October 31, 2014

Startup Failure Rates — The REAL Numbers

I’m writing today’s blog in the hopes of getting accurate information on new business failure rates out into cyberspace in a way that the search engines will find it quickly. There is a huge amount of misinformation on the Web about new business failure rates that gets cited and reproduced all over the place and that’s a problem for a host of reasons.

Below is Figure 6.2 (p.99) from my book Illusions of Entrepreneurship: The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By. The data come from a special tabulation by the Bureau of the Census produced for the Office of Advocacy of the U.S. Small Business Administration.

While these data look at the 1992 cohort of new single-establishment businesses, the failure rate percentages are almost identical for all the cohorts that researchers have looked at. So, these are pretty much the one through ten year survival rates of new firms.

Proportion of New Businesses Founded in 1992 Still Alive By Year.

Small business failure rates over 10 years - United States - by Scott Shane

These are the averages. There are considerable differences across industry sectors in business failure rates (see Figure 7.1 on page 113 of Illusions of Entrepreneurship), which is pretty interesting and important. But I’ll have to leave a discussion of what those are and why they exist for another blog post.

* * * * *

About the Author: Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of eight books, including Illusions of Entrepreneurship: The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By; Finding Fertile Ground: Identifying Extraordinary Opportunities for New Ventures; Technology Strategy for Managers and Entrepreneurs; and From Ice Cream to the Internet: Using Franchising to Drive the Growth and Profits of Your Company.

205 Comments ▼

Scott Shane


Scott Shane Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool's Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: and The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By.

205 Reactions

  1. Hi Scott,

    Very interesting. I have often read the statistic that 90% of firms are out of business by year 10. Amazingly, in Internet mythology that sometimes that gets shortened to year 5 — that 90% are out of business at the end of five years!!! Which would be incredibly depressing ….

    But from these figures, 29% are still in business at the end of year 10 — is that right? And the biggest drop comes in the first 5 years, when half of startups go belly up. Still shows the odds are against startups staying in business, but at least the real numbers you cite are not quite so dismal.

    Anita

  2. Anita,

    When the word ‘failure’ is used here…does this mean simply closed shop? Businesses close shop for different reasons, are reborn under another name. People close businesses not because they failed but retired, moved on to another venture had to move to another state and chose not to sell it. It does not equate to failure…and I’m not talking about psychological use of the word.

    So, my question is, does this chart simply show businesses closing after 10 years or does it break it out further? Also, as you say, it is different across professions and this is an important qualifier.

    At least it busts the myth that ‘more than 1/2 of all businesses fail by year two.’

  3. The most amazing number to me is year 1 – a full quarter of small businesses don’t make it 12 months. That’s truly mind-numbing.

  4. Friends of mine who are entrepreneurs said that the first year was always the hardest, but if you can go 3 years and still provide quality products and fresh services then you are golden

  5. I attended a conference last week were a representative from the U.S. SBA mentioned that the failure rate was 44% after 4 years. I also recall reading a study about two years ago where business closures (intentional) were being classified in the old stats 9/10 yrs.

  6. Susan,

    You make a good point that “failure” here measures closure. But using a sample of the closed firms, an economist at the SBA a few years ago asked those founders whose businesses closed whether they perceived their start-up effort to be “successful” or “unsuccessful.” Approximately 70 percent of those founders whose businesses closed viewed their start-up efforts as unsuccessful.

  7. Thanks for that.
    Here’s a link to some data published by the SBA http://www.sba.gov/advo/stats/bh_sbe03.pdf.

  8. Those numbers do look very disappointing and would stop a lot of people from even trying. I would hope that those numbers don’t discourage someone from taking the leap into business. You never know, you could be among the 29% remaining after year 10.

  9. While these figures are a little scary, they’re not half as bad as what some (usually those with an axe to grind or a startup service to sell you) would have us believe. It’s always good to have the real figures available – thanks.

    Ian

  10. I’m looking forward to reading your book. The previous data I’ve used on failure rates comes from Bizminer (http://www.bizminer.com/business-failure-business-risk.asp) it’s very thorough, if expensive.

  11. Scott,

    Closing business is a fact: the owner calling it a ‘failure’ is still so subjective. It would have been nice if there was more specific criteria applied. If I voluntarily close my business, all my bills are paid and I fed my family but wanted to go globally and the economy turns..would I call it a failure? Or I wanted to be able to retire at 29 would I call it a failure? See what I mean? This is an important concept for my readership so that’s why I’m belaboring the point a little bit. Statistics have always troubled me as a rule so if I’m pushing the envelope here….well, that’s what I do.

  12. Another cartoonist once told me that most cartoonists will give up (fail) after 6 months.

    That makes Scott’s graph look downright rosy!

  13. We enjoyed your graph on U.S. business closure rates; it seems to align substantially and conveniently with the commonplace theory of “thirds” and a “study” by the U.S. Small Business Association that states only 2/3 of all small business startups survive the first two years and less than half make it to four years. However, to imply the graph represents bonfied “failures” as opposed to mere “closures” or “restructuring” may not comply with the facts and may totter on the false assumption that businesses “need” to stay in business for a x number of years in order to be considered “successful” (if this is in a fact a “failure chart”) and gives rise to the great illusion that permanence is not only achievable but is the brother-in-arms to virtuosity or in this case, “success”. I think a greater study would have to do with the number of businesses that operated 5 years or less and turned a profit of x. Also, this chart by its own acclaim is exclusively representative of a “1992 cohort of new single-establishment businesses”. Given the paradigm shifts in technology and internet based businesses, although the graph may be reasonably indicative of a general trend as per 1992, it could be a bit underwhelming in validity when one, of necessity factors in the emergence and exponential paradigm shifts of the post-1992 internet/business age, with all due respect.

