‘..and did you know that 9 out of 10 businesses fail?’ This statement is published as fact in countless websites. You may have even heard speakers source it as the truth. Sometimes the quote may even add a time frame such as ‘9 out of 10 businesses fail in the first 2 years’. Other variations include ‘8 out of 10 fail in the first 3 years’. Whatever the numbers, they always shine a bright light on the risk small business owner’s face.
It’s scary. When I first heard it I bit my bottom lip.
Rest assured, the statistics are only a myth. They have no reliable source. In fact they have no source at all. Three separate research groups investigated the claims and found them to be a gross exaggeration of fact. These academic groups found the true small business failure rate to be much lower. Consider their findings below:
* Headd, B. Redefining Business Success: Distinguishing Between Closure and Failure, 2002
# Shane, S. Startup Failure Rates – The Real Numbers, 2008
< Phillips & Kirchhoff. Small Business: Critical Perspectives 1989
As shown above, the results of all three studies have a strong correlation. The studies agreed that at the 4 year mark, 50% of small businesses were still open and trading. By year six, the success rate had fallen to 40%.
Every Small Business That Closes is a Failure
Not quite. While further examining the numbers, it became evident that a closed business did not necessarily mean a failed small business. The pie chart below puts this into perspective.
It shows that at the 4 year mark:
- 50% of small businesses are still open
- 33% of small businesses have closed due to performance
- 17% of small businesses have closed for non-performance reasons
Therefore, counting all closed small businesses as unsuccessful is incorrect. A total of 17% of businesses were found to have closed for non performance reasons such as choice, retirement or being bought. These businesses ventures should not be classed as failures.
What is the True Small Business Failure Rate?
Taking the three studies into consideration, the business failure rate is closer to 33% within the first 4 years. This is a far cry from the purported 90% within the first 2 years. Researcher Brian Headd put it best with his comment:
“These results suggest that potential entrepreneurs, particularly those planning very small ventures, have less to fear than is commonly believed.”
So get out there and go for it! Super charge your small business.