Ben Means Business

Business Failure Rate statistics are some of the most widely misqouted statistics in the world. I’ve heard everything from 90% of startups fail in their first year to 20% fail in their first year. I think it’s safe to say that the actual business failure rate is probably somewhere in between those numbers. I can understand why this is such a hard statistic to keep though. There is no surefire way to track every sole proprietorship, home based business, ebay entrepreneur, etc…that decides to start collecting money for their services. This is why I think that somebody needs to take the liberty of breaking these statistics down and displaying failure rates for each type of business entity.For instance, a corporation will probably not fail at the same rate as a sole proprietorship simply because someone who has taken the time to form an corporation is probably planning to create a larger company and has done his research. Whereas anybody wanting to earn a little extra cash can be a sole proprietor(see 411 on Sole Proprietorships) so they will be quicker to close up shop because their startup costs were not as high. Business failure rate statistics that are broken down this way will be more useful to aspiring entrepreneurs.

However, despite the innacuracies that exist with the way that data is currently collected, I think that Scott Shane over at Small Business Trends seems to have found the most accurate statistics out there. These statistics were collected by the Bureau of Census for the Office of Advocacy of the Small Business Administration. The statistics in his article(as seen in chart above) show that about 25% of new businesses fail within the first year and 36% fail within their second. Now while I do think that these numbers are more accurate than those previously spread around the internet, I think they still beg several questions.

One of the most important questions was posed by Susan Cartier Liebel. In the comments section of Scott’s post she says:

“When the word ‘failure’ is used here…does this mean simply closed shop? Businesses close shop for different reasons, are reborn under another name. People close businesses not because they failed but retired, moved on to another venture had to move to another state and chose not to sell it. It does not equate to failure…and I’m not talking about psychological use of the word.So, my question is, does this chart simply show businesses closing after 10 years or does it break it out further? Also, as you say, it is different across professions and this is an important qualifier.”She took it a step further and wrote a post about her concerns for these statistics. It is a pretty interesting read and she actually got some of her questions answered in a reply from Scott. These are the types of questions that always pop into my head when I see business failure rate statistics but I am glad that Scott has located and shared some more accurate(and encouraging) information than what was previously out there. So take a look at some of those articles and share your thoughts on what you believe to be the truth about business failure rates.

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business failure rates, startup, small business, entrepreneurship