  14. I want to know what constitutes “success” and “failure”: if the founders sell after 4 years for $6 million, knowing they’ll otherwise be eaten by a competitor, is that failure? For me, the success or failure of a job has more to do with what I learn from it, and its career-advancing value, than whether it ends by my choice or not. However, that definition of success is nearly impossible to measure.

    In any case, I don’t find these numbers to be as scary as some posters. Jobs don’t last forever, losing one is not the end of the world, and, anyway, working in a large company has its own risks. Honestly, if any company could offer me a job and career path where I had a 50% chance that it would still be worth coming to work four years later, I’d take it in a heartbeat.

    • Totally agree with Mike’s comment about failure and success, I have just designed and published my website and though I am finding it extremely difficult the amount of knowledge gained from the project as been invaluable and worth the effort.

      I studied at College for three year’s to gain an higher qualification and to learn about Information Technology and Business, what I find annoying is that people tend to define success to the size of their wallets and not to the overall wealth of the knowledge gained from the chosen project.

      Looking at the statistics and from an analysis of my figures my website will probably fail, however, I won’t see it as a failure and at the end of the day at least I have tried to succeed.

  15. Whilst these figures could be daunting, I think to many entrepreneurs they are actually a challenge that they enjoy winning against.

    It would be interesting to know the facts behind the failures and successes over these years and what these trends show us apart from the usual ones that you read about. This may be in your book Scott, if so I will look for a copy

  16. I agree with Mike Church and his statement that “jobs don’t last forever”. I have been struggling with a small business for about two years now and we have learned a lot during this time.

  17. These numbers actually aren’t as bad as one would think. At what point is a business a “business”? Is it someone incorporating? I’ve known people who have started the process by getting their business legally established but bailed before getting a store front. I much prefer to see that I have a 75% chance of success in the first year than a 50% chance of failure.

  18. Entrepreneurship involves risk. The statistical failure rates (whatever they are) should discourage any rational person from ever venturing beyond the limits of a steady paycheck and a predictable outcome.

    Yet, as Vinod Khosla, a partner in Kleiner, Perkins said “Success only comes from those who are foolish enough to think unreasonably. Entrepreneurs need to stretch themselves beyond convention and constraint to reach something extraordinary.”

    Blogger Mark Fletcher put it this way “You have to be wrong in the head to start a company But we (entrepreneurs) have all the fun.

  19. I agree with Gary Schoeniger that “Entrepreneurship involves risk.” Be sure to do a great deal of industry research before you invest your time and money into a new business. Are people actually buying the products you’d like to sell? How much marketing and advertising investment do you need for your particular industry? If you’d like to start out with minimal risk, try ecommerce platforms that allow you to sell other’s items and earn a commission when you buy those items. You pay a flat fee, I know WebStore by Amazon charges about $60/month. I’d check it out.

  20. I agree it is good to have real statistics. While everything does not look rosy, it is much much better than the 90-95% after 5 years that I keep hearing quoted all over the place like it was fact.

    If is also noteworthy that these rates all differ by industry, business size, geographic area, experience of the individuals starting the business, etc, etc, etc. When all of these items align themselves in an attractive manner, I would bet that the odds of failure would go way down.

    I also agree that “Entrepreneurship involves risk.” But lets not forget, sitting in a job with a steady paycheck offers risk too.

  21. Great post. Very timely and inspiring in its own way to show starting your own business is tough…but not as tough as we’d been led to believe.

    Thanks.

  22. Thanks for this honest research that throws some light on the failure rate of both franchisees and franchisors in new and old systems.

    Unfortunately, these statistics do not get wide coverage and in the franchise world, franchisors and their agents still sell franchises with the untrue hype that “the franchise is different and that franchises survive at greater rates than independent businesses.” There is still the old myth of the “95% success rate” that was thrown around for years, and while now denied by the IFA is still spread as rumor in the pre-sale hype of the franchisors.

    This rumor that brings naive and inexperienced franchisees who are looking for jobs and income to sign malicious 10 and 15-year contracts with franchisors with no knowledge of the great risk they are taking is made possible because unit performance statistics in franchise systems do not have to be disclosed under the FTC rule and the FDD presented as a package before a franchise sale can be completed under the law.

    Hopefully, the research and comments of Scott Shane will be found by all franchise prospects who will do Google Searches on Franchise Failure Rates and there will be a new era in franchising. Hopefully, those VETS and their families who are targeted by the Patriot Express Loan Initiative passed last year will be WARNED of the risk and the possibility of the loss of their collateral in any failure to complete the long-term contracts that they must sign in order to buy a franchise.

    Additionally, there appears to be cooperation within the status quo to hide the very high rate of failure of startup franchisees from new buyers of franchises because, of course, even the failed franchisees DO stimulate the economy and feed the franchisor all of the time they are trying to make their businesses successful. And, of course, the failure of the franchisee isn’t always a failure for the franchisor if the assets are acquired in a fire sale and continue to serve the franchisor.

    If some percentage of franchisors in any way beat the harsh statistics offered by Dr. Shane, is it only because they can churn on the flesh of their franchisees to reduce the statistical risk of the start-up small-business chain franchisors? Is this why the FTC Regulatory policy and the economists support franchising as a business model and subsidize the franchisors with ineffective regulation that permits franchisors to hide the risk of the franchise purchase from new prospective buyers?

  23. Thanks for posting such relavent and useful info. Hopefully more entrepreneurs will read your posts before walking into the harsh realities of business blindly.

