Do 80% of small businesses fail in five years? Fact, Fiction, Myth or Legend?
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M$8 Answers
http://boss.blogs.nytimes.com/2009/07/15/failure-is-a-constant-in-entrepreneurship/
I've been looking around, and have yet to see the actual original source for the 80% statistic (and by source, I mean something that explains methodology, not just some guy spouting an unsourced statistic). Apparently I'm not the only one with this trouble:
http://www.entrepreneur.com/magazine/entrepreneursstartupsmagazine/2006/march/83530.html
Most of the numbers I've been seeing seem to put the failure rate for 5 years to be somewhere around 40% to 60%. There are good reasons why the statistics on small business failures vary widely across actual studies people have done. We, as a country, haven't historically done a good job of tracking small business closures, and have been much worse about getting information about why the businesses closed, or (in many cases) their financial states leading up to closure. Not all of them needed to report such information.
After all, not all closures indicate "failure" in the sense most of us are probably thinking (bankruptcy, or at least continued poor performance). Some people just decide their business just isn't interesting to them anymore, or have personal emergencies that force them to quit (like a family member is ill, and they want to spend more time caring for them). Sometimes they close because the owner died. Not all studies distinguish between businesses that closed for financial reasons and financially sound businesses that were sold due to the owner retiring or moving on to other pursuits. Some of them are based on compiled listings of businesses that aren't necessarily complete, and don't always account for things like name changes.
The definition of failure has varied widely across studies. Some consider any business that has discontinued for any reason to be a failure. Some consider bankruptcy or loss to creditors to be the true mark of failure. Some consider a business to have failed if the business closes to prevent further losses (which sounds good on the surface, but creates lots of problems for finding the necessary data for the businesses studied). Some consider failure to be a "failure to make a go of it", which is also difficult to quantify. All of these general categories of study give substantially different "failure" rates.
Basically, you should take all statistics related to this with a grain of salt, particularly if you can't read about how the numbers were estimated. Anyway, it's probably better to ignore the statistics for failure rates, and instead look for studies about why businesses don't succeed instead, if you're thinking of starting one. Regardless of how many fail or succeed over time, what really matters is how your business will do if you start one, with your particular location, circumstances, abilities, helpers, etc. Knowing that a lot of businesses end after a few years really isn't that informative if you don't know how their situations related to your own. You'll learn more from studies that give more context about business performance.
http://web.sba.gov/faqs/faqIndexAll.cfm?areaid=24
http://www.sba.gov/advo/stats/bh_sbe03.pdf
http://www.businessweek.com/smallbiz/news/coladvice/ask/sa990930.htm
http://business.usi.edu/news/2007/2007-06-05-Murphy.asp
http://scholar.google.com/scholar?cluster=9967465452707081377&hl=en&... (try opening the html link if the PDF link in this cluster doesn't work--it's not for me--this is an Australian study, but their
http://161.31.108.27/research/icsb/1995/pdf/19.pdf
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M$
False 55% of small business fail in there first year. 95% of small business never make it to 5 years.
It's even worst for Big business, 90% of them tend to fail in there first year and 98% don't reach 5 years.
The medium size business tend to fair better , just enough cash, just enough worker to do the job, management is not insane or as too much cash to try stupid things, as real expertise.
The thing is of all those failures, you usally build experience for the people who make them and for those that do end up beeing the winners.
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M$
wow. i live in the United States. it is a good point to wonder failure rates of all countries, and areas, which probably does have a lot to do with it. demographics, studies of best possible sites, towns, and locations, is probably really important to brick and mortar startups. i've done my share, and it is always possible to gain experience as you go, if you care enough. in fact, i prefer it that way. when you care, it is your single biggest asset which is passion.
I opened a small business about 10 years ago.. it was only after opening I realized that McLeans magazine had named the city I was in as the TOUGHEST city in Canada to start a business... I sold it 3 years later, I realize now many mistakes I made that I could have done different, I was struggliing but on the way up. (not making a profit at that time)
I would say 80% might be realistic when you consider how many people start businesses while they still have their job.. they think their business is going to skyrocket but as they are working they do not have the time to invest (or their business idea was stupid) and anyhow it fails.. most of these business are ones we dont even know about - they are not big stores, just run from home things..
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M$
business is tough. one value is having a lot of options. fortunately, i could change ideas constantly which is not always possible in real selective markets or businesses. maybe the ideas fail, not so much the business. i had no expectations, other than to survive which is a worthy opponent.
