improvement and repairs industry dropped 1% the first year before starting to increase again according to Statista. Meanwhile, home repairs increased by 22% during the pandemic.

Depending on the cause of each recession, the business opportunities may be in repairs or improvement. Offering both types of services makes a business that much more recession-proof.

Check out our list of construction businesses to learn more about starting home repair and improvement businesses.

https://youtube.com/playlist?list=PLaU6uY9Yy7XkawrX0jjKktx5hmzuzFrlr&si=pHMf4liTi7llybh_

6. Property Management Companies

According to the Congressional Research Survey, there are 49.5 million rental properties in the United States. Furthermore, 44% of them are managed by property managers according to DoorLoop.

People don’t stop renting just because the economy isn’t doing well, and these companies take a percentage of monthly revenue.

Learn more about property management and real estate investment.

https://www.youtube.com/watch?v=nFahVcXiXNM

7. Cleaning Services

A cleaning business can be recession-resistant. Home cleaners may find people cut back on cleanings, but janitorial services are unlikely to stop managing cleaning contracts because nobody wants to go to a business that is filthy.

During the pandemic, many cleaning services added sterilization services to drive new revenue and growth.

Learn how Christobal Mondragon makes over $1.5 million per year in our exclusive cleaning business course.

8. Accounting Services

Almost everyone in the United States needs accounting services. Some people only need once-per-year tax filing assistance, while others need financial advisors for things like:

• Financial planning services
• Bookkeeping
• Quarterly taxes
• Payroll
• Comparing financing options

These services are in high demand during all economic conditions.

9. Healthcare Industry

The healthcare sector benefits from people getting sick and having emergencies. That means healthcare companies make money no matter what the economy is doing.

Right now is a perfect time for starting a new business in the healthcare industry. According to The Hill, the entire healthcare industry is facing shortages of essential workers. The work is typically high paying and offers job security for those who can handle the grueling hours and stressful environment.

10. Child Care

According to Statista, there are 46.6 million American kids under 11 years old. The Census Bureau estimates 17% of their parents rely on paid childcare services. Meanwhile, the Department of Labor reports that people pay between $5,357 and $17,171 per year for childcare.

In-home daycares make great small businesses—you can save money and fulfill the ever-higher demand for childcare.

Pro Tip: Check out our picks for 698 Endearing Daycare Names and How to Start a Day Care (in 9 Simple Steps).

11. Information Technology Support

IT support companies are recession-proof companies because people still need help solving their tech-related problems, even in a downturn.

According to Axios, tech companies did poorly at the turn of the century because of the tech bust, but 2008 led to a lot of new technology that opened new business opportunities. Then, in the pandemic, there were grants to help small businesses implement new technology.

Small business ideas in this field tend to have high profits that make it easier for them to be recession-proof businesses. Just make sure to save money so you can weather economic downturns and invest in businesses that thrive in recession.

12. Pet Care

Recession-resistant industries include pet care. These are good business ideas because pets still need to be fed and go to the bathroom during economic downturns.

These recession-resistant businesses can use affordable luxuries like online shopping, digital marketing, and social media to make modern life easier for their pet-owning customers.

13. Dollar Stores

Dollar stores tend to do best when money is tight. According to USA Today, multiple chains are closing down their dollar stores due to financial challenges.

These businesses need to be able to purchase things in bulk and sell them for low costs, which requires implementing successful and sustainable buying and pricing strategies.

While dollar stores can be businesses that are recession-proof, getting into the game might be best in expansionary times.

Benefits of Starting a Business in a Bad Economy

Starting a business during a recession can actually be really beneficial. A recession often provides people who want to start a business with some competitive advantages, including:

• An Obvious Problem: Recessions are almost always tied to a specific event or industry bubble. Finding the solution to solve that problem can be highly beneficial.
• Lower Costs: Many large purchases, like equipment, real estate, and existing businesses, tend to be less expensive during economic downturns.
• More government incentives: Governments tend to provide other businesses more support during recessions than expansionary times. As long as you provide a solution in the industries they are focused on, this can help you.

Don’t focus so much on what industries do well in a recession; rather, focus on the industries in which you can differentiate yourself.

Consider this example: Lee Kindell started Moto Pizza when COVID shutdowns closed his hotel. He put $60,000 on a credit card to open the pizza shop—and has since opened multiple locations. Find out how he did it in the interview below.

https://www.youtube.com/watch?v=X4qjfVZR51s

Conclusion

At this point, you have an understanding of recession-proof businesses that commonly perform well during an economic downturn.

We discussed the industries that perform well during recessions, how businesses are impacted by recessions, what businesses do well in a recession, and why you might want to start a business…even during an economic downturn.