  24. Thank you for the information, there is always a lot of risk to build and manage a business. Is not only competition, but also managerial ability, capitalization, hiring, etc. Clearly there is a difference between a Business Owner and a entrepreneur. Business owners plan for all those contingencies and work on a plan to grow their business while Entrepreneurs are usually enamored with their ideas, but they don’t usually take into account what is needed to do to make it happen.

    Daon from http://conxie.com the bad credit blog

    • If you have a great idea and burning desire to succeed and are willing to work your butt off your business has a great chance. I have started two businesses in the past and one did fantastic and the other not so good. The second was a retail shop which is a very hard go in this ecomomy. You learn so much and go on to bigger and better things when something doesn’t work out. It’s much better going with your dream that wondering like most people.
      They say follow your heart and the money will follow. With a little luck and a lot of hard work I believe that statement may be true. Wish me luck!!! I’m about to start venture number three.

  25. Yes! Daon!

    In the Franchise World, it is the FranchiSOR who is the entrepreneur who “brands” his particular concept and the franchisee is merely a resource of cheap labor and cheap “venture” upon which the franchisor hopes to grow the gross sales of the system. The franchisor ALWAYS gets his royalties/profits no matter what the status of the franchisee; the franchisee can be operating at a LOSS, at PROFIT, or at BREAKEVEN STATUS but must al.ways pay royalties and other fees to the franchisors for the entire term of the contract that he/she survives.

    Corporations would open their own chain units if there were greater profits to be realized but franchising is a way of MAXIMIZING profits while reducing the risk and the expense of building and operating the physical units themselves because the risk is taken by the franchisee who believes there will be profits as well for them in the operation of the branded business.

    Franchisors, of course, don’t want the “startup failure rates” of franchisees to be advertised to prospective franchisees because this would make it difficult to recruit and capture franchisees without provioding some kind of PROOF that there would or could be actual profits for the new buyer who is investing in the franchise. There has been cooperation in the status quo to not produce any statistics concerning franchisee failure that would dry up the pool of potential targeted prospects. Entrepreneur Magazine deals with the success of the franchisor who is the advertisor in the magazine from whom they realize a great percentage of their income. The “big” franchisors use their visibility to suggest viability of the investment to new prospects.

    FranchiSORS have better odds of surviving than the independent small business man and their own franchisees because they don’t share in the failure of their startup franchisees. The franchisors KNOW that the odds of the startup franchisee completing the ten-year and fifteen-year mandated franchise agreements are not good but they KNOW that they can count on the assets of the startup franchisees to continue to serve the franchisor in a high percentage of the startup failures. Churning thus becomes as management tool of franchisors.

    Government regulation, the FTC Rule, and the FDD, assists the franchisors in obscuring the risk of failure of their units because the franchisors themselves are not required to disclose the UNIT PERFORMANCE STATISTICS in their possession to new buyers of their franchises. Due diligence investigation of Item 20 references is inefficient and ineffective and Item 20 of the FDD just passes off the obligation of the franchisor to disclose to the current and ex-franchisees. Earnings Claims are not mandated under disclosure law and after almost 30 years of regulation, the great percentage of franchisors don’t disclose “earnings” or make ANY representations as to the success and profits of the franchise WITHIN the franchise agreement. Once the agreement is signed by the franchisee, the franchisor is protected from failed franchisees in the courts and in arbitration from charges olf fraudulent inducement to contract through misrepresentation of the success of the franchise or failure to disclose the risk.

    This, obviously, as indicated by Robert Purvin of the AAFD and Susan Kezios of the AFA, over ten years ago, was the intent of the FTC Rule and the current regulatory policy. The irony is that the government can now state that the “regulation of the industry” has reduced fraud in the industry. The package of the FDD and the adhesory franchise agreement works as a constructive fraud against prospective inexperienced Mom and Pop franchise prospects who sign these boilerplate contracts in good faith that there is very little risk and who find out too late that the actual risk and profitability of the investment was never disclosed to them under law.

    Just look at Quiznos, The UPS Store, Cold Stone Creamery and others and read the history of the Coffee Beanery Case and SonaMedSpa on Blue Mau Mau, Franchise Pundit, and Franchise Pick to see this regulatory policy in action,.

    LET THE FRANCHISEE BUYERS BEWARE.

  26. Your theory of failure is interesting but the 90% quotation comes from none other than a decades old Dun & Bradstreet study of thousands of new businesses from their first through their tenth year. What most failed to understand is that the study encompassed all forms of failure to continue including insolvency, abandonment, sickness, death, closure, sale of business, loss of lease, acts of god etc etc. The D&B stats were real hard numbers but they didn’t drill down into the systemic causes of entrepreneurial stoppage vs real failure. As I see it selling a business within the first 10 years of start-up is not necessarily a bad thing. The more important part of that study was the causal effects of failure. Armed with this information, we have built a 40+ year old consulting service to assist entrepreneurs with disabilities to build effective alternatives to regular employment. I have also taught accessible entrepreneurship to vocational rehabilitation counselors, entrepreneurs and youth with disabilities for the past 10 years.

