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April 29, 2008

Don't Most Small Businesses Fail?

I am so often asked, "don't most small businesses fail?", that I was both delighted and dismayed when I read this recent post by Case Western Reserve educator and author Scott Shane on Small Business Trends in an effort to bust myths surrounding statistics on small business successes and failures.

Proportion of New Businesses Founded in 1992 Still Alive By Year.Small business failure rates over 10 years - United States - by Scott Shane

These are the averages. There are considerable differences across industry sectors in business failure rates (see Figure 7.1 on page 113 of Illusions of Entrepreneurship), which is pretty interesting and important. But I’ll have to leave a discussion of what those are and why they exist for another blog post.

I have not read the book this chart comes from (the post just came out on Monday) but in the comments section I took issue with the implied assumption all businesses which close are considered failures.  No, they are closures and for this statistic to have meaning failure needs to be defined with objective criteria.

We don't know why they closed.  Businesses don't always close because they 'failed' which in my book means the business owner wants to keep the business open but is unable to sustain business or herself financially, heading either towards personal and/or professional bankruptcy.  Failure in my book does not include sustaining yourself and the business but needing to close because of a move, a new venture, selling then the new owner closes.

Scott replies to my comment that in follow-up the SBA surveyed those who closed their businesses and asked them if they considered their business "unsuccessful' and 70% said they would.  This, again, is subjective.  What was their definition of success?  I'm not playing word games here.   There was simply no objective criteria used to determine if the business failed factually or if the owner had dreams that were left unfulfilled by the business and therefore he deemed it 'unsuccessful'.

So, when a solo says to me, "don't most businesses fail?' do you understand now why I can't answer this.  And as far as seeing more specific rates across professions (hopefully including the legal profession), we have to wait for Scott to post this on Small Business Trends soon.

However, when we hear the statistic "more than half of all new businesses fail within 2 years" whether we call it failure or closure, we now know this is not true...at least by these numbers.

If you are considering opening your own solo practice, do not use broad brushed statistics to make a personal decision.  Statistics will help you consider the challenges you may face, but that is the only way you should use them.  If challenges are identified then your plan to succeed must address those challenges.

Remember, any statistic tortured long enough will eventually tell you what you want to hear. It's your choice to listen...or not.

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Business Failure Rate statistics are some of the most widely misqouted statistics in the world. I've heard everything from 90% of startups fail in their first year to 20% fail in their first year. I think it's safe to say that the actual business failu... [Read More]

Comments

Carolyn Elefant

Here is a more positive statistic, I think - 80 percent of the dotcom companies survived while only 20 percent failed - http://www.myshingle.com/2006/11/articles/trends/great-news-for-law-firm-start-ups-80-percent-of-dotcoms-survived/
The reason that I think that this stat may hold more meaning for small firm lawyers than traditional small biz numbers is that law firms are more like dotcomes - low start up costs, no inventory, even ability to run the business part time and generate revenue from another source to feed back in. That's very different, from say, starting a bagel store or a dress boutique where you need to rent space and initially, spend all your time at the business to get it up and running.

Ubu Walker

So, what percentage of solo lawyers are still in business after 6 months? A year? After 5 years?

Susan Cartier Liebel

Carolyn, You bring up a great comparison. The author notes there are significant differences across professions and will post about this soon. I'm very anxious to see these numbers and to then compare to the numbers you provide.

Thanks for the input.

Ubu, let's see what Scott has to post soon.

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