It’s up to you to do the research on each business, but we have interviewed hundreds of business owners to learn what they did and how you can speed up your process to success. Consider taking one of our courses to start a successful business faster.

What recession-proof business will you start?

Did you know an S-Corp can create considerable savings compared to an LLC? An S-Corporation (S-Corp) and a Limited Liability Company (LLC) are both excellent choices for business structures, but once you hit $100K net income, an S-Corp might reduce your tax load. UpFlip is here to help you choose between an S-Corp vs an LLC. We’ll explain what to consider when choosing one business structure over another, what LLCs are best at, what S-Corporations do best, and what they have in common. We’ll also explore frequently asked questions between an S-Corp and an LLC. 

What is a Limited Liability Company?

According to the National Small Business Association’s (NSBA) 2017 Year-End Report, an LLC is the most common business entity. Thirty-five percent of businesses opt for this business structure. The primary reasons people choose an LLC include: 

1. Separation of business and personal assets
2. Ease of forming an LLC 
3. Separation of personal and business liabilities
4. Ability to choose your tax structure
5. Pay self-employment tax

Keep reading to learn what an S-Corporation is and why people use it.

What is an S-Corp?

An S-Corporation isn’t a business entity but a tax filing status. Despite this technicality, 33% of small businesses are S-Corps, according to the same NSBA report.  An S-Corp files taxes using Subchapter S of the Internal Revenue Code. Click the link to view the current version of the S-Corporation tax code. You must meet the following requirements to form an S-Corp:

1. Have less than 100 stockholders
2. Run an LLC or C-Corp
3. Be a U.S. resident
4. Maintain one class of stock
5. Pay the business owner a reasonable salary
6. Pay half of the 15.3% payroll taxes

S-Corporations are predecessors to LLCs, according to Law Shelf. People also call an S-Corp by the names:

• Sub S-Corporation
• Small business corporation

Difference between LLC and S-Corp

There are a handful of differences between LLCs and S-Corporations. Some of the most important differences include:

• An LLC is a business entity. At the same time, an S-Corp is a tax filing status.
• An S-Corp treats business income differently than a default single-member LLC.
• An LLC provides more tax options than an S-Corp.
• LLCs have fewer compliance requirements.
• LLC owners pay self-employment taxes, but S-Corps use payroll taxes.

LLC vs S-Corp: Entity Status

Because an S-Corp is a filing status as opposed to a type of business formation, an LLC is by far the more efficient business structure unless you want to take advantage of the S-Corp dividend abilities. That means you’d need to go through creating an LLC or a C-Corporation before you can even start an S-Corp. S-Corporations were heavily used before LLCs became a business structure because of the limited liability protection to professionals without the far more significant complication of C-Corp status.

LLC and S-Corp: Business Formation

The formation of Limited Liability Companies and S-Corps can be relatively similar. Let’s look at the requirements for each to understand the differences and similarities.

Forming an LLC

An LLC will have several main requirements to create and maintain it. You’ll need to:

• Pay the filing cost
• Pay ongoing fees
• Write an operating agreement
• Submit the articles of organization
• Get an EIN

We’ll look at the filing costs, operating agreement, and the articles of organization because they are unique to an LLC.

Filing Cost and Ongoing Fees

To form an LLC, you need to register with the Secretary of State (SOS) in the state you plan to operate. You can find your state’s SOS by using the government agency finder on USA.gov. Paying the filing cost will require a fee at the state level. None are over $500, and most are under $300, but you’ll also have to pay ongoing fees that range from $0 annually to $500 annually. The lowest fees to maintain an LLC are in Pennsylvania, which typically costs $70 every ten years.

Operating Agreement

An operating agreement states how the business will function. When you file this document with the SOS it provides the benefits of:

• Personal liability protection
• Making verbal agreements legally enforceable
• Setting rules that are different than your state's default rules for LLCs

An operating agreement is mandatory in California, New York, Delaware, Missouri, and Maine. Others may give you the option to include one, but those states require one. An operating agreement includes:

• The creation date
• Location
• Owners and percentages
• Management and voting interests
• Investment in business
• How profits, losses, and assets, are distributed
• A succession plan
• A dissolution plan
• And anything else required by your state.

You’ll need to sign and notarize the operating agreement. Create an LLC through our partner BetterLegal to save $30.  Let’s look at the Articles of Organization next.

Articles of Organization

The Articles of Organization are very similar to the operating agreement, but you must submit the document to the Secretary of State’s office. They include:

1. Company name
2. Description of the company
3. Mailing address
4. Name and address of the registered (or statutory) agent
5. Information about company owners, managers, and officers

The most common reason for rejecting an LLC application is that someone else is using the name.

