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Sunday, June 21, 2020

Small Business Failure Rate - 9 Out of 10?

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Would you believe that 9 out of every 10 small businesses fail? How about 8 out of 10? Well someone must believe these statistics because they keep being referenced by entrepreneurial experts and speakers alike. The statistic is aimed at inducing fear. To paint a picture of thousands of small business owners tossed to the wind with barely a penny to cling to. And it's all false.

There is no truth in the extraordinarily large business failure rates. This is hardly surprising though, as they never come with supplied references.

Fortunately, the truth can be revealed. In fact three separate research groups have investigated these common claims and all have found the failure statements to be factually baseless. These three research groups were

  • Headd, B in the study 'Redefining Business Success: Distinguishing Between Closure and Failure', 2002

  • Phillips and Kirchhoff in the study 'Small Business: Critical Perspectives', 1989

  • Shane, S in the study 'Startup Failure Rates - The Real Numbers', 2008

The results of these three studies all showed a marked correlation with one another, which is a big thumbs up for debunking the myth. The studies found that by the forth year of operation, 50% of smaller businesses were still open and operational. When fast forwarding to year six, this had fallen slightly to 40% of businesses remaining open.

Great, so should the statistic be: 6 out of 10 smaller businesses fail? Well, not quite. The term 'fail' implies that the business was forced to end due to operational pressures. In fact, almost 20% of the businesses that closed, did so due to non performance issues. An owner may have chosen to close because they wanted a change, to retire, or perhaps they opted to onsell the business instead. Whatever the reasoning it's important to separate 'closure and failure' from 'voluntary closure'. They are both completely different motivations and should not be confused and summed.

What is the Real Small Business Failure Rate?

OK, let's cut to the chase. When assessing the findings of all three studies, the actual failure rate is 33%, within the first 4 years of operation. Or put another way - just over 3 out of 10 small businesses fail in the first 4 years. This rate is considerably smaller than the wives tale of 9 out of 10. You can wipe the sweat off your brow now. Reality isn't as cruel as reported.

So if you're planning on opening or expanding you business, rest assured the failure rate is considerably lower than is usually perceived. If someone tries to quote you the mysterious '9 out of 10 failure' statistic, ask them to produce a source. They'll be left to sheepishly turn their pockets inside out without a retort in the world.

Having said that it's important to recognise that every venture faces the known and unknown risks of failure. However if you seek good advice from people with results and take the time to research and critique your small business plan, you've already mitigated the major challenges.


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Source by Ben Vestic