I work on a local directory/search site where large numbers of local business listings nationwide are removed from the database every month. We recently relaunched our site and are seeing a high number of 404s from the old businesses that no longer exist.
Are we better off creating a single custom 404 page where we redirect all deleted business listings to this single page or should we create an individual page for each deleted business with a custom "not found" message on it? The assumption on the later alternative is that the old pages won't be active links on the site so they will eventually fade from Google's index.
Also is there any known penalty from Google for having thousands or redirects coming to a single page?
Good question - I wouldn't 301 redirect the pages. I would leave them - they will eventually drop out of Google's index. Redirecting them with a 301 tells Google that the pages moved permanently which they didn't really do.