The Real Data on Small Business Failures 1

Have you heard the way-too-familiar numbers on small business failures? Supposedly there’s a study somewhere that says seven out of every 10 new businesses started in the US fail within three years. I’ve seen it referred to dozens of times. But is it true? And does it matter to you?

If you’re curious about the research and business failures, do a good web search. You can start with this Google search on statistics on small business failures. You’ll see there that what we tend to take for granted isn’t necessarily so. What you won’t see there — at least I couldn’t find it — was the supposed definitive study that’s so often referred to.

The truth is that nobody knows. Because business existences and business fates have so many tax implications, statistics are distorted. Lots of businesses exist for tax reports only. Lots of businesses are born and die as statistics only, not real people with real hopes. Some businesses are doing fine but cease to exist because they were sold or absorbed, meaning there was a successful exit. Some businesses move or change their name. It’s really hard to see what really happened.

For some healthy published skepticism on these small business statistics, I recommend Mark Hendricks’ Why the Small Business Failure Rate is 90 Percent Smoke and Mirrors on BNET a couple of months ago. The title describes it pretty well, and so does Mark’s subtext as “the debunker.” Here’s an important quote:

According to well-supported studies by reputable researchers, 70 percent of new firms that have at least one employee survive for at least two years. Roughly half go on for five years. That comes from the SBA, but other studies reached similar conclusions.

And even the 30 percent failure rate after one year may overstate the real risk of starting a small business. That’s because other studies have shown that most firms that close their doors were profitable at the time. They may have closed because the owner had health concerns or decided to do something else more personally interesting. They didn’t, most of the time, go broke.

My conclusion for today is: put down that article. Step away from those statistics. The small business failure that matters is only the one that affects you. Do your homework first, Break your uncertainty down into pieces. Your business isn’t a statistic. Do people want what you’re selling? Will they pay enough to cover your costs? Will your numbers work? Is it real? Are you kidding yourself?

(Image: mac steve, Flickr cc)

  • http://www.diedonthevine.com DiedOnTheVine.com

    Yes it is very hard to peg down exact figures. What you say here makes great sense. It really is a question of how can you make the best use out of a failed business venture.
    When you view failure as part of a journey, one of exploration and wonder, a whole new world opens up. What if you could see your own failed business ventures as an opportunity for insightful learning and growth. The opportunity being to move forward with renewed confidence, with greater knowledge, understanding and awareness. Viewing failure as a negative, sad and depressing thing. As one without value, completely negative cuts you off from
    truly taking something wonderful away from your experience. Shifting into a mindset of positive learning aligns you in a whole new way. When you change your way of looking at these experiences you are in a different state of mind, one
    that allows new opportunities and possibilities to be revealed to you. By changing our perception we can see what failure really has to teach us. The need for this shift is what prompted me to co-found the website DiedOnTheVine.com
    Its purpose is to explore these invaluable learning experiences.

About the Author Tim Berry is the founder and chairman of Palo Alto Software and Bplans.com. Follow him on Twitter @Timberry. Follow Tim on Google+ Read more »

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