AdvisorSmith found that 22% of small businesses fail within the first year, 32% fail within the first two years, and 40% fail within the first three years of business. Half (50%) of small businesses fail within the first five years, and two-thirds (66%) fail within ten years.
As important drivers of employment and the economy, small business owners are key to the American economy. When businesses succeed, small business owners are rewarded both financially and with the knowledge that they’ve made positive contributions to their communities. However, entrepreneurship is far from easy, and many who start small businesses end up closing shop after a number of years.
AdvisorSmith examined data published by the U.S. Bureau of Labor Statistics on the survival rates of businesses in the United States. This data reports the survival rate of businesses based upon their employment reports to various government agencies. Business survival is measured starting from a business’ first report of employment, including self-employed workers.
What is the small business failure rate?
The table below shows the failure rate and survival rate of small businesses in the United States in 2020, examining businesses that were started in each of the years between 2010 and 2019. Businesses are most likely to fail in their first three years of operation. Our analysis found that businesses that make it to their fourth year have an approximately 90% (89%-91%) chance of surviving through each subsequent year.
|Years in Business||Survival Rate (Cumulative)||Failure Rate (Cumulative)|
Small Business Failure Rates by Industry
AdvisorSmith examined survival rates by industry over the past five years to find the industries where businesses are most and least likely to fail. We constructed a weighted ranking of each industry’s survival rate over the five-year period to find the industries with the highest and lowest survival rates. The table below shows the industry failure rates over this time period as well as each industry’s rank, with the lowest failure rates listed first.
|Rank||Industry||Failure Rate (2015)||Failure Rate (2016)||Failure Rate (2017)||Failure Rate (2018)||Failure Rate (2019)|
|1||Agriculture, Forestry, Fishing and Hunting||29.0%||25.7%||20.2%||20.2%||12.0%|
|2||Real Estate and Rental and Leasing||35.8%||31.7%||25.2%||24.1%||14.7%|
|4||Arts, Entertainment, and Recreation||40.7%||33.6%||27.0%||25.5%||17.4%|
|5||Accommodation and Food Services||41.4%||34.6%||30.0%||26.7%||17.3%|
|9||Health Care and Social Assistance||44.7%||40.9%||33.2%||25.2%||20.0%|
|10||Finance and Insurance||43.7%||39.3%||33.6%||29.2%||18.5%|
|12||Management of Companies and Enterprises||47.2%||42.9%||35.5%||32.2%||19.3%|
|13||Transportation and Warehousing||47.1%||42.5%||33.2%||32.2%||23.6%|
|15||Professional, Scientific, and Technical Services||49.6%||43.5%||37.1%||33.0%||22.0%|
|16||Administrative and Waste Services||47.7%||43.6%||37.4%||33.0%||24.1%|
|17||Mining, Quarrying, and Oil and Gas Extraction||59.8%||49.0%||37.7%||34.4%||23.8%|
What Industry Has the Highest Failure Rate?
The Information industry has the highest failure rate nationally, with 25% of these businesses failing within the first year. 40% of Information industry businesses fail within the first three years, and 53% fail within the first five years. This industry includes businesses such as publishing, software, film/video, audio/music, broadcasting, Internet publishing, data processing, and other information services.
The next highest failure rate belongs to the Mining, Quarrying, and Oil and Gas Extraction industry. In this industry, 24% of businesses fail in the first year, while 38% fail within three years. After five years, 60% of Mining, Quarrying, and Oil and Gas Extraction businesses fail, which is the highest 5-year failure rate of any industry.
What Industry Has the Lowest Failure Rate?
The Agriculture, Forestry, Fishing and Hunting industry has the lowest failure rate out of the industries surveyed. Only 12% of these businesses fail in the first year, while 20% fail by the third year. After five years, only 29% of these agricultural businesses fail.