    Owen P. Doonan III, Chairman of the Board
    THE-Group [The Handi-CAPABLE Executive Group]

    Virtual management, IT & mentor consultants to Entrepreneurs, Professionals and Executives with disabilities. Advocates for virtual access to public meetings and home based employment for the homebound and people with severe limiting disabilities.
    Statutory Member, Massachusetts State Rehabilitation Council.
    Chairman, Massachusetts State Rehabilitation Council’s Consumer Satisfaction Committee
    Chairman, Massachusetts Statewide Task force on Home Based and Self Employment for people with disabilities
    Member, AT [Assistive Technology] Act Advisory Council
    Founding member Massachusetts Statewide Task force on Acquired Brain Injury [ABI] & Traumatic Brain Injury [TBI].
    Member Easter Seals – MRC Assistive Technology Loan Review Committee
    P.O.BOX 2169
    DUXBURY, MA 02331
    E-mail: mentor-one@usa.net

  27. I have been a small business owner for 22 years. What put me out of competition was the unethical politics in business. By companies that were not even my competitors. My advice to (Joe the Plumber) or the person that wants to own a small business, think about it many times over you have more to lose than you can think about. I should have closed up shop when I noticed that my nitch in the service industry was being overrun by new companies. The price to produce the finish a product was reducing our profits by as much as 40%, it takes hundreds of thousands of dollars to run a business and to walk away with small profit is insane, but you keep on keepin on and you hope you can make it. Think about whom will profit off your company’s profits. The service industry is this country major industry; the balance of industry, service, and capital is so out of sorts watch your step.

  28. Personally, I like to see high failure rates. Growing a small business into a sustainable operation is special. Anything special should be hard. If everyone could do it, we would not be having this conversation. Plus, failures get rid of the junk businesses. Failures let the cream rise to the top. Strong, smart, well researched and well executed businesses are the basis of our economy. These are the ones that create lasting jobs, bring in new revenue to local areas, and financially lift those around them, especially employees. Weak businesses, many started on a whim, should fail and fail quickly so that stakeholders, like employees or customers, don’t have to waste their time and effort with them.

    Also, failure of a business, and learning from it – your failure or others – may mean a more successful venture later.

    Just my thoughts.

  29. Personally, I would like to see people like Phanio lose everything they have but he has already lost his compassion. He must make his living in and around the franchise world and, of course, he doesn’t want to get the point of the conversation. The point being, if you are going to gamble on as franchise and put yourself at risk, shouldn’t that franchisor have a duty under the law to disclose the risk of the investment as known by the unit performance statistics of the system? —-and not use the cover of a government disclosure regulation to sell a franchise with low profitability history and high failure rate to the public?

  30. As the owner of a startup, only 27 months into this, I fully understand the reasons for failure. Failure is a multi-headed dragon. I have seen many a startup fail or flounder for a mutitude of reasons. The biggest reason for failure that I have seen is chasing a dream……not a viable business. The second would be unrealistic financial forecasts. By this, I mean expecting greater sales and profits then reality produces. Third, and this connects to the previous point, lack of funds. One must have the available funds to support the business….and the home!!!! For extented periods of time. And lastly, and perhaps THE most important factor to success …..support !!!!!!! Your wife/husband and family MUST be as devoted to this business as you are. And that is the hardest thing for you to control. No money coming in, bills mounting, cash dwindling, long long hours. The pressure to give it up and get a “real” job can become overwhelming. From my experience, all these things combined are what lead to startup failures. And,in closing, if a startup is well thought out and discussed, along with a common dedication within the family to succeed….startup businesses do succeed.

  31. Joe the Plumber maybe doesn’t have privy to examine the books of his employer. The plumbing business in the United States has been invaded by BIG FRANCHISORS, really big business, who drive many of the independent small business plumbing contractors out of business and saturate the “snakeout” sector of the economy to grow the gross sales upon which they earn their royalties, fees and commissions.

    Owning a business of your own is represented as the American Dream but it can be the American Nightmare if it doesn’t work out. In a recession, self-employment often looks like a good option when there is a shortage of jobs and high unemployment but the “sharks” in franchising are out there looking for the needy and hoping to gain access to their franchisees” financial assets and cheap labor with with the hope that they can earn profits while reducing THEIR RISK and survive the recession.

    Owning a franchise, of course, is not really owning a “business of your own’ and even the SBA Advocacy Committee pointed this out to the SBA —–who guarantees loans for franchisees of franchisors because this acts as a subsidy of both very big franchisors and small startup franchises, and is good for the economy.

    Hopefully, Bob, above poster who tells the truth from his heart, is not a franchisee. I wish him great luck and hope that his business will become viable and gratifying.

    Carol

  32. I find this interesting but ….

    I have started many businesses. Some I closed after a year or two, not because of ‘failure’ rather because I found a better one to start.My current business is now 22 years old. Would the 6 I started before that and made money count as failures because I closed them, with no debt and no losses?

  33. Paul: Good for you! But, of course, if these had been franchises that you bought, you couldn’t have closed them down after a year or two to pursue some other business, under the usual long-term retail franchise agreement, without suffering losses.

    The point is that “franchising” helps the franchisor to somewhat beat the statistics in the graph above because the franchisor doesn’t necessarily share in the failure of the franchisee if the assets of the failed franchisee can be acquired by a second-generation franchisee who perhaps can then bring the business to breakeven because he gets the business for almost nothing and can sublease from the original failed franchisee, who continues to be responsible to the landlord for the lease.

    Churning of franchisees out of view of prospective buyers of franchises and investors in franchise systems is apparently what has made franchising so durable for franchisors.

    May I suggest that it is RARE indeed for someone to start a business, independent or franchised, and close down without debt or losses, just because the owner found a better business to operate!

    This just doesn’t change the reality of the statistics as provided in the graph above.

  34. I would like to extend my prior comment on the D&B failure rate and add a comment on franchising. The plus side of the D&B study dealt with the systemic reasoning for the 90% failure of start-up entrepreneurs to remain in a given business for 10 years. The reason for minimal and non successful operations was due to a lack in expertise or holes in management and reliance on free sources of information from professionals in other fields and SCORE representatives who lacked adequate small business experience. We built our successful strategic mentoring practice around time sharing retired and disabled former successful small business executives virtually. The goal was to deliver timely affordable management expertise as and when needed to support new business entrepreneurs. According to D&B the availability of experienced management and financial [CFO]advisors substantially reduced business risk, increased equity value growth and enhanced profitability substantially.