Forming an S-Corporation

An S-Corporation will first require starting a business entity with your state’s SOS. You may opt to create an LLC or C-Corp as your business entity. Then you’ll need to file Form 2553 with the IRS to opt to be treated as an S-Corp. There should be less than 100 stockholders, and they can’t be foreign residents or several types of legal entities. UpCounsel explains which legal entities can and cannot hold S-Corp shares, but each one may need to be considered on a case-by-case basis. These restrictions are significant drawbacks of an S-Corp.  Unless some of the following sections impact your company, I recommend starting with an LLC and opting for an S-Corp when the benefits outweigh the costs. 

LLC or S-Corp: Treatment of business income 

How LLCs and S-Corps treat taxable income varies dramatically. Significant differences include:

1. Owner employee classification
2. Profit treatment
3. Treatment of Fica
4. Tax code(s) used

We’ll look at each in more detail.

Is the owner of an LLC required to pay self-employment tax?

By default, the government classifies an LLC owner as self-employed, which means the owner:

• Claims the profit or losses as personal income, which is called pass-through income.
• Pays the full 15.3% Federal Insurance Contributions Act (FICA) taxes.
• Follows the same tax code as a sole proprietor or partnership.
• May choose to file taxes as an S-Corp or C-Corp and file based on their tax codes.

An S-Corp owner will treat their income differently. Their income is treated two ways depending on whether they are actively involved in the company. Let’s look at each.

How is an S-Corp owner’s income treated when they run the business?

If you actively work in your S-Corp, there are three types of income.

1. A reasonable salary: Must pay comparable to the Bureau of Labor Statistics Median Income or higher for your role. Find the appropriate wage.
2. Losses: Treated as pass-through income, reducing your net income.
3. Profits: Profits are treated as dividend income and have three tax brackets: 0%, 15%, and 20%. You don’t pay FICA on dividends.

The salary will be subject to 7.65% payroll tax taken out of your paychecks and 7.65% that comes out of the S-Corp revenue and is considered an expense, which reduces dividends. You’ll be following a different tax code and filing different forms.

S-Corp Owner as a Stockholder Only

If you are not actively involved in the management of an S-Corp, you do not have to include a reasonable salary. You only have to include losses and profits based on the following:

• Losses: Treated as pass-through income, reducing your net income.
• Profits: Profits are treated as dividend income and have three tax brackets: 0%, 15%, and 20%. 

This strategy can be beneficial if you pay others to run the company and do not want to be taxed based on FICA and personal income brackets. Depending on your role in the business, net income, and other factors, an S-Corp can have considerable benefits over an LLC. The benefits become tremendous once you have reached a net income greater than the median wage for a comparable position. All profit from the S-Corp will be dividends, reducing your tax load. We’ll discuss tax benefits next.

S-Corp vs LLC: What Are the Tax Benefits?

Both an LLC and an S-Corp have benefits that create tax savings depending on your company's profits and the number of business owners. The table below shows an S-Corp’s tax savings over an LLC assuming $500,000 income before taxes.

Comparisons Using Operations Manager Median Pay of $180,000
	LLC (Default)	Working in S-Corp	S-Corp Dividends Only
Net Income/Salary	$500,000	$180,000
Minus FICA	$18,228	$9,114
Minus Income Tax	$148,753	37831.5
Dividends	0	$320,000	$500,000
Minus Dividend Taxes	0	$41,749	$70,761
After Taxes	$333,019	$411,306	$429,239
Effective Tax Rate	33.40%	17.74%	14.15%

We’ll discuss the benefits of each now.

What are the tax considerations of an LLC?

An LLC owner has several considerations for taxes if using the same tax code as a sole proprietorship or partnership, including:

• 15.3% self-employment tax is broken into 12.4% for social security and 2.9% for Medicare.
• Pay personal income tax rates of up to 37%.
• Benefits like Health care are tax-deductible in pass-through taxation.
• Pass-through LLCs can deduct 20% of net income before being taxed.

An LLC can also file as a C-Corporation or an S-Corporation by filling out the appropriate documentation. Please read up on LLCs on the IRS website to learn about their tax treatment. From a tax standpoint, the benefit of an LLC is the ability to choose whether filing like a sole proprietor or corporation is best for the business owner. Choose the one with the least tax consequences. When you own an LLC, pass-through taxation is easier because you only pay personal taxes to the Internal Revenue Service. However, business entities can see even more benefits through the S-Corp election. Let’s look at that now.

What are some tax considerations when electing S-Corp status?

