How Much New Business Failure Is There?
Five out of every ten businesses fail within the first year! 95% fail within 5 years! Statements are made like this all of the time as if they were fact. Is it a scare tactic or is there a serious problem? If the business failure rate is 95% in the first 5 years why would anyone start a new business? The fact is, no one really knows what the business failure rate is.
At the State and Federal government level it is known how many businesses start, file returns, and stop operating each year. The government however doesn’t keep track of the reasons a business stops operating. They only recognize the fact that the business is no longer operating. This would be OK except not all businesses stop operating because they fail. There are many reasons other than failure for businesses to stop.
One of the reasons a company stops operating is the reason it was created in the first place. Many companies are set up for a purpose other than selling products and/or services. Companies started for tax reduction reasons are an example. These companies are created only as a “shell” that does not conduct business in the usual fashion. They do not employ people or sell anything. These companies last only as long as the tax reduction exists for them. Once the tax reduction goes away, so does this type of company.
Another reason some businesses stop is a result of a merger or acquisition. In this situation the company is absorbed by another. The company stops but it is not because it was a failure. It just goes away as a separate legal entity.
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For many small private businesses the reason they no longer exist is because of the owner. Perhaps he or she decides to retire or maybe he or she dies. In either case if there is no one willing or available to continue the business it will cease to exist. Again the reason these companies stop is not because they fail.
Recognizing not all businesses cease to exist because they fail and knowing that State and Federal governments do not have the answer requires you to look elsewhere for the reasons businesses fail.
Three recent independent studies agree that 50% of companies really do fail within their first 4 years and that since 2007 there has been a 40% increase in failures. This is not surprising given what has happened to the U.S. economy since 2007. Even very large companies have had serious problems and several have teetered on the edge of extinction before they were “bailed out” financially by the U.S. Government. Some of the most notable of these “To Big to Fail” organizations are: Freddie Mac, Fannie Mae, Citigroup, General Motors, Chrysler, GMAC, Bank of America, Wells Fargo, and AIG.
At present the economy is too often given as the reason why a business is struggling and failing. If you look deeper into the company there is a more fundamental reason for its problems. For those contemplating starting a business or those that already have a business what needs to be discussed are the real reasons businesses struggle and end up failing. It is only by recognizing these more common business failure reasons, owners can take the steps necessary to avoid them and move towards success.
The Three Key New Business Failure Reasons
Most businesses are not started by a genius or a person you would think of as an entrepreneur (i.e. Steve Jobs or Bill Gates). The majority of businesses are started by regular, normal people just like you and me. Some of the traits typical of new business owners are:
- They worked in the same type of business before or it was a hobby for them before they started the new business.
- They left their prior job as the result of retiring, being laid off, or having a falling out with their boss which caused them to quit or get fired.
- They have a high school education and may have attended college but they rarely have any business education.
Typically, the new business owner knows the technical or operational side of their business since this is what they did in their previous work life. They do what they know and as a result, when they create their new business, what they really do is create a job for themselves. For those of that have been down the business ownership road, we know ownership requires much more than doing a job like the one we had at our previous employment.