    My early consulting career in the late 60’s focused on creating / developing new franchised concepts, restructuring and rescuing failing and failed franchise operations. We acted for franchisees in renegotiating troubled franchises. It has always been my observation that according to IFA literature franchisor failure is lower than start-ups but that franchisees tended to experience rates of failure and stoppage in line with D&B’s failure report.

    It has been my experience that a well researched [including solid due diligence] purchase of a going business is the least risky way to grow. Our clients use our mentoring services to determine business synergies that increase their business through acquisitions. We also recommend this as a solid option to consider as a first business rather than getting entangled in an overpriced franchise with minimal if any support systems in place.

    Owen P. Doonan III, Chairman of the Board
    THE-Group [The Handi-CAPABLE Executive Group]

    Virtual management, IT & mentor consultants to Entrepreneurs, Professionals and Executives with disabilities. Advocates for virtual access to public meetings and home based employment for the homebound and people with severe limiting disabilities.
    Statutory Member, Massachusetts State Rehabilitation Council.
    Chairman, Massachusetts State Rehabilitation Council’s Consumer Satisfaction Committee
    Chairman, Massachusetts Statewide Task force on Home Based and Self Employment for people with disabilities
    Member, AT [Assistive Technology] Act Advisory Council
    Founding member Massachusetts Statewide Task force on Acquired Brain Injury [ABI] & Traumatic Brain Injury [TBI].
    Member Easter Seals – MRC Assistive Technology Loan Review Committee
    P.O.BOX 2169
    DUXBURY, MA 02331
    E-mail: mentor-one@usa.net

  35. I didn’t read every comment, but those I did read leave out some important information and facts. I’ve been involved in several startup businesses over the past 15 years. None of them lasted for ten years but that doesn’t mean that they went “belly-up” as I’ve seen a few comments suggest. This “belly-up” concept is perpetuated by terms such as “Failure Rates.”

    The assumption is these businesses are failing. To get a true picture of what is really happening someone would need to factor out those business that no longer exist due to a number of issues such as mergers, acquisitions, transitions, change of focus, lack of interest in continuing, or simply the opportunity to put your resources into a better opportunity.

    Over the past 15 years I’ve not had a business last 10 years but none failed. Each one fell under one of the above situations. Ironically the one I had the longest (8 years) was the least profitable of all but offered great personal satisfaction. I finally chose to shut it down due to other opportunities with substantially greater rates of return.

    Just something people should factor in when looking at these stats.

  36. People have such a fantasy of owning a business not realizing all that is involved. Often the fantasy is of working lesser hours and making more money and here are the sold hard facts to show that it makes more than a dream to run a business.

  37. What is disturbing is that “small business” in the retail sector was often represented as the answer to the economic problems that we face today. The saturation of the retail markets and the service economy has accompanied the housing bubble and the over- construction of Malls (many of which are failing) as is evidenced in our economy today. Franchisors, of course, have the greatest representation in the Malls and mega Shopping Centers.

    Perhaps, the global economy and short-term goals for short-term profits and the concept of secutitizing long-term leases and cash flows into the future has brought us long-term problems that will be difficult to solve.

    The concept of “supply and demand” is interrupted when demand is seen as INFINITE and CREDIT limits come into play but markets have been SATURATED by investors in the quest for market share and profits, and profit margins become thinner. When the profit margins are thin to begin with, a recession can turn into a depression when small business men cannot earn enough to pay their overhead costs.

    I post here to WARN that franchisors use franchisees merely as resources, as allowed by the law, to compete for market share and that government regulation protects the franchisors and not the franchisees. Unfortunately, government appears to depend upon franchisors and franchising to stimulate the economy in recessions and the climate becomes even more dangerous for prospective franchisees.

    I post here to WARN veterans and their families that THE PATRIOT EXPRESS LOAN INITIATIVE OF THE SBA, that was said to be for the purpose of “honoring” VETS and their families, and to permit the Vets and their families to pursue the American Dream, may not result in the American Dream when they purchase a franchise.

    The average retail franchise agreement is a malicious legal trap upheld by the Courts, and becomes the American Nightmare when the franchisee fails to thrive. AND, the franchisee is not furnished the odds of profitability or failure of first-owners of the franchise by the seller, the franchisor, before he puts his signature on the dotted line.

    Better to go independent with a small business with a short-term lease and an exit strategy that won’t destroy you if you can’t generate the sales that you need to break even within your estimated startup costs.

  38. Sorry, but what was the final decision??
    let’s consider economic failures, is the expectancy that majority fail at 5 or 10 years? And what is the percentage??

  39. As a small business owner myself, I find the very best comments are coming from those who are also small business owners.

    It took six years for me to get this business to the point where it would support my family. I was licky enough to have a very supportive wife who was willing to play the “pay Peter with Paul” game to keep us out of bankruptcy.

    The real difference I found between failure and success was two fold. One, finally learning how to run a business rather than acting like an employee in my own business.

    Second, learning how to sell and how to market, two very different things. Without these three skills, I would still be struggling and eventually have to close the doors.

    oh, and there was one other things. Developing relationships with other business people and both relying on them and learning from them.

  40. How is “not around” defined? If i could start a company sell it or get acquired by year 3, then do it again, I’d be happy to not be around after 10 years. How is “fail” defined?

  41. Good info.

    Tried to get a copy of your white paper – had to jump though hoops to read it. Goodness. I’m no corporate bigwig – just a communications writer doing some research for a sales page. Infor wanted to extract piles of totally irrelevant stuff out of me. I’m surprised they didn’t ask for the blood type of my first born.

