Common sayings about small businesses get thrown around that are too often taken as truth. Most of us have heard someone say that 50% of all small businesses fail within the first year or that 90% of restaurants fail within the first year. These cliches get repeated so frequently that they’re accepted as fact when the reality is actually quite different.
Read on to find out what the small business failure rate really is and what steps you can take to prevent your own business from failing (see also tips on what to do when selling a business). In addition, if you are a sole proprietor, check out the tax guide here.
What Is the Small Business Failure Rate?
One of the best sources for information on the average small business failure rate (see also business license regulations) is the Small Business Administration's Office of Advocacy. According to the Office of Advocacy’s latest Frequently Asked Questions publication, the typical new business survival rate is much more complex than the common cliches convey.
According to the SBA, small business survival rates are:
Four out of five establishments (79.4%) started in 2017 survived until 2018.
The average one-year survival rate from 2008 to 2018 is 78.7%.
About half of all establishments survive five years or more.
About a third of establishments survive at least 10 years.
One point, however, that needs to be made clear is that timely firm survival rates are not available. These are establishment survival rates, and an establishment is defined as a business location rather than the whole company. Still, according to SBA data, about two out of three establishment exits are firm closures, so there is a significant correlation between establishments and firms.
Common Reasons Why Small Businesses Fail
The small business failure rate is not as dire as people tend to think. That said, small businesses face incredible challenges in order to become successful and sustain that success. Small businesses face general business challenges as well as ones that are more specific to smaller sized endeavors. Therefore, you may want good legal assistance when setting up a business, so checking out our top formation service / registered agent service reviews should prove useful - Swyft Filings, BizFilings, SunDoc Filings, Inc Authority, or MyCorporation are some the best.
Now, to get you back on track, here are some of the most common sources of small business failure:
Market Doesn’t Need Your Products or Services
An entrepreneur should certainly be passionate about his or her business, which is one of the traits of the successful business owner, but they need to align that passion with something that is marketable. All too often, people will start businesses based on their experience and expertise, which might be excellent, yet do it in a saturated or down market. Take for example someone who is a natural when it comes to real estate but starts their real estate agency when the housing market is in a slump (see 'How to Start a Real Estate Business'). Another example is developing a mobile app that, while brilliant, gets introduced into a market space flooded with similar or near-identical apps.
Averting this source of failure is heavily dependent on you doing your homework in the first place. It's critical you do thorough and constant research on the market that your proposed business will enter once it is launched (see also guide to write business proposals). It’s one thing for market conditions to change and affect your product and sales. It’s very much another to launch a business that, from the get-go, offers products to a market that is not interested or viable. Take as long as necessary before you start a business to learn everything about the market and market conditions (take a break here to learn more about accounting software, as well). If you already have an established business and are finding the market is falling out of favor with your product, then it’s time to pivot. Not pivoting is part of the next common reason for failure (see also 'Business Bankruptcy' post).
Inflexibility, such as failing to pivot when market conditions have undeniably changed, like moving to E-commerce platforms, is a major source of small business failure. Just because you've done all the planning, launched your business and acquired a customer base doesn't mean you can get complacent. The need that your company is fulfilling could decline and vanish some day. You need to always be monitoring the market, conducting research and self-evaluating in order to recognize when you may need to change your business plan (see 'How To Write A Business Plan' here). Stay on top of key trends in the market through industry publications, reports and fellow businessmen. Look internally at your company as well since often practices and processes that worked at the beginning have become stale and outdated. As already mentioned above, start doing business online (see Etsy and Shopify) cause you cannot allow basic stubbornness to undermine your business’s success.
Poor Business Plan or No Business Plan
Every business should start out with a good business plan. This might sound terribly obvious but all too often entrepreneurs get so wrapped up in the emotion of launching a business that they don’t sit down and hammer out a written business plan. What sounds or feels like a good business idea may not work out so well in reality. This doesn’t mean you should bat away the business ideas that pop up in your head. Rather, it means you need to put time into business planning.
Your business plan is where you outline the essential details of your business. Part of the process of writing a good business plan involves steps that will force you to think critically about your business concept. For example, as part of your business plan, you’ll need to conduct and present market analysis, describe your product or service line and explain your marketing strategy - remember, investors often use your D-U-N-S number to check out your creditworthiness. On a more fundamental level, a business plan forces you to figure out what unique business value your idea will introduce. Each one of these steps is an opportunity to reflect on your business idea and modify it for a better chance of success.
Financing Runs Out
Cash flow and working capital are major concerns for any small business, fledgling or successful. If you’ve launched a business and things aren't going your way, cash is tight and orders aren’t coming in, you're not in a good position to try and get another loan (see small business loan rates) or find an investor (be careful, though, not to depend too much on so-called angel investors). Speaking about loans, check out some of the key differences between PPP and EIDL business loans. From the outset, before you start your business (see 'Start a Business in Florida') you need to be realistic. As part of writing a business plan, you’ll need to work out important financial considerations. How much money will it take to launch your company? How much revenue can it generate? What are the ongoing operational expenses? If you can work out answers to these basic questions, then you’re setting your business up on sound footing.
According to Guidant Financial, 32% of small business owners say their greatest challenge is lack of capital. Creating and maintaining a steady income stream and reliable customers is tough. This is why being flexible is essential to a business’s success in the long-term. New income streams need to constantly be found. Existing ones need to be sustained and augmented. All of this requires adaptability and creativity in order to surmount financing issues.
The Bottom Line
Small businesses face countless roadblocks and unforeseen challenges. But you have to remember that every business, including household name corporations, ultimately began as small companies (see here how to incorporate). The challenges can be fierce, but they’re not insurmountable. At the end of the day, most of the ways to deal with sources of business failure come from thorough planning, research and self-evaluation. If you can remain flexible to changes and new ideas, open in your communication with your team and employees and always monitor the market, then you give your business better chances of achieving and sustaining success.