The Real Estate and Rental and Leasing industry has the next lowest failure rate, with only 15% of these businesses failing in the first year. 25% of real estate businesses fail within the first three years, and 36% fail within the first five years.
States With the Highest and Lowest Small Business Failure Rates
The business environment varies considerably in various geographic locations across the country. A large number of variables come into play when determining which states are more and less hospitable to small business owners and entrepreneurs. These factors can include state regulations, taxes, a state’s economy, the purchasing power of residents, among many other factors.
AdvisorSmith found that Massachusetts was the state with the lowest failure rate for small businesses. In Massachusetts, 20% of businesses failed within the first year, 36% within three years, and 46% within five years. All of these failure rates were substantially below the national average failure rates.
Washington was the state with the highest failure rates for small businesses. A nationwide high of 37% of businesses in the state did not survive their first year, while 44% failed within the first three years. Washington businesses failed 54% of the time by the fifth year in business.
In the table below, we rank all 50 states plus the District of Columbia based upon their small business failure rates over the past five years. States with lower failure rates are ranked first.
|Rank||State||Failure Rate (2015)||Failure Rate (2016)||Failure Rate (2017)||Failure Rate (2018)||Failure Rate (2019)|
|49||District of Columbia||57.2%||51.0%||45.4%||37.4%||22.7%|
AdvisorSmith spoke with the following experts who provided answers to key questions on small business failures:
- Brian Van Hook, Florida International University, Regional Director of Florida SBDC
- Dr. Christopher Garrett Pryor, Assistant Clinical Professor at the University of Florida, Warrington College of Business
- Judy Mahan, Economic Development Director, Cal Poly Center for Innovation and Entrepreneurship
- Ken Szymusiak, Managing Director of Academic Programs, Michigan State University, Burgess Institute for Entrepreneurship & Innovation
- Dr. Peter Boumgarden, Koch Professor of Practice for Family Enterprise, Washington University in St. Louis, Olin Business School
What are common factors that cause small businesses to fail?
Brian Van Hook: The most common issues that lead to business failure focus on financial and management difficulties. For example, some businesses fail to manage their cash flow properly or price their goods/services incorrectly, leading [to] financial issues for the company. Additionally, many business owners lack the business acumen or experience to handle rapid business growth or unexpected business interruptions. Either of these scenarios, if not handled properly, can lead to business failure.
Dr. Peter Boumgarden: One common factor in the failure of small businesses is that they run out of cash. I know that seems simple, but in this case, simple can be true. The consultancy McKinsey and Company did some work this past summer and found that a third of small business respondents to their survey were operating at a loss or just breaking even before the pandemic hit. If you are operating with already slim margins and your days of cash on hand are limited, this means that your likelihood of failure can be quite significant when a shock hits.
It also means the recovery trajectory is longer. An analysis in the same article found that larger companies took four years to fully recover after the 2008 recession, but it took smaller companies closer to six. What makes this especially challenging for small businesses today is that there is still a very significant dip in revenue for these organizations compared to a year ago. Research by academics over at “Track the Recovery” shows that all small business revenue was still down by over 29% at the end of April 2021 compared to pre-pandemic levels. This kind of sustained lower revenues can be difficult for companies to bear without significant changes to their operating structure.
Dr. Christopher Garrett Pryor: Of course, the obvious answers are the right ones. Entrepreneurs fail because they don’t know who their customers are. Entrepreneurs fail because they don’t know how to sell. Entrepreneurs fail because they don’t know the numbers.
All entrepreneurs fail all the time, though. Only some of them fail for good. These folks fail because they give up. Maybe that’s because they think entrepreneurship is going to be easy. Maybe that’s because they think people will immediately fall in love with their product or service. Maybe it’s just because they find something else worth doing. But it’s always going to be about the entrepreneur giving up. Failure only becomes permanent once you decide you won’t try again tomorrow.