    Here’s a number for you – 76% of US Businesses are owned by one person. So how relevant is “company name” really?

    Feel free to delete this comment as it’s not relevant to your post

  42. Since 1986 I have weathered many a storm by offering
    intelligent site, home, and energy design.
    This particular financial storm is now in 3rd year.
    Tragedy is knowledge, early warnings, unheeded.

    Barack Obama should be compared to Teddy Roosevelt
    in the early 1900’s and the subtle meanings of the
    Wizard of Oz as a political revolution precursory to
    the labor movement. Teddy heard/answered us well.
    Perhaps the Belle Epoch and Golden Age prior to the
    actual Progressives Age was about value and values,
    justice and fairness, 8 hour workday, and healthcare.
    Teddy Bear stood against corruption.
    Smokey Bear stands like Aldo Leopold.

    I doubt we’ll have a T.G.eithner Bear in history
    although, I challenge the current admin to strive
    for the same greatness at last turn of century
    that carried us through another century to 2000+.
    I stand like Martin Melaver as a 3rd Gen witness.

    Quite seriously, -Katje

  43. The key missing question is–WHY are sm biz no longer an entity? What percent were bought out? Encorporated? Profitable but closed for other reasons…

    meaning, just becasue a biz in no longer “still alive” doesn’t mean it failed.

    Any insights??

    thank you

  44. I’ve owned 4 businesses over the past 15 years. Only one is still in business, but all four were successful. The first business I ran for 8 years, but got burned out and had other opportunities that simply generated greater revenue. I chose to shut that one down to focus on other opportunities.

    The second business was very profitable but after four years was acquired by another company. The third company, which was a result of the acquisition, was eventually taken over by investors and has changed hands several times and is now under a new name and management, but still in business 9 years after it was initially started.

    My fourth business generates good revenue and is something I really enjoy. It is more part time, but is pulling at me to become a full time business. I will likely keep it part time so that it is always something I enjoy rather than a career change.

    From what I’ve seen, most startups fall under the experiences I’ve had. I don’t consider any of my businesses failures. I’ve just changed direction, or the business has changed hands, but they didn’t go away due to failure. Maybe I just don’t define failure the same as the author.

  45. Scott,
    It appears that you’ve learned a lot about how people start, operate and (sometimes) fail at business. Have you ever looked at how they make decisions, e.g., whether or not to start a biz; what kind of biz; how to finance, it, market it, etc.? It seems this macro of succeed/fail is a product of a series of decisions, usually involving groups, e.g., investors, family, operators, employees, etc.

    We’re looking into this decision failure factor. Any thoughts?

  46. As for small business and family practices, does anyone have a figure that can tell me how much more a month “they” needed to earn to keep their small business afloat?

    For instance with all the foreclosures last year, an additional $400-$600 dollars a month would have keep 80% of those families in their houses. Does anyone have a similar figure for smaller/family businesses?

  47. Whatever the percentage of survival of new bussinesses may be, they are so far and few that even the ones that are still around may not be bringing in a healthy profit. Simply, one business owner may just be satisfied if he just gets enough to survive and not have to work as an employee elsewhere. That is not a successful business. A better question then would be, “how many businesses within 5/10 years bring in a sound, healthy profit?
    Bottom Line. Modern day Capitalism has been outdated for a while now and needs a major overhaul. The stats show it and therfore is not an opinion.

  48. Adrian,

    Capitalism is alive and well. I live it in my business every single day.

    I fear, though, there are misconceptions about starting a business. Three things to keep in mind:

    (1) In the early years when you start your business you WILL make less money personally than you did when employed. To be successful and not give up, you have to be able to “delay gratification.” Most business owners I know live on as little as possible and plow whatever they make back into the business as a source of funding to grow it. That’s not failure — that’s called low-cost funding for your business, in lieu of borrowing money from a bank and paying interest.

    (2) Much as we business owners like to complain about high taxes (hey, who doesn’t), the reality is, you can make less money, but still net more for yourself because you can legitimately write off expenses, such as use of a vehicle and other things. Plus, you’re more in tune with your money than when you get a paycheck from someone else — trust me. And so you become a better money manager.

    (3) There are other reasons to grow a business — including the challenge. Some of us live for that challenge — can’t put a price on that. Then there’s the idea of building an asset that’s worth something. I left a very high paying corporate position, with stock options and annual bonuses — all to start a business. And yes, in the first five years, some might have dissed my business as “just scraping by.” But after that, the picture looks very very different. Among other things, I’ve passed up several offers to sell my business in the past year. As an employee, I wouldn’t have an asset that could be sold.

    My main point here is: those of us who’ve been through a startup look at things through radically different eyes.

    – Anita

  49. To get a real figure on business failure, would necessitate some sort of an independent audit. After discussing business failure with our local Washington Small Business Admin and Dept of Revenue, the challenge is data collection and reporting. I have been told that new business failure in this State is as high as 90% within the first year because many failures go unreported for long lengths of time. Those who never generate revenue (a large proportion) and therefore never submit taxes, do not even submit their revenue forms nor do they officially close their business. We have many businesses who have not responded to mail, email or phone inquiries as to the business status and therefore are assumed closed.

    I also believe there will be a rather large variance in failure rates among States since funding toward SBA, Dept of Revenue and even each State’s Development Council differ and therefore, the resources to business startups differ.

  50. Hi Shane,

    Great post. It suggest (If I’m reading it correctly) that 29% of the businesses in this pool of data managed to survive 10 years…

    This data lines up well with the failure rated estimated by the SBA (they offered that roughly 50% of new small business fail with 5 years.)

    I’m looking forward to reading more from you.

