How many small to medium businesses ACTUALLY fail in the first five years?

Question

You always read things like 80%, but where is this statistic coming from? Can this be found on-line somewhere? I ask, because it's such a common statement and I'm wondering if it has any real basis in fact. A quick search around the web and I find people using 70%, 75%, 80%, 95% and the generic, "Most." The truth is out there somewhere. : )

Answer 1

There are studies to really find out what percentage of small businesses actually fail (and yes, 80% is the "magic" number that seems to be the accepted truth, whether it has basis or not)

SBA has a study called "Redefining Busines Success: Distinguishing Between Failure and Success" http://www.sba.gov/advo/stats/bh_sbe03.pdf by Brian Headd that looked at the characteristics that result in better chances of survival. The study showed that

- 66 percent of new employers survive two years or more
- 50 percent survive 4 years or more, and
- 40 percent survive six years or more

Answer 2

Well, the problem is that "business" and "failure" mean different things to different people...

Let's say you started a home-based business, operated it as a sole proprietorship, had no debt, made $5,000 in the first six months, decided that you can make more money working for someone else, got a job, and ceased operations.

Was that a business? To you, definitely. To those who collect relevant data, not necessarily. You didn't apply for EIN or resale permit, you never filed a separate tax return for the business, so no government agency has a record of your business. You business didn't borrow, so neither credit bureaus nor Dun & Bradstreet ever learned of your business' existence.

Was that a failure? To you, maybe. To bankruptcy courts, it wasn't (there were no unhappy creditors left behind). To the Census Bureau and the Department of Commerce, it also wasn't, since the entire lifespan of your business fits within a single census period.

The net result of all this is that no one knows for sure. Everything you read is either a statistical estimate or a plain guess.