Smallbusiness.com
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M$
definitely have to be tough about where to spend money, either on products, or because you are required to when you gain entry into a market, i.e. purchasing a franchise or similar lease requirement. a different question, but it is always important to be replacing your best customer so that you maintain sales momentum. it dies pretty quick if you lose your best customer. starting is not much of an option for me anymore, it is more about finishing :). thanks, and i do like starting over and over and over. i'm not Rocky though, so being smart is important so i don't get banged up too bad..
For business terminations, the Wells Fargo/NFIB study uses data of the U.S. Census Bureau, which only records closures of companies with employees. Those statistics show that about half of businesses that employ people are still operating five years after they open. "I feel good about the accuracy of the startup numbers," Dennis says, "but there are undoubtedly a lot of underreported stops."
I think that 80% is grossly exagerated, if you define small business as a formal business that is supposed to provide the full income for a person. If you however define small business to include any venture a single person starts to earn some extra money, then it might be much closer to the triuth
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M$You can leave an optional "tip" with Mahalo's virtual currency, Mahalo Dollars. If you are asking a difficult question that might require some research, or if you'd like a wide variety of feedback, a higher tip often leads to more answers to your question.
M$
business planning is essential. most people probably think of it as a one time deal, but in reality, you must plan every single day and never stop planning. in fact, i imagine that planning sometimes outweighs sales and production, or it did in my case. i planned, executed, then delivered. yes, i really delivered. i like to know what my customers are doing so i know how to start the process all over again.
- Is the business plan coherent?
- Is there clarity about who the customers are?
- Is there clarity about the size of the market?
- Is it clear who the competitors are and what differentiates you from them?
- Is the leadership emotionally healthy?
- Is the company building, selling, and promoting with gusto?
Among those who can answer "yes" to the above questions, the success rate is far higher.
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M$
http://ezinearticles.com/?90-Percent-of-All-Businesses-Fail-in-5-Years&id=3042913
http://www.ex-cult.org/Groups/Amway/otherside/tosp05.htm
http://www.moyak.com/papers/small-business-statistics.html
http://answers.google.com/answers/threadview/id/418119.html
Hope that answers. Thanks
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M$
looks like some good information! thanks. i'll be logging all the responses. i started business believing that failure rate option of 80% and didn't want to be a statistic. i helped various family, and my own small business corporations out as much as i could for many years. i did see all of my competitors disappear, but was also told the business i wanted to start when i was young was not the correct business as they were all being eaten up by giant competitors. i had a stable business plan, and strong family work group starting out. as i got older, i read an actual study by the Department of Labor that said those figures were the complete opposite, that actually, in the 1990's most businesses actually survived. this proves that small business really is the backbone of America. Since then, the internet came along and probably mixed up some of those statistics. i just started my own research, and didn't find much starting off except a lot of old myths and leadership articulation. i'm disappointed but hopefull that i need to obtain a lot more research with plenty of good research facilities as well. thanks again.
I see one of the the commentaries on the stats says this...
-- Quote
For business terminations, the Wells Fargo/NFIB study uses data of the U.S. Census Bureau, which only records closures of companies with employees. Those statistics show that about half of businesses that employ people are still operating five years after they open. "I feel good about the accuracy of the startup numbers," Dennis says, "but there are undoubtedly a lot of underreported stops."
The NFIB estimates that over the lifetime of a business, 39% are profitable, 30% break even, and 30% lose money, with 1% falling in the "unable to determine" category. Even when a business closes its doors, there can be many reasons for what's statistically a "failure," including a sale or merger, which may actually be a sign of robust financial health or good prospects. "When a business ends, it may be because the investors have lost their investments or because they have sold out profitably," Dennis notes.
-- /Quote
That sounds about right. Albeit, the quote is from 1999.
The other thing that is not mentioned in stats like this is that there are large numbers of small businesses that manage to keep going, but where the owners are working long hard hours, and still not making all that much money.
But if you're disheartened by such stats, you probably aren't the type of person that becomes an entrepreneur anyway.
Good data there, probably the most convincing. However I'm surprised the 5-year survival rate is as high as "nearly half". I guess we'd need to delve deep into the data before we conclude anything too definitive... maybe the data source is one which would undercount very small or very short-lived businesses anyway.
But leaving the precise stats aside, the pattern is pretty clear... a large proportion of small businesses don't survive (in some sense) more than a few years.
However if you're thinking of starting a business, the good news is that so many businesses start off making so many basic mistakes, if you do know what you're doing, the odds are rather better than the overall stats would imply.