Shasta-Cascade Updates Small Business Tips

Business closures are not always a bad thing

8 June, 2022

Thinking about starting a new business?

If you go about things the right way, your chances of success may be much higher than you think. 

People love to quote statistics.  And for years, we’ve heard scary “facts” about small business failure rates.  Recently, I listened to a webinar where the presenter stated that 70% of businesses fail in the first year of operation.

That seems to be a common perception . . . but according to the census bureau, it just isn’t true. 

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I have two pieces of good news when it comes to this subject.  The first concerns survival rates: small business survival rates are actually better than widely reported.  Second, failure rates: just because the business isn’t around any longer doesn’t mean it “failed”.

Survival rates

The US Bureau of Labor Statistics (BLS) put together some data last year, showing the number of annual business openings and survival rates from March 1994 through March 2021.   The good news is:

  • After the first year, about 80% of businesses are still open,
  • After the second year, between 66% and 70% are still open,
  • After 5 years, half are still around and
  • After a quarter century, about 15% of them are still up and running.

You can review the data here: https://www.bls.gov/bdm/us_age_naics_00_table7.txt

But, that’s not the whole story.  The businesses that did not survive were not necessarily failures.   

Failure rates

Consider this: in 2003, a study of 12,185 companies was published.  It stated that, after four years 17% of the businesses were closed, but considered “successful” by the owners. You can read/download the study here:  
https://www.researchgate.net/publication/5158172_Redefining_Business_Success_Distinguishing_Between_Closure_and_Failure

There are several reasons a business would close and be considered a success.  For example:

  • The business was established to take advantage of a specific market window for a specific period of time; once that window closed and the profits were made, the business – with no other reason to continue – closed,
  • The owner(s) retired, or
  • The business was sold and merged into another company.

In May 2018, the SBA reported top 9 reasons employers closed their businesses. Here’s a link: https://cdn.advocacy.sba.gov/wp-content/uploads/2019/06/06192013/Small_Biz_Facts_Why_Do_Businesses_Close_May_2018_0.pdf  Not all of these had a negative outcome (note that owners could select multiple reasons for closure):

  1. Low sales / cash flow (25.0% — ok, that one’s bad)
  2. Retirement (21.9% — that’s usually a positive thing)
  3. Sale of the firm (20.3% — that can be positive or negative as well)
  4. Opened another company (6.3% — again, that could be a good thing)
  5. Illness or injury (4.7% — bad)
  6. Business credit (3.1% — again, bad)
  7. Died (3.1% — not good at all)
  8. Personal credit (1.6% — bad)
  9. Project ended (1.6% — could be a very good thing)

The message here is a positive one.  New businesses are not failing at the high rate that some may have reported.  And, if an aspiring entrepreneur goes about setting his or her business up the right way, their likelihood of success should only increase. 

Need help starting your small business?  Contact us – 95% of our clients recommend our services.