Judy Mahan: Access to capital funding is fundamental. If a small business cannot access funding to support growth, the business will stagnate and/or fail. Small businesses need to invest in strong sales and marketing campaigns, invest in hiring the right talent and expertise to properly execute on their sales and marketing strategies, and be able to hear customer feedback to make the necessary investments in refining their products or services to meet specific customer needs. And of course, access to capital allows businesses to meet cash flow priorities as needed to properly manage operations in a consistent manner.
If I had to then narrow it down to one specific area as a follow-up to access to capital, for both main street businesses and tech startups, the lack of a strong strategic sales and marketing plan is most often the Achilles heel that can derail a company. For main street businesses, strapped with a small marketing budget, not understanding your customer segments and how to reach them through the proper targeted social media/marketing channels will not only be a waste of time but more alarmingly, a drain on limited financial resources and no positive outcomes.
For startups, the lack of a proper go-to-market strategy becomes a huge barrier to obtaining funding from investors and being able to properly execute on the launch of the business. Seasoned startup investors avoid falling in love with the startup product or service; they focus on investing in a winning team that can showcase how they are going to execute their sales and marketing plan to attain specific milestones, especially sales traction.
Ken Szymusiak: This can often be industry-dependent, but the most common cause is usually being undercapitalized. Most businesses fail to understand how much money it will take to cover upfront costs to open, operating expenses as sales ramp, and the cost of labor.
What actions can federal, state, and local governments take to improve the viability of small businesses?
Ken: Small business is a large spectrum of industries so government policy could have lots of influence depending on the market. In general, I believe that the best thing governments can do is be a champion for their local business owners and try to adopt policies that reduce red tape, fees, and time to open. All of these can have a tremendous impact in creating a “business-friendly” community without having to get overly complicated with tax incentives or more aggressive government interventions, but of course, sometimes these are necessary.
Brian: Federal, state, and local governments have a number of programs and resources available to help entrepreneurs start and grow businesses. An example is the Small Business Development Center (SBDC) program, which partners with local universities and community colleges to assist businesses in their areas. In Miami-Dade County and the Florida Keys, the local SBDC center is housed under Florida International University’s College of Business. The center offers no-cost consulting and training services to local businesses in our area. Additional programs under state and local governments focus on providing additional opportunities for small businesses to secure government contracts for goods and services.
Dr. Boumgarden: If we are dealing with a short-term dip for small businesses, then I think capital in the form of loans or even forgivable loans can make a lot of sense. PPP money was a godsend for many of these businesses to provide some lift, for example. What I find more challenging is the longer-term story if revenues remain down as they are today. If the revenue for small businesses stays permanently lower as consumers learn new habits such as increasingly ordering from online retailers, it might be a drain on government cash to continue to support these small organizations with a kind of perma-loan.
Beyond loans, many state and local governments should look hard at the ease of doing business in their state and city and consider policies that make it easier to start and support a smaller enterprise on a sustaining basis. There might also be creative ways to ensure they guard against predatory pricing practices or other behaviors that inappropriately and illegally undermine market share of the smaller players.
Judy: Grant funding during the pandemic has been phenomenal, saving companies from bankruptcy, giving them the opportunity to re-organize, test out new revenue models, adopt better tech and hire the right experts. Between March 2020 and May 2021, the Cal Poly CIE SBDC took on a new responsibility and became the first responders for business owners in San Luis Obispo County who needed support to navigate the impact of COVID. The SBDC team was literally working around the clock providing general counseling, helping businesses understand funding eligibility, and guiding clients through multiple disaster loan application processes. In all, the SBDC team counseled 674 businesses, provided 5,700 hours in counseling, helping 201 San Luis Obispo County companies receive $22.6M in funding (EIDL/PPP/SVOG/RRF/CA Grant & Loan Relief). The government stimulus funding was instrumental in saving our local economy.
