Closed Up Shop: The Reasons Why Many Small Businesses Fail Before Year #5
August 29, 2016
In the US, about 50% of small businesses fail within the first 5 years and two-thirds go under within the first 10 years. That’s one heck of a daunting statistic, especially for the starry-eyed entrepreneur.
Now, there are a number of reasons why small businesses tank—and many don’t have novel explanations. We chatted with Susan Solovic—serial entrepreneur, author, speaker and dubbed THE Small business Expert—to find out the top reasons why half of small businesses don’t see past their fifth birthday.
To begin, Susan outlines the general rule-of-thumb for the first three years of operations:
- In year 1: Expect to lose money,
- In year 2: Start to break even,
- Finally, in year 3: The goal is to turn a profit.
“Usually, within the first three years is when we see the most small business failure,” she says. “Statistics are rather grim when you look at businesses that get started and actually make it to that third-year mark. Once you get over that three-year hurdle, you start to get your footing and your business starts to run a little more smoothly.”
Top Reasons Why Small Businesses Fail
1. Lack of Business Fundamentals
“People start businesses because they’re passionate about what they’re doing and really good at their product or service. But what they don’t realize is they don’t have the basic fundamentals of running a business.”
Despite the type of business you have, Susan explains there are basic business fundamentals put in place in order to scale and grow. The problem is, many entrepreneurs get caught up in the limelight of starting a business without getting educated or laying down the foundation first.
Pro-tip: “Here, I think social media is a game changer. You don’t have to be a sophisticated researcher or business-minded to learn more. Set some Google Alerts and see what’s out there. Trade associations and small business organizations provide good research about the industry. Also, look at what your competitors are doing.”
2. Lack of Originality
“Let’s say I bake great cupcakes and I do it just the way everyone else runs their cupcake business. With that said, I’m not really giving the market a reason to change its buying habits. I’m doing the same old thing.”
It’s not what you sell that will make customer buy into your service, instead, it’s the experience you create that will really win them over. Susan explains that small business owners focus too much on talking about themselves and don’t really understand exactly what customers are “buying.”
Pro-tip: “Play into the emotion—that’s what customers are really buying. You’re not really selling, you’re solving a problem. Once you really understand what customers are buying, then you’ve solved that problem—and you give them something that no one else is doing.”
3. Lack of Vision
“Small business owners fail to sit back in the beginning and really think about what they want their businesses to become.”
Every small business owner has an overarching end-goal in mind: be successful. But the little details to get to that point is often lost in translation. Susan says that while it’s okay to dream of success, it’s also crucial to pause, identify the necessary skills and funding you’ll need and lay out the steps that will get you there. Undoubtedly, these measures will change as you grow. But by setting a clear vision for yourself, it ensures you won’t get caught in the conundrum of working your tail off and not making any progress.
Pro-tip: “I think one thing is to really do your market research before you launch your business. It’s really so much simpler now than it was 10 years ago. You can listen to what people are saying via social media, review websites, discussion groups—there are so many opportunities to really discern and get insight into what’s happening in your marketplace.”
4. Lack of “Funds”
“I hear people say it’s all because I can’t get money. It’s hard, and the economy has made it even harder for small businesses.”
It’s easy to blame the job market and the economy as the root of your business’ financial problems. Of course, the thought of running a business amidst an unsteady economy is daunting, but the allowing the influence of external pressures dictate your business decisions can be just as stifling. Susan advises small business owners that while bootstrapping is a challenge, it isn’t an impossible practice.
Pro-tip: “You don’t need that much money to start your business. If you really want to get it done, most small businesses bootstrap. They start with very little and get a lot accomplished. There have been a lot of successful businesses that have started in very down economies.”
Making the Same Mistakes, Over and Over Again
The reasons why small businesses fail are ubiquitous. The root of the problem nearly always points at management or finances, so the explanations for business failure aren’t nearly novel. But why?
“I think it’s just the excitement and enthusiasm you have about your business,” Susan explains. “You may know these things from a common sense perspective, but when you have that idea that you’re going to go out and start this business, you just take that leap of faith.”
Entrepreneurs typically identify themselves as being self-confident and risk takers. “You have to respect that,” says Susan. “I don’t want to diminish anybody’s energy or enthusiasm for it, but you also have to do your own homework, and that takes a little bit of time.”