    Thanks,
    Jay

  51. Doh! I should have proofread that before hitting submit!

  52. are you considering business that merged, were acquired by larger companies,etc
    the names disappeared but their contributions to growth and jobs remain in their new incarnations, so if their existence per se is short their contributions could be longer lasting and perhaps major

  53. Unfortunately, the grim and brutal failure rate of ALL small business startups is true but obscured by those franchisors who can somewhat beat the brutal odds of failure of physical business units within their systems through direct and third-party churning and the cheap acquisition of the assets of the failures.

    What is frightening is that public policy concerning small businedss startups is NOT based on the hard realities of these startup failure rates and short term solutions to stimulate the economy are pushed by the special interests who have to cooperate to hide the high failure rate of startups from the public and the Congress, as well.

  54. The Veil of Ignorance is an interesting article about “risk” and “reward” and human nature and gambling.

    Obviously, any amall “startup” business is a gamble when experience and statistics indicate that 50% of them will fail within the first five years, and only 29% survive for ten years.

    However franchises are sold to the needy public who are looking for a job AND income in hard times! The actual risk of the investment is obscured from the view of the new buyers because of the subsidy of ineffective and dishonest government regulation of presale disclosure of material information by the seller to the buyer of the franchise.

    Unfortunately, franchising is for dummies who often are fooled by appearances and inadequate disclosure of the known risk of their good faith investment in a franchise. They don’t understand that the mandated disclosure process actually licenses the franchisor to sell franchises that experience high failure rates of founding frachisees because the franchisor systems can survive through the process of churning the original franchisees.

    If the true risk and the actual rewards of buying a franchise were common knowledge, the public would turn their backs on this “gamble” with low or no reward that is hyped and sold as an investment in “the American Dream.”

    Certainly, nobody should gamble MORE THAN THEY CAN AFFORD TO LOSE on any franchise opportunity. New buyers shouldn’t be using their retirement savings or their houses as collateral to gamble on a franchise opportunity. But, of course, the dishonest status quo of the sale of franchises wherein the historical unit risk factor is obscured from the view of prospective franchisees and prospective investors in the systems encourages the prospective buyers and investors to believe that they are making a safe investment.

    http://thegreatfranchisingrobbery.blogspot.com

  55. These figures do not surprise me at all, actually I would think they could be higher. The volume of failed business ventures is something that we as a society need to look at in a whole different light. The hard fact is that more business fail than succeed. This is a huge understatement. Having said that, how can we use these experiences to help entrepreneurs rather than discourage. I co-founded DiedOnTheVine.com because I saw a need for a transition away from viewing business failure as a negative, stressful and depressing thing. It seems the all to common process is to fail, depress, maybe wallow and move on eventually. Maybe take another attempt at entrepreneurship and maybe throw in the towel. But if we can begin to view failure as a positive, as an opportunity for learning and growth, we are more aligned for success. What a valuable resource for the aspiring entrepreneur to have at his disposal. A tool to learn from, to move forward with renewed confidence. As we grow and grow as so will our value to the business community. DiedOnTheVine.com We welcome your feedback!

  56. We learn and we grow and eventually die from all of our life experiences!

    I post on this site to WARN prospective franchisees who are looking for a job and income and life style to NEVER invest more than they can afford to lose in a franchised small busines. The home equity or the retirement savings should NEVER be used as collateral/personal guarantee to borrow to purchase a retail franchise — no matter how famous the brand name.

    The malice of the required ten and fifteen year personally guaranteed contracts as required to purchase most retail franchise opportunities should be looked at by The Congress and the Executive and the Courts! Franchising SUCKS! –but big corporate entities have stacked the law surrounding franchising to feed the top of the financial pyramids.

    Intelligent people do take great risk for small rewards or no rewards. The sale of franchises to needy citizens looking for jobs and income in a disgraceful “confidence game” that has been highly successful for franchisors and the other special interests who profit from the ignorance of prospective franchisees as to the actual risk of the purchase of a retail franchise. Ineffective and dishonest regulation of the sale of franchises to the innocent public is a disgrace to our democracy and its ideals.

    True entrepreneurs who can finance their own ventures, or find an- gels, and who know and understand the risk are a different matter all together. Franchisees are NOT entrepreneurs! They are independent contractors who assume the risk of building and equipping physical units to earn gross sales upon which the franchisor ALWAYS earns a profit while mitigating HIS risk –which is passed off to the franchisees.

    I commend you for trying to find the bright side of “failure” but I wonder if it is a good thing for the government and policy makers to make policy decisions concerning small business and the jobs that are produced without facing the reality of the truth that just as many small businesses go out of business as go into business each year!

    The SBA subsidizes franchising and franchisors and banks and lenders, etc. through SBA loan guarantees and special programs like The Patriot Express Loan –which permits franchisors to target and exploit Military Personnel and their families.

    The word “entrepreneur” is misused by the sharks who sell franchises without disclosing the risk of the purchase as known to the franchisor under cover of ineffective and dishonest regulation of the sale of franchises to the public!

    http://thegreatfranchisingrobbery.blogspot.com

  57. Thanks for sharing real information on small business closure rates. I am working on a presentation regarding the use of Lean principles for solo entrepreneurs, and the information you provided will be helpful for that presentation.

  58. The use of these sorts of statistics often skews perception. It is important to also consider why the businesses are no longer “alive”. Research conducted in Australia suggests that most businesses are no longer alive because they sell, retire or restructure with only a small percentage going out of business because of failure (bankruptcy).

  59. I agree that judging failure on business closure does not tell the full story. I know someone who has started 3 businesses in the last 7 years, none of which lasted more than 3 years but he mad a lot of money selling them on.

