Data from the Small Business Administration shows that an average of 80% of employer businesses survive the first year, 70% survive at least two years, 50% survive at least five years, 30% survive at least ten years, and 25% survive at least fifteen years.
That’s a much better survival rate than the frequently cited myth that 50% of businesses fail in their first year. They don’t. However, starting a business and going the distance is obviously quite hard and success is far from guaranteed.
Reasons why businesses fail
Figuring out why small businesses fail is a bit trickier because “failure” as defined by these statistics is simply the business no longer existing—anything else will have to be self-reported by the founder, and that isn’t always reliable.
CB Insights research based on over 100 startup post-mortems found these reasons listed most often for why the founder thought the business failed:
- 42% – failed to find a market need for their services or products
- 29% – failed due to running out of cash
- 23% – failed because they didn’t have the right team
- 19% – failed due to being bested by a competitor
- 18% – failed due to pricing and cost issues
- 17% – failed due to poor product offering
- 17% – failed due to a bad business model
- 14% – failed due to poor marketing
- 14% – failed because they ignored their customers
1. No market need
Product/market fit is the number one killer of new businesses. Reaching product/market fit typically means creating a product that is faster, cheaper, or easier to use than competing products or creating a product that serves a poorly-served segment of customers.
For example, Partake Foods was founded by a mother who wanted to find snacks for her daughter, who is allergic to gluten. Partake now provides gluten-free, vegan, and non-GMO cookies—a differentiating factor that helped them stand out in the crowded snacks vertical.
The other market factor to consider is whether a product category is growing or slowly declining. Generally speaking, there are four types of good product categories based on what trajectory they’re on:
- Fad. A fad is something that grows in popularity for a very short period of time and fades out just as quickly. A fad can be lucrative if your entry into the market and exit are timed perfectly, but this can be difficult to predict and a recipe for disaster.
- Trend. A trend is a longer-term direction that the market for a product appears to be taking. It doesn’t grow as quickly as a fad, it lasts longer and, generally, it doesn’t decline nearly as quickly.
- Stable. A stable market is one that generally is immune to shocks and bumps. It is neither declining nor growing but maintains itself over long periods of time.
- Growing. A growing market is one that has seen consistent growth and shows signs of a long-term or permanent market shift.
2. Ran out of cash
Outside of poor sales, the main reason businesses run out of cash is due to bad forecasting. Forecasting is the process of predicting future sales and expenses based on historical data. If you don’t have any historical data, you can still base forecasts on expectations and quickly update your forecasts as you get real data.
Forecasting may not be the most glamorous work, but it’s essential to the health of any business and much easier to control than your direct sales.
3. Not the right team
Starting a business requires a certain level of heroics—as the founder, you’ll be wearing a lot of hats. But any founder working with a co-founder, early contractors, or early employees knows that business really becomes a team sport. The primary reasons teams don’t work out are (A) a poor mismatch and overlap of skills and (B) poor team culture and cohesion.
Be wary of hiring your friends or people you personally like, and instead try to hire scrappy, resourceful people who help shore up your strengths in areas that matter to the business. E.g., if you’re already a strong marketer, but your business relies on streamlined operations, you might look to hire in that area to round out your team.
Read this next: How Many Businesses Are Started Every Year?
FAQs
Small Business Failure Rates
What percentage of small businesses fail 2022? ›
In that time, 23.2% of businesses that opened on or after March 2022 failed within a year. For the same time period (March 2021 to March 2022), 20.8% of businesses failed, while from March 2020 to March 2021, 18.4% of business failed.
What percentage of small businesses fail within a year? ›
Why Do Most Startups Fail? Most new companies do not survive the startup phase, with 20% failing after the first year. Surveys of business owners suggest that poor market research, ineffective marketing, and not being an expert in the target industry were common pitfalls.
Why do 90% of small businesses fail? ›
Business owners say they've failed because the money ran out, being in the wrong market, a lack of research, bad partnerships, ineffective marketing, and not being an industry expert.
What is the rate of failure for small businesses? ›
About 50% of all new businesses will fail within 5 years
The SBA reports that 49.7% of businesses will fail in half of a decade. Historically, these statistics have stayed consistent since the 1990s, even despite the recent COVID-19 pandemic. So in short, businesses have a 50/50 chance of survival in 5 years.
What is the #1 reason small businesses fail? ›
Running out of money is a small business's biggest risk. Owners often know what funds are needed day to day but they're unclear as to how much revenue is being generated. Inexperience with managing a business or an unwillingness to delegate can negatively impact small businesses.
What percentage of the economy is small business in 2022? ›
Small businesses employ nearly half of the American workforce and represent 43.5% of America's GDP. They are a critical part of our economic ecosystem where big businesses and small businesses are vendors, employees, partners, and customers to each other.
What is the number one reason for the failure of new businesses? ›
Final answer:
The number one reason for the failure of new businesses is poor management, including poor financial planning, operational inefficiencies, and lack of strategic direction. Taking too many risks without proper evaluation and mitigation can also be detrimental.
What is a main cause of business failure? ›
According to sources, there are six common reasons why small businesses fail: a lack of proper planning, insufficient funding, ineffective marketing, poor management, failure to adapt to market changes, and legal issues.
Why are so many small businesses closing? ›
HERMOSA BEACH, Calif. — It's been four years since the pandemic began. As COVID-19 regulation fell into place, many small businesses had no choice but to close.
Approximately 10% of startups fail within the first year. According to the United States Bureau of Labor Statistics, the startup failure rate increases over time, and the most significant percentage of businesses that fail are younger than 10 years. Over the long run, 90% of startups fail.
What is the survival rate of small businesses? ›
What we know about the failure rate of small businesses. According to data from the Bureau of Labor Statistics, as reported by Fundera, approximately 20 percent of small businesses fail within the first year. By the end of the second year, 30 percent of businesses will have failed.
What industry has the highest failure rate? ›
Industries with the worst survival rates
The transportation and warehousing industry has the highest percentage of businesses that fail in the first year (24.8%). This industry includes roles in air, rail, water, truck and pipeline transportation, among others.
What business is least likely to fail? ›
What type of business has the lowest failure rate?
- Real Estate. “90% of millionaires got their wealth by investing in real estate.” – ...
- Self Storage. ...
- Trucking. ...
- Vending. ...
- Laundromats. ...
- Senior Care Centers (Healthcare) ...
- Bad operational management. ...
- Bad financial management.
The failure rates of businesses show that around 20% fail in their first year and about half of businesses are still standing after 5 years. Certain startups, however, tend to have a 90% failure rate and somehow, this statistic became the norm.
Are many small businesses fail every year True or false? ›
The U.S. Bureau of Labor Statistics reports that about 80% of small businesses will survive their first year. About 70% of businesses with employees will survive their second year in business. Down the road, it's reported that 70% of small business owners will fail before their 10th year of operating.
What are the odds of a small business being successful? ›
Starting a small business is not easy, and many entrepreneurs face significant challenges. According to the Bureau of Labor Statistics, approximately 20% of small businesses fail within their first year. The failure rate increases to 30% by the end of the second year, 50% by the fifth year, and 70% by the tenth year.
What is the average net profit of a small business? ›
As reported by the Corporate Finance Institute, the average net profit for small businesses is about 10 percent. Here are some examples reported by New York University—note the wide range of actual profit margins reported in the study: Banks: 31.31% to 32.61% Financial Services: 8.87% to 32.33%
What small business has the highest success rate? ›
Massachusetts has emerged as the U.S. state with the highest chance of survival for a small business. Out of the number of small businesses that opened in 2019 in Massachusetts, 64.96% have survived over three years.
