Small Business Failure Rate: What Percentage of Small Businesses Fail?
Have you ever considered leaving the office life behind for good and starting your own business? You’re not alone. According to the latest U.S. Small Business Administration data, there are 30.2 million small businesses in the United States.
Undoubtedly, with millions of businesses in the country, some are bound to fail. Businesses falter for a variety of reasons – sometimes owners face financial constraints, workforce issues, or they simply decide to choose a different lifestyle.
Before you dive into the wild world of entrepreneurship, it’s important to take a long look at the statistics to learn why some businesses fail, so you can be sure you don’t become one of them.
How many businesses fail?
Before you can start dreaming of business success, it’s important to understand the probability of failure. According to data from the U.S. Bureau of Labor Statistics, about 20 percent of small businesses fail within their first year. By the end of their fifth year, roughly 50 percent of small businesses fail. After 10 years, the survival rate drops to approximately 35 percent.
What’s interesting about these figures is that the rates of failure are fairly consistent. Even during the economic downturn, failure rates didn’t skyrocket. They remained steady, suggesting that economic factors don’t have as significant an impact on the success of small business survival as many may think. When the economy took a turn for the worse, small business failure rates remained steady.
Why businesses fail
Businesses fail for a number of different reasons. An analysis by CB Insights found 20 primary reasons why startups fail. These include:
- No market need – 42%
- Ran out of cash – 29%
- Wrong team – 23%
- Outcompeted – 19%
- Pricing or cost issues – 18%
- Unfriendly user product – 17%
- Product without a business model – 17%
- Poor marketing – 14%
- Ignored customers – 14%
- Mistimed product- 13%
- Lost focus – 13%
- Disharmony among team and/or investors – 13%
- Pivot gone bad – 10%
- Lack of passion – 9%
- Failed geographical expansion – 9%
- No financing or investor interest – 8%
- Legal challenges – 8%
- Didn’t use network – 8%
- Burned out – 8%
- Failure to pivot – 7%
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Industries with the highest survival rates
If you have been considering starting a small business in the health care or social services industries, then you are in luck — these are the industries with the highest survival rates. The Bureau of Labor Statistics shows that the social services and health care industries are projected to reach 19.8 million jobs in 2018, and have grown at an average rate of 2.3 percent. This is the fastest-growing rate of any sector.
Industries with the lowest survival rates
Not all industries are treated equally, however. Data from the Bureau of Labor Statistics (BLS) can help you identify industries that have a high rate of failure or success.
One industry with the lowest survival rate is construction. According to data collected by the BLS, a construction company founded in 2004 only had a 26.5 percent success rate just 10 years after launching. While this doesn’t mean you shouldn’t start a construction business, it may be worth further research to consider the risks of the industry.
How to succeed in your first year of business
Fortunately, not every business is destined for failure. Plenty of businesses go on to be successful for years to come. Here are a few tips on how you can succeed in your first year of business:
Create a business plan. All too often, business owners forgo the business plan right off the bat. They have big ideas and feel the need to jump right in before really gaining a thorough understanding of what their business is and what it can offer.
The primary purpose of a business plan is to define what the business is or what it intends to be over a specific period of time. “Clarifying the purpose and direction of your business allows you to understand what needs to be done for forward movement,” said Chondra Wilson, founder of Hawthorne, Calif.-based organic skincare company Blu Skincare.
Keep expenses low. As a new business owner, you’re going to have some startup costs, but if you’re not careful, you might feel like you’re writing more checks than you’re bringing in.
“Test out your idea first before going all in,” said Vivek Chugh, founder of Listables, an online task management tool. “With all of the incredible tools available today, it is easier than ever to start up a business and test to see if there is even any interest in your product or service.”
Focus on the customer. Surprisingly, 14 percent of business owners reported to the CB Insights survey that their business failed because they ignored their customers. In a business, it’s easy to get caught up in the day-to-day activities and to-do lists. In order to be successful, however, you have to think about your customer or client in everything you do.
Utilize and build your network. As a new business owner, people in your network are often the first customers you serve. Not only that, but your network can open the door to other connections that may be of value to your business, such as connecting you with key employees or opportunities that you need to succeed.
Increase sales efforts. As a new business owner, employing and training the proper salespeople is the key to success for your business.
Seek work/life balance. Business owners are notorious for overworking themselves and tend to push their personal lives to the side in order to focus on their business. This commonly comes back to bite them, as they inevitably face burnout after a year or two as an entrepreneur.
The bottom line
Starting a business isn’t easy, but with advanced planning, budgeting and vision, you can achieve wild success no matter your industry. By knowing what to do (and what not to do), you can continue being a successful business owner for the rest of your life.