Don’t worry, it isn’t true.
You’ve probably heard the statistic bandied about, that 9 out of 10 businesses close before the end of their first year.
Yet statistics from the US Census Bureau reveal something entirely different. According to the Census’s Business Tracking, 66% of new businesses actually survive for two or more years. Even more telling, 50% survive for four years, with 40% surviving for six years or longer.
It gets more interesting.
Though entrepreneurs have different definitions and varying degrees of success, many would consider their business a triumph if they were able to close, sell or walk away while the business is still turning a profit.
The Census statistics can’t possibly take into account that a properly articulated exit strategy might have been part of the business plan from the very beginning. Those statistics could easily warp the true picture since there is no way to accurately account for an intentional closure.
Of the numbers reported, a scant 33% of business declared having to close under duress, or situations the business owners considered a failing. Skill based service businesses such as real estate, financial planning, insurance, accounting, etc., have relatively low startup costs and high requirements for the individuals running them.
This truth enhances the possibility of a successful forfeiture of the business.
Consider a situation where an entrepreneur started a service based business, built up their authority, then closed that first business in favor of a second, more profitable enterprise in speaking or consulting.
If the old tired statistic that 9 out of 10 businesses close down their first year has in any way kept you from reaching for that next rung of your dreams, take comfort in the thought that it’s not really true.
Start your business tomorrow. Your odds just got a whole lot better.
Glaring caveat: these statistics only reflect formalized businesses, those that went through the wringer to apply for an EIN etc. A lot of people start out in the grey economy. It’s only after they work at it for awhile and presuming they don’t wash out, that they take the next step of getting official. There’s also a wide variation depending on the business focus. For example, the failure rate of independently owned restaurant start ups is about 95%. Among crafters working at home in their spare time, it’s similar.
That said, it would be unfair or untrue to surmise that craft businesses at home are predisposed to fail. Far from it. The issue is more a matter of competing priorities and family needs may necessarily take precedence until children are older. I’d be more interested in measuring exits in this grey economy and their success rate when they re-enter it later on.
One needs to be careful using U.S. government statistics. Jerry Useem, when editor of INC Magazine, once wrote an article titled, “U.S. Business Data Worst in World—and Getting Worse.” Useem wrote this 14 years ago, and the data has continued to deteriorate ever since. To the point where there is not even a common definition throughout government agencies for what constitutes a “business.”
That is why the U.S. Census Bureau only analyzes data for businesses that have employees and at least $1,000 of revenue. This leaves out over 70% of all U.S. businesses. (For a more definitive discussion on this issue, go to the Small Business Administration web site and look for the Working Paper titled, “Nonemployer Start-up Puzzle.”)
Also, as Kathleen pointed out, failure rates vary drastically between industries. Part of every new business startup’s due diligence should be a discussion with their chosen industry’s association regarding the success rate of new businesses in their industry. Most associations track this much better than the government.
“9 out of 10 businesses closing during their first year” has never been a “statistic,” it has been an opinion handed down from writer to writer. It may also be true for some industries, however.
But, the most important thing for a new entrepreneur to remember is that if they don’t do their homework, and properly prepare—they WILL fail, regardless of what statistic is used.