Outside of COVID-related stimulus funding, ongoing financial support through SBIR/STTR grant funding is extremely helpful in supporting the launch of tech and innovation-focused startups. Tech startups are crucial; they are more likely to become scalable and high-growth, as well as support the creation of high-paying jobs. The more the government can engage in stimulating and providing resources to tech-focused enterprises, the more economic development will be effectively triggered.
What advice do you have for entrepreneurs that can increase their chances of business success?
Dr. Pryor: Expect to start small. The entrepreneurs who give up are very often the ones who have set themselves enormous goals and are disappointed when they can’t achieve them in a couple of days. Instead, start small. Don’t rent the storefront if you can work from home. Don’t buy the piece of equipment if you can borrow it. Don’t hire someone when you can do it yourself. (And you should almost always be doing it yourself, especially in the early days.)
Expect to fail. Keep your financial and capital investments small, so that when you do fail, you don’t lose the house and your kids don’t get to go to college. This is not rocket science, but it’s still worth saying.
I’d encourage folks to remember this, too: If you have a great idea, do something about it now. Every second you wait, you’re less likely to take action at all. Most of those “failures” you asked about in the first question happen in the first few seconds of a business’s life. Someone comes up with a good idea, or they see a problem that people have, which they could solve. Then they think on it. Or write a business plan. Or get a website. Anything, that is, besides actually doing the thing they thought of. Thus were many would-be entrepreneurs ruined.
Brian: Entrepreneurs by definition are those who take on financial risks in the hope of profit. So there will be risks with any business venture. However, successful business owners find that balance where they are able to “play it safe” in some areas while taking a calculated risk in others. It is important to ask questions, get the full picture, and ensure that whatever risks you do take, you have taken steps to ensure it is as calculated as you can make it. Also, take advantage of resources and mentorship to help you build out the big picture.
Judy: Follow the lean startup business model: figure out your minimum viable product, test it out with your “friends and family,” obtain concise feedback, incorporate the feedback into your product or service, make edits and launch your next version to a wider audience. Constantly keep a close ear to customer feedback. Build your company around your customer needs, customer service, and customer satisfaction. The customer feedback loop is paramount to success and should always be the business priority.
Ken: In general, it will probably cost more than you think and will probably take longer to generate revenue than you anticipated. So be conservative in your estimates and make sure you have identified the sources of capital necessary to clear these hurdles as you launch your business.
Dr. Boumgarden: The advice I would have for many of these businesses is learning how to discern whether or not the last year’s shock is temporary or whether it will have some long-term effect. If you are a small office furniture company, for example, you should be thinking hard about whether a return to office will be likely in many of the firms to which you sell. If you are a small restaurant, you will want to consider whether moves to cook from home and order take-out will be stickier than they would have been if it were a short-term viral hit.
If these are significant operating changes for your business, you want to think about adjusting your operating model to prepare for this new reality. More broadly, I think we are learning it can be essential for companies to have some level of conservatism in their operations. Days of cash on hand was not something many companies were paying attention to when things were going great, but it has become critical to consider in times like these. As such, I would encourage companies to rethink the metrics they pay attention to and adjust behavior always with some possibility of the black swam events in mind.
AdvisorSmith examined small business failure rates based upon data published by the U.S. Bureau of Labor Statistics, Business Employment Dynamics, Establishment Age and Survival Data. To determine failure rates for businesses, we examined business data as of 2020, taking the failure rate of businesses that were started in each of the preceding ten years.
Additionally, we examined the failure rates of businesses in 18 major industries over the past five years. We examined businesses that started in each of the five years between 2015 and 2019 and calculated the failure rate through 2020 for each of these industries. We then ranked the failure rates across the five-year period for the industries and used a weighted average to rank the industries.
We took a similar approach in ranking the states for business failure rates. We calculated the business failure rates for each state for each of the past five years and also took a weighted average approach to rank the states for the survival and failure rates.
1. U.S. Bureau of Labor Statistics, Business Employment Dynamics, Establishment Age and Survival Data