Small Business Statistics And Failure Rates

Ever businessman or woman’s worst fear is failure. Unfortunately, small businesses can be extremely vulnerable to certain factors. For example, they may be vulnerable to hard economic times, poor marketing, and other problems such as a lack of owner interest. This does not apply to every small business but does tend to worry owners. The failure rates of small businesses and other related small business statistics such as debt tend to be high over the first five to ten years of any business venture, as the statistics outlined below should highlight. Knowing these statistics in advance will ensure that you are better equipped to avoid potential business problems.

Non-Employer Firms

Non-employer firms represent the highest number of businesses in the small business statistics collected every year. There were 25 million non-employer firms in the United States alone in 2006 and that includes freelancers, contractors and other individuals that work alone. The average that each of these businesses earned was $47,000, which is a good living and one that is indeed higher than the average salary for individuals in employment. However, the profit of those small businesses employing individuals was, on average, $3,000 higher at $50,000.

In terms of failure rates, non-employer businesses are more likely to fail than any other form of small business in the United States today, but not necessarily because they close. Business failure rates are defined as a company disappearing from tax records. In other words, many of the available statistics are incredibly deceiving given that the failure rate statistics for small businesses incorporate changes of name and changes of business tax code. As such, your business may be classified as a failure if you so much as change the name or convert from a non-employee business or sole trader to a small business that employs another individual. In fact, transitions are not accounted for and so they are added to the overall figure.

Take the 2006 figures taken by the US Small Business Administration for example. There were 671,800 new businesses opened but 544,800 business closures in that year. However, there is a note underneath the figures that not all closures were a result of bankruptcy. As a result, the figures are not accurate for business failures and it is important to distinguish between the failures and the closures for accurate figures.

The Accuracy Of Figures

The actual figures in small business statistics indicate that small businesses do not fail as often as many people often assume. For example, the figures that put small business failure as high as 90% are wholly inaccurate. Take the restaurant figures established by Ohio State University in 1999 as an example of this. Only 26% of newly established restaurants failed in the first year with a further 19% and 16% failing in the second and third years respectively.

Many experts on the issue of small business failure rates agree with David Birch, a former head of a research company that investigated small businesses. Mr. Birch formulated the following percentage rates for small business success in the first through tenth year:

  • First Year – 85% success
  • Second Year – 70% success
  • Third year – 62% success
  • Fourth Year – 55% success
  • Fifth Year 50% success
  • Sixth Year – 47% success
  • Seventh Year – 44% success
  • Eighth Year – 41% success
  • Ninth Year – 38% success
  • Tenth Year – 35% success

Of course, this is a generalization but it has proved extremely accurate in the past. Any business that passes the fifth year stands a great chance of succeeding in the long term. Of course, you can increase the chances of success by choosing a business that is relevant to society and in demand. Completing a lot of research is therefore important before beginning your business, so take every advantage you can to ensure that your business succeeds.

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