S-Corporations have more tax requirements than an LLC, but less than a C-Corp. S-Corps don’t pay corporate taxes, but they do have to file a tax return. The requirements for an S-Corp include:

• 1120S: Documents income, gains, losses, deductions, and credits.
• 1120W: Estimated tax form that is required if a corporation elected S-Corp status.
• Employment taxes: The company will collect and pay payroll taxes, which are the same rate as self-employment taxes, but the company and employee split the cost. They are also responsible for federal unemployment tax.
• Excise taxes: Charged on industries like energy, gambling, and tanning booths.

Meanwhile, stockholders will have special requirements for their personal tax returns, including:

• 1040: This form is to claim income and losses from S-Corps, estates, trusts, etc. 
• 1040SR: Alternative form 1040 for those over 65 filing their personal tax returns.
• 1040ES: Quarterly estimates for business owners' personal tax returns.

I suggest reviewing Schedule E and other S-Corp requirements with a licensed tax professional. Information in this blog should not be considered income tax advice. While there are more requirements for S-Corp tax status, the S-Corp tax rate is zero. That means you get most of the benefits of a corporation without the corporate income tax.  If you have to pay taxes, an S-Corp tax treatment definitely beats an LLC once an LLC is taxed at the 25% tax bracket or higher.

LLC vs S-Corporation: Operations

The operation of an LLC or a business electing S-Corp status is similar, except 

• An S-Corp has to manage payroll taxes.
• An S-Corp has more legal requirements, which take time.
• An LLC taxed for self-employment tax is done on a personal income tax form unless the LLC has other employees. 

Which is better, LLC or S-Corp? A small business will have fewer operating requirements as an LLC vs corporation requirements. You’ll want simpler operations when starting a business because there is a long learning curve.

LLCs and S-Corporations: Compliance

LLCs have a much easier time complying than an LLC elected as S-Corp. Unfortunately, the tax classification is the main reason for selecting S-Corp status, but it is also the cause of increased compliance requirements. If you consider having your LLC taxed as S-Corp, I would recommend getting several estimates from licensed accountants of how much it will increase your costs. If the tax savings are more significant than the additional costs, you can save a lot of money on taxes. Use the formula above to determine whether the transition makes sense for you. An S-Corp is one of the types of businesses that makes the most after-tax-profit as long as you plan on staying under 100 stockholders.

Frequently Asked Questions about LLCs and S-Corps

The following sections answer some of the most commonly asked questions about S-Corp and LLC business structures.

Is an LLC a corporation?

An LLC is not a corporation. A corporation can sell stock in the company, while an LLC cannot. An LLC may opt to file taxes as either an S-Corp or a C-Corp. LLC owners can file with the IRS to opt into one of the tax structures. The forms to file are:

• LLC as S-Corp: Form 2553
• LLC as C-Corp: Form 8832

Can an LLC be an S-Corp?

An LLC can be an S-Corp by filing Form 2253 with the IRS.

What is an S-Corporation?

An S-Corporation isn’t a business entity but a tax filing status. Despite this technicality, 33% of small businesses are S-Corps, according to the same NSBA report.  An S-Corp follows Subchapter S of the IRS Tax Code. To become an S-Corp, your company must:

• Have less than 100 stockholders.
• Be a C-Corporation or LLC.
• Be wholly owned by U.S residents.
• Have one class of stock.

Can an S-Corp own an LLC?

Yes. LLC owners can be any combination of people or legal entities in most states, but some states may have restrictions. You can view the requirements on their Secretary of State (SOS) website. Use USA.gov to find the link for your state’s SOS office.

S-Corp vs LLC for real estate?

Real estate professionals may want to file as an S-corp instead of an LLC because tax benefits can reduce your tax rate. As an employee of an S-Corp, you have to assign yourself a reasonable salary, but the S-Corp pays profits as dividends, which have a lower tax rate.  You’ll want to use an S-Corp vs LLC calculator to establish whether it makes sense to create an S-Corp.

How does an LLC become an S-Corp?

An LLC becomes an S-Corp by filling out Form 2553 and filing taxes using guidance from the IRS.

How to revoke an S-Corporation election?

To revoke S-Corp status, you’ll need to send a statement of revocation to the IRS. You can find more information about revoking S-Corp status on the IRS website.

S-Corporation vs LLC: So Which Should You Choose?

You can’t go wrong choosing to form an LLC or electing S-Corp tax classification. Both are highly beneficial to small business owners because they each offer liability protection for business owners' personal assets. The main difference between the two is income taxes once company profits pass median income for a comparable position. While I am not licensed to give legal advice, I would personally start with a single-member LLC, then move to an S-Corp after reaching a level where the income taxes are reduced S-Corp status. If you still aren’t sure which structure to use, I suggest reading our other blogs about choosing a formal business structure.

• 11 Types of Business Structures: Which One’s The Best Fit?
• Sole Proprietorship vs LLC – Which Should You Choose?
• S-Corp vs C-Corp