  60. I come from India- a fast growing emerging economy. My rule of thumb: to survive as an SMB, you should be able to meet your own (self & family) needs for first 1,000 days without depending/encroaching on finances of your business.

  61. One should do a study to examine the very few business that make it, what thier actual profit margins really are. Lot of times you will find out that although still in business, the amount made is equivalent to a salary you would get working elsewhere. People sometimes chose to work for themselves until Costco or wall mart runs them to the ground completely where they can sell you anything from hearing aids to coffins. Let’s not forget to mention the cost of marketing, interest on the loans and working Capitol. By the time you start paying off some of the debts, it’s time to fold. But of course, we will always be reminded how the top .005% of corporations like starbucks, walmart, google and Facebook made it, so can you. The question is what is the 99.99% of the population suppose to do?

  62. With the advent of “real” Internet Marketing” the playing field is leveled a bit in favor of “thin managed businesses with great business plans”. The word “thin” call for low cost high efficiency and well researched and desirable offerings”! The words “great business plans” call for just that well thought out and researched sustainable by design plans. It is the people who have significant need, unrelenting drive and great business concepts as well as plans who fit with the 10 percent paradigm and go on to develop businesses that support hundreds of if not thousands of employees.

    As a world in need of work for everyone who needs work, we need to identify these very special people fast and support them with all the resources that we waste on big business and institutions. I envision what the result would be today if we invested the capital that governments wasted supporting big banks and investment firms on great business concepts and the .001 of the population that are left hanging by bad capital utilization and stoggy old big businesses that should have gone the way of the buggy whip and horse drawn carriages decades ago.

    Think lean mixed with above average value and great customer experience and you will be on track to be not only in the game, but you will have tilted the playing field in your favor.

    best regards,
    Owen Doonan
    mentor-one@usa.net

  63. I wonder about the phrase I hear associated a lot with those stats. “Out of business”. This summer I had a good run at a start-up, we were doing really well but then one of the partners had get out, so we restructured the company into a sole proprietorship. On paper our business didn’t last 3 months, yet I still offer the same services to the same clients 6 months later (knocking on wood though). Very interesting data that you presented. I will certainly be digging this in hopes that it gets out into the interwebs!
    thanks,

    Mike

  64. Thank you all for your insights. These numbers are staggering. I’m doing some research in this area to find out 1-3 factors that lead to such high failure rates.

    Would anyone like to offer their ideas?

    Thanks!

  65. Has anyone looked at the (failure/success rate)numbers for the past 5 years? (E.g. # of Small business startups in 2007…how many are still around today?)

  66. The failure rates are clear. I think the unclear factor is WHY. Why do so many businesses fail. You have to think the founders went into it with passion and verve and some sort of plan. In my experience, the factor that sinks a startup is usually poor management, or out of sync management. If you can get along with the people who are running the company, you have a much better chance of success.

    A few thoughts… thanks, Jacques Habra

  67. Sometimes startup companies fail because they created the business with a short term plan to sell the business.

    Arindam

  68. Thats actually allot better then the common belief, 55% failure rate in 5 years. I would like to know what companies they followed and their sample size though.

  69. We had a local business “close” because they did not want to try to sell the business. (I am not judging the logic there.) They classify that as a failed business although it was very profitable for the owners. Another couple just decided to close the business because they did not want to work that hard regardless of the excellent profit they had. This happens more than you know and it skews the numbers against new entrepreneurs. Banks are only interested in profits and they use the skewed numbers to avoid taking a risk on new businesses.

  70. Frank: Some of the banks were burned by “franchising” because of loans made from “Home Equity” credit qualifications for prospective franchisees.

    Obviously, banks are only interested in profits and they use the best numbers available to avoid making loans for risky new businesses. Their share holders are, of course, happy that banks don’t make risky loans.

    It is rare indeed when a “profitable business” just closes up and no effort is made to sell the business. But, of course, you didn’t see their books.

  71. Nice information! More and more small business form the past are getting failure rates slowly each year and I think it’s also because technology is progressing and the competition gets tighter.

  72. Scott,

    Just found this as I research for business survivability for my next blog posts. It’s interesting and yes, what I know is misleading :)

    I wonder what’s the figure would be in the next 10 years – 1992-2012…

  73. A great study and rtesource for new entrepreneurship and students. As a retired commercial banker it does not surprise me. However, if any of you are familiar with the 80-20 rule you will notice the verification in these statistics. Economic trends do effect the results, but over long periods of time the rule prevails.Just my humble opinion.

  74. how many of these businesses got bigger and changed their names, how many got integrated in larger businesses and “vanished”, for instance Apple has absorbed hundreds of small businesses????????

  75. The 12 months mark sounds accurate because this is the discovery phase of a business. In other words, it is the time when entrepreneurs get to see if their offerings fill a need in the marketplace. Most businesses fail because, when their customers wants don’t match their offerings, they fail to change course.

    • I have not personally used much of any services nor needed to in the last few years. Very little, dry-cleaning, hardly any repair or maintenance. Mostly purchased new equipment once old one went out. Some I repaired myself watching youtube videos. Restaurants once in a blue moon. No shoe repair, no tailor, not much of anything needed. Just go look at the local strip mall. nail saloon, hair saloon, mattress store, coffee shop, back store, hearing aid store…etc… Once you shake these guys up, there is barely any money left over at the end of the month. Even the chain monopolized electronic stores are closing down. The ones that ate all the smaller ones. If your still pitching the same old theory of the 1950’s,60’s,70’s, to think there is a fighting chance, just look at the numbers, the statistics, failure rates of 95% of new businesses.
      BTW, “failing to change course” requires lots of barrowed capital, which you don’t have having to pay off the previous screwup.

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