One of the first things people do when they decide to start their own business is look for some advice online. Unfortunately, the web is littered with staggering figures that seem to intentionally discourage young entrepreneurs from taking the plunge. On the other hand, there are some websites that focus solely on the blue skies and don’t even dip a toe into the dark pond of failed businesses. Don’t worry, though; our small business failure statistics are comprehensive and realistic. You’ve come to the right place.
We’ve carefully analyzed and compared dozens of sources to paint a realistic picture of the entrepreneurial world today. We don’t want to artificially get your hopes up or kill your dreams before they come to life. Instead, we want to present you with concrete facts about the failure rates of small businesses.
If you know the main reasons most businesses struggle, you can prepare accordingly and give yourself the best chance of succeeding. This information can help you decide which industries and demographics you should target, and which traps to avoid. Most importantly, it can give you hope that where there’s a will, there’s a way.
The road ahead is long and fraught, but we believe you can succeed. Let’s get started.
Small Business Failure Stats – Editor’s Choice:
- Only 78.5% of small businesses survive their first year.
- Business owners under 30 years of age are more likely to fail.
- The most common reason small businesses fail is that the market simply doesn’t need their products or services.
- 29% of businesses fail because they run out of cash.
- Only 17% of restaurants fail in their first year.
Statistics on Small Business Failure
1. Only 78.5% of small businesses survive their first year.
(Office of Advocacy)
New beginnings can be tough, especially for entrepreneurs. For 21.5% of small businesses, the journey ends before the first year is over. Only about half of businesses manage to reach their fifth fiscal year. And there aren’t many businesses that manage to stay open for a decade. Research shows that, on average, only one-third of all entrepreneurships get to celebrate their 10th birthday.
2. The small business failure rate has declined by 30% since 1977.
If our first stat seemed dark, we hope this data about the growing success rates of small businesses will brighten your mood. The good news is that you now have a 30% better chance of creating a successful business than you would have in the late ‘70s. This is according to Scott Shane, a university professor who believes that smarter business owners are behind this increased success. Indeed, entrepreneurs nowadays have access to a lot more resources to learn from. It’s also much easier for them to communicate with other owners and establish symbiotic business partnerships.
3. For 33% of small business owners, the greatest challenge is a lack of capital.
Stats on small business failure show that nearly a third of business owners feel they’re not getting enough cash flow to keep their business running. Finding a steady income stream and reliable customers is difficult, and the failure to do so often forces companies to throw in the towel. Besides cash flow, entrepreneurs also list marketing problems, time-management issues, recruiting challenges, and administrative work as some of their biggest concerns.
4. Business owners under 30 years of age are more likely to fail.
A number of factors determine whether a business will be successful or not. Experience is one of them. Small business failure rate statistics show that entrepreneurs over 30 have a slightly better chance of succeeding. This age factor becomes clearer when you look at the high achievers who belong to the top 0.1% growth group. Only 0.09% of owners under 30 reach these heights, compared to 0.17% of over-30 entrepreneurs. It seems that, in this case, experience makes all the difference.
5. Only 17% of restaurants fail in their first year.
For many Americans, successfully running a restaurant seems like an impossible dream that is destined to fail from the start. That’s because the internet is full of small business restaurant failure rates statistics that claim at least 90% of restaurants fail in their first year.
As this study shows, that is ridiculously far from the truth. In fact, 83% of full-service restaurant startups reach the one-year mark, while the median lifespan is 4.5 years. This source is a lot more reliable than internet hearsay; its calculations were based on data from 81,000 restaurants over a period of 20 years.
6. 71% of small businesses in Canada fail due to management issues.
This refers to both financial and general management issues, so it’s safe to say that a lack of cash is a problem in Canada, too. According to these failure statistics for small business, the biggest problems with financial management are the inability to manage working capital and under-capitalization. Almost half of the companies surveyed (49%) had a lack of managerial vision, which eventually led to their downfall and bankruptcy.
7. The healthcare and social assistance industry has the highest survival rate for small businesses.
The Bureau of Labor statistics small business failure rate from 2004 to 2015 tells us that the healthcare and social assistance industry is the most fertile ground for startups. In 2015, after nearly 11 years of existence, 40.5% of businesses in this sector managed to stay operational, while only 19.2% of businesses closed down after just a year of work. On the other end of the scale is the construction industry, with a 25.4% survival rate in 2015 and 23% of businesses failing after one year.
Why Do Small Businesses Fail?
8. The most common reason small businesses fail is that the market simply doesn’t need their product or service.
In researching its small business closing statistics, CB Insights carefully analyzed 101 small business that closed down in order to determine why they failed. Researchers found that almost half the companies (42%) on the list shut their operations down because there was no market need for their products or services. This is the most important condition for starting a business; no amount of marketing or investment in technology can make up for it.
9. 29% of small businesses fail because they run out of cash.
Having a small business can be an expensive venture, especially if you’re just starting out. According to small business failure statistics, nearly a third of companies don’t make it because they simply run out of cash. This makes sense considering that 67% of owners use personal funds to deal with their financial crisis, which can become extremely costly in the long run. If we add to that a 2018 study showing that 68% of small businesses have an outstanding debt (often caused by non-strategic credit card use), we can see how these problems escalate.
