What is the Failure Rate of New Businesses in Their First Year of Operation?
Oct 21, 2019 by Bob Voss
Over the last eight years I have presented over 550 times a free seminar at Workforce Centers called “How to Start a Successful Small Business.” In these seminars I always ask what the participants think the failure rate is for businesses in their first 12 months of operation. Usually the answers range from a high of 90% to a low of 20%. So what is the real answer?
First off, if you Google “failure rates of new businesses” there are over 67 million responses. When looking at the first ten pages you find there is virtually no real data on this subject. There are articles that say 90% of new businesses fail. There are also articles that say 50% fail, and so on. To me the only real article about this subject was written by Scott Shane, a college professor of Entrepreneurship. Use this link to view an article by Scott.
To make a long story short, Scott makes the case that about 25% of businesses fail in the first 12 months of operation. In reality this figure may be higher (up to 40%) when you take into account the fact that in many states when you file as a Sole Proprietor, the filing is good for 10 years and no annual renewals are required. So these failures go under-reported.
In any case, small business start-ups do fail, and the first year of business sees the greatest number of business failures. So my opinion on this subject is, let’s not spend a lot of time focusing on the failure rate. Let’s focus instead on why new businesses fail. If you know why small businesses fail in the first year, then you can learn from other people's mistakes and make sure you don’t do the same things they did.
In the next few posts I am going to share with you the four main reasons a small business fails in its first year of business. As a teaser for my next blog, I will tell you that not having even a simple business plan PRIOR to starting your business is one the major reasons why new businesses fail. You siimply MUST go through the business planning process for your new business to make it through the critical first year of operation. And in case you haven’t figured it out already, the Proof Plan™ is the easiest and simplest way to create a business plan for your new business! If you have any comments on this post or would like to ask me a question, please email me.