I know those statistics scare people away from starting their own businesses, but I’ve looked at statistics of business births and deaths closely, and I know of no credible study showing anything close to a 90% failure rate.
So I picked up the phone and called the good professor. He couldn’t remember where that number came from, and he quickly backed away from it.
“How do you define failure?” said Professor David Blanchflower, Professor of Economics at Dartmouth University, explaining that failure didn’t really mean failure. “Failure usually includes companies that change their name or ownership or a person who is self-employed who moves to employment.”
That’s the rub…statistics you’ll hear about business “failures” are likely to mean business “closures.” In some cases, not even closures, just business changes.
For instance, I had my own successful consulting practice for many years. Like most sole proprietors, I reported my business income on my personal income tax return, using my own social security number. When I incorporated, the business got its own tax identification number. So my first “business” probably shows up in statistics as a business “death” even though it was actually getting larger.
As Mark Twain said, “News of my death is greatly exaggerated.”
Overwhelmingly, businesses don’t die or fail; the owners close them for reasons unrelated to whether the business is making money.
Take restaurants, for instance. Restaurants have a notoriously high “failure” rate. You’ll often hear that 90% of restaurants fail in the first year; that’s what they said on the TV reality show, “The Restaurant.” Well, don’t believe everything you hear on a reality show.
In a study in Columbus, Ohio, Professor H.G. Parsa of Ohio State University, tracked new restaurants from 1996-1999. In the first year, 26% closed. Another 19% closed the second year, and 14% the third. Collectively, 59% of new restaurants closed those three years. By the way, the “failure” rate wasn’t very different between franchised restaurants 57% and independent restaurants 61%.
Now, even though these numbers are much better than the 90% failure rate bandied about on TV, it’s not particularly heartening to know that six out of ten restaurants closed in three years.
However, Professor Parsa found that reasons other than economic necessity made the owners decide to close. They cited divorce, poor health, and most importantly, an unwillingness to make the immense time commitment necessary as reasons for shutting their doors.
In other words, they had what David Birch, former head of a research firm specializing in studying small business data, called the “I Had No Idea” syndrome. Would-be entrepreneurs don’t realize what’s truly involved with running a business.
So what is your chance of success? I think Birch’s statistics are probably as accurate as any. His survival rates:
First year: 85%
“Once you’ve hit five years, your odds of survival go way up,” Birch said. “Only two to three percent of businesses older than five shut down each year.”
The lesson? To greatly increase your chance of success, find out as much as you can BEFORE you open your doors. Talk to people who run their own businesses, especially businesses similar to yours, and get a realistic understanding of the time, financial, and emotional resources necessary. Keep your eyes open not to the possibility of failure, but to the very real demands of running your own business.
So what about that 90% failure rate cited on the radio? I went to the station’s Web site and replayed the story. Listening closely, I realized they didn’t mention any time period. So, perhaps the professor is right after all. I think it’s safe to assume that within some period of time oh, let’s say 50 years 90% of all businesses will close. I can live with those odds.