Global Business Failure Rates: Statistics at a Glance

Angel Holdings compiled data from numerous studies, looking at small-business failure rates over the past 30 years. Unfortunately, the results are often contradictory or vague.

Getting good data on small, privately held companies (and interpreting it accurately) isn't easy because they don't have to report their financial results. The National Federation of Independent Business' Education Foundation, analyses a survey of 36,000 households each year for the Wells Fargo/NFIB Series on Business Starts and Stops. They report that 2.9 million businesses were launched in 1997, involving nearly 4 million people. Another 1 million people purchased 700,000 existing businesses that same year. The data showed that most new businesses are very small with more than two-thirds starting in the owner's home. A mere 21% initially employ someone besides the owner. (*The report doesn't track start-ups by industry category).

For business terminations, the Wells Fargo/NFIB statistics show that about half of businesses that employ people are still operating five years after they open.

The NFIB  report estimates that over the lifetime of a business 39% are profitable, whilst 30% break even, and 30% lose money, with 1% falling in the "unable to determine" category.

There are many reasons for businesses closing doors, becoming “statistical failures” such as a sale (Investors sold out profitably), or merger (which may actually be a sign of robust financial health or good prospects), or investors lost their investments.

*The premise that there are many reasons (not all of them bad) for business closures was behind a study by John Watson and Jim E. Everett published in the “Journal of Small Business Management” in October, 1996.

The authors studied 5,196 start-ups in 51 managed shopping centres across Australia between 1961 and 1990 to try to determine true failure rates, because they felt that bankers and venture capitalists were basing negative views of small companies on dubious statistics.

Their data showed that annual failure rates were greater than 9% when failure was defined simply as discontinuance of ownership." When failure was defined as bankruptcy, however, the number dropped to less than 1% annually. About 4% of the businesses that closed their doors each year "failed to make a go of it." And owners disposed of about 2% of businesses annually to prevent further loss.

The authors concluded that cumulatively 64.2% of the businesses failed in a 10-year period (if failure was measured as discontinuance of ownership), but only 5.3% actually filed for bankruptcy during a decade.

Sources of information: U.S. Census Bureau's Characteristics of Business Owners Database: www.census.gov; Dun & Bradstreet, www.dnb.com; Robert Morris Associates, www.rmahq.com; & Financial Research Associates, www.frafssb.com.