If you are new in this “Small Business” world, and you’ve just recently opened your doors, you have a lot of uncertainty ahead. You can’t be sure how your product will evolve, or if you’ll even make it through the many challenges of entrepreneurship. I don’t blame you if you are wondering what percentage of small businesses fail. It’s a very valid question, and it’s important to stay up-to-date with the facts.
So, what percentage of small businesses do fail? I think it’s best to put this statistic into how many U.S. businesses survive.
According to the Bureau of Labor Statistics’ Business Employment Dynamics, the survival rate looks like:
- About 80% (four-fifths) of businesses with employees will survive their first year in business. The most recent data shows that of the small businesses that opened in March of 2015, 79.9% made it to March of 2016.
- About 66% (two-thirds) of businesses with employees will survive their second year in business. Recent data shows that of the small businesses that opened in March of 2014, 69.4% made it to March of 2016.
- About 50% of businesses with employees will survive their fifth year in business. Data shows that of the small businesses that opened in March of 2011, 51% made it to March of 2016.
- About 30% 0r 1/3 of businesses will survive their 10th year in business. The most recent data shows that of the small businesses that opened in March of 2006, 32.8% made it to March of 2016.
So what all this is saying is that about 20% of small businesses fail in their first year, and 50% of small businesses fail in their fifth year. These rates are pretty consistent over time, suggesting that year-over-year economic factors don’t have much of an impact on how many U.S. small businesses survive. What you want to takeaway here is that you can pretty much bet on a 80%, 66%, 50%, and 30% survival rate across 1, 2, 5, and 10 years in business—no matter the year.
It’s important to note that this reflects all businesses in the private sector. While the overall survival rates for small businesses surprisingly don’t vary much, the facts look a little different when you look at business failure industry by industry.
Which Industry Has the Highest Survival Rate?
Health care and social assistance businesses tend to have the best survival rate. So, if you’re planning on opening a business in the health care or social assistance industry, you’re definitely in luck! About 85% of small businesses in this industry survive their first year, around 75% survive their second year, and about 60% make it through their fifth year.
Which Industry Has the Worst Survival Rate?
Even though historical data looks good for health businesses, it doesn’t look so great for the construction or transportation and warehousing industry. For the construction industry, about 75% of businesses survive their first year, 65% make it through their second year, and about 35% make it through their fifth year. The transportation and warehousing industry doesn’t look much better: A little more than 75% of businesses survive the first year, a little more than 65%survive the second year, and about 40% make it through the fifth year in business.
Debunking Industry Failure Myths
Have you ever been told how risky starting a restaurant is? Were your culinary dreams crushed when you heard that 60% of restaurant businesses fail in their first year?
Well let me tell you, this is a myth.
Here’s business survival rates for restaurants:
- About 85% of food service businesses survive their first year in business.
- About 70% of food service businesses survive their second year in business.
- About 50% of food service businesses survive their fifth year in business.
- About 35% of food service businesses survive their tenth year in business.
Where does this survival rate myth come from? Survival rates for food services are really pretty similar to other industries. The most interesting part of this business failure myth is that the reason why restaurants do end up failing is because they lack access to startup capital. Banks often refuse to lend to restaurants because their business is too risky.
Why Do Small Businesses Fail?
Now that you know what percentage of small businesses fail, you’re probably wondering why they fail. There’s a whole number of reasons why small businesses close. According to a 2007 study, the biggest reason why businesses fail is a lack of sufficient capital plus cash flow problems. In fact, 82% of business failed because they experienced cash flow problems. This statistic reiterates the often overlooked fact: Small businesses need capital to grow. After capital, there are many other reasons why a business fails—from a founder departure to a poorly structured team.
This CBInsights analysis of 101 failed startups, polls the reason why a business failed according to their founder:
- 42% of small businesses fail because there’s no market need for their services or products.
- 29% failed because they ran out of cash.
- 23% failed because they didn’t have the right team running the business.
- 19% were out-competed.
- 18% failed because of pricing and cost issues.
- 17% failed because of a poor product offering.
- 17% failed because they lacked a business model.
- 14% failed because of poor marketing.
- 14% failed because they ignored their customers.
- 13% failed because of poor product timing.
- 13% failed because they lost focus.
- 10% failed because they pivoted poorly.
- 9% failed because they lacked passion.
- 9% failed because of a bad location.
- 8% failed because they didn’t have financing or any investor interest.
- 8% failed because of legal challenges.
- 8% failed because they didn’t use their network or advisers.
- 8% burned out.
- 7% failed to pivot in time.
Clearly, there are many number of reasons why a business fails, and a few keep coming to the top: capital access, cash flow, lack of demand, and poor management. Keep these stats sourced straight from failed entrepreneurs bookmarked, and do your best to avoid making the same mistakes!