10. 23% of businesses fail because they don’t assemble a good enough team.
A functional team of professionals is essential for every business. Of course, assembling such a team is easier said than done. You have to take into consideration different personalities, skills, and how they all work together. It’s no wonder that statistics of small business failure tell us 62% of entrepreneurs choose not to have any employees at all. This reduces costs and avoids the risk of incompetence or laziness creeping into your business, but it also limits your business’s ability to grow.
11. 14% of small businesses fail because they ignore their customers’ needs, while the same number fail because of poor marketing skills.
When you’re starting your small business, you need to know not only what you’re selling, but also to whom you’re selling it. Getting acquainted with your target audience is half the work. The other half is catering to your users’ specific needs.
The small business survival rate indicates companies that ignore their customers’ problems usually have a greater risk of failing. This overlaps with poor marketing skills. After all, good marketing means adapting to the user-focused world of the 21st century.
12. 19% of small businesses fail because their competition out-performs them.
Most of the time, having a good business idea just doesn’t cut it. You also need to know how to present your idea, build upon it, and keep a keen eye on what your competition is doing. Small business failure stats show that nearly a fifth of all small businesses get beaten by their competition because they don’t pay enough attention to their surroundings.
Whether you want to admit it or not, having a successful small business is a never-ending race. You need to regularly check on your opponents to see if they’re using any new techniques or implementing any successful strategies.
13. For 13% of businesses, disagreements between the workforce, owners, and investors leads to failure.
We’ve already mentioned the importance of finding the right team for your small business, with 27% of owners describing it as a major challenge. Of course, that doesn’t relate only to employees. A high percentage of small businesses that fail do so because of disagreements between the founders, staff, and investors.
To prevent this from happening, it’s essential to clearly define everyone’s role and rights at the beginning so there aren’t any misunderstandings later on. The same can be said for investors, who often have unrealistic expectations of what the business can achieve.
14. 13% of small businesses collapse because they lose focus, while 7% are doomed by their failure to pivot.
When your product is not delivering the results you expected, you might have to consider a different approach or a new direction altogether. The failure rate of small businesses shows there’s no shame in admitting defeat, especially if there’s a potential success down another path.
Of 101 companies surveyed by CB Insights, 13% failed because they simply lost focus, while 7% failed to make the necessary changes. That said, for 10% of companies, pivoting actually turned out to be a major mistake.
15. According to small business failure statistics, 18% of companies fail because of pricing issues.
Choosing the perfect price for your product can be problematic. It’s a double-edged sword; if the price is too high, you’ll drive away potential customers and destroy your reputation on the market. On the other hand, if you short-sell yourself, you might not earn enough to keep your company afloat.
It may seem like a minor detail, but according to these small business failure stats, it leads 18% of companies to ruin. Balance is the key.
16. 9% of small businesses fail due to unsuccessful geographical expansion.
The success of any business depends largely on the owner’s ability to analyze the market and see where his or her product fits in. This analysis is even more important when it comes to entering an unknown area.
If not done properly, this step can be fatal. Indeed, failed expansion is a contributing factor for 9% of businesses that go under. Geographical expansion can also cause additional stress for remote teams due to communication problems and cultural differences.
Small Business Failure Stats: How to Avoid the Death Knell
17. 58% of business owners believe spending time with family in the evening is crucial for their effectiveness at work.
Getting lost in the vast and complex world of entrepreneurship is quite common among business owners, but it can also lead to copious amounts of stress. In turn, this makes them less productive and efficient at work.
In a small business survey by Xero, more than half of business owners said it was necessary to unwind with family on a daily basis to achieve maximum effectiveness at work. Having a free weekend with loved ones every week is a priority for 53% of business owners. Indeed, according to statistics on small business failures, 8% of companies that fail do so because of burnout brought on by poor work-life balance.
18. 86% of companies invest in technology to improve their productivity.
Small businesses that want to keep up with the competition need to invest in new technologies and offer their customers a more user-friendly experience. For that reason, 49% of businesses use mobile apps to connect with users. Another 32% add a mobile payment option to ensure easy purchases. And in order to avoid becoming a number among the small businesses failure stats, 26% of companies use business-planning tools to make sure their productivity is at an all-time high.
19. Businesses that sell services rather than products have a better chance of survival.
Xero’s research found that small business failure rates are a lot lower among businesses that sell services compared instead of products. With a survival rate of 59%, companies that sell services have a much better chance of pulling through than the ones that focus on products. According to the research, failed companies mainly sold to individuals (49%), while only 28% of surviving businesses did the same.
What are the most common causes of small business failure?
Based on a survey by CB Insights, 42 percent of small businesses that fail do so because there’s no need for their product or service on the market. Other important causes include running out of cash, having a bad team, getting beaten by the competition, and being unable to set the right price for their products or services.
What percentage of small business fails?
Research shows that 21.5% of small businesses fail after just a year. About half of all small businesses make it to their fifth year of work, while only a third survive a decade. Only 17% of full-service restaurants fail in their first year.
How can small businesses avoid failure?
The most important thing to do before deciding to start your own business is to carefully analyze the market, examine the available small business failure statistics, and see where your business might find its place. You need to come up with a working business model, assemble a well-functioning team, and listen to your customers.