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The Dark Side

A look at some data about births and deaths of small U.S. businesses.

Americans may be ambivalent about business, but they love entrepreneurship. Something about the act of starting a company and venturing into uncharted corners of the marketplace appeals even to the terminally cautious.

Since 1986 nearly 750,000 start-ups have joined the ranks of tax-paying, employee-hiring businesses every year. Add in roughly 140,000 new ventures that take over existing companies, and you get nearly 900,000 enterprises opening (or reopening) in a typical year -- and that's not even counting the millions of people who launch solo ventures. This population of youthful upstarts is where most of the employment-generating "gazelles" can be found. (See "The Age of the Gazelle," [Article link].) So there's a reason for our fondness for entrepreneurs: We can thank them for the millions of new jobs added to the economy since 1990.

On the other hand, there are the business deaths. We don't mean the 800,000-plus "terminations" that take place in a typical year. Most of those business closings are voluntary. We're talking about companies that go under with loss to creditors. In 1994 Dun & Bradstreet counted over 70,000 of them. Those failing companies left nearly $30 billion in unpaid bills and threw thousands of people into our unemployment lines.

Before you get nervous about your customers or suppliers -- or your own business, for that matter -- it's worth looking at where and why all that failure is taking place. Here's what an analysis of the statistics tells us:

  • Simple truths first: failures go up in recessions and down in boom times. Just what you might expect. In 1992 -- a lousy year -- nearly 100,000 companies gave up the ghost. For boom year 1995, Dun & Bradstreet puts the figure at about 71,000. Average losses are bigger in bad years, too. Generally, failures "lag" the national economy, meaning that they don't start to go up until we're well into a downturn.
  • Despite the scary numbers, more than half of business failures leave less than $25,000 apiece in liabilities. Most actually leave less than $5,000. The splashy bankruptcies you read about in the newspaper, with liabilities of more than $1 million, account for no more than 3% to 5% of all failures.
  • When it comes to the failures, there is no uniform national economy -- there are only regional ones. The Midwest's failure rate in 1994 was one-third lower than the national average. The Pacific Northwest's rate was two-thirds higher than the national average. California's rate was triple North Carolina's and double New Jersey's.

In a free-enterprise economy, businesses fail for any number of reasons. They're hit by broad economic trends. (That's why California looked so bad in 1994.) They're in sluggish or troubled industries. (Failures in fishing are high.) They're threatened by global competition. (It's tough to be a clothing manufacturer right now.)

But most often, maybe, they're pushed out of business by more aggressive or just more successful upstarts. We celebrate those upstarts. We just don't always pause to mourn the companies they shove out of the way.

* * *

Risky business: Giving up the ghost
Hundreds of thousands of companies shut their doors every year. Only a fraction of them are what Dun & Bradstreet defines as "failures," businesses that terminate with loss to creditors.

1990 1991 1992 1993 1994
Business terminations 844,000 821,000 819,000 801,000 803,000
Business failures 60,747 88,140 97,069 86,133 71,520
Average liability $923,996 $1,098,539 $971,653 $554,438 $410,477

Sources: The State of Small Business: A Report of the President, 1994, U.S.Government Printing Office, Washington, D.C., 1995; Business Failure Record, 1994, Dun & Bradstreet Corp., Wilton, Conn., 1995.

* * *

The riskiest time in a business's life
Percentage of total failures, by age of company

1ñ5 years 40%

6ñ10 years 27%

More than 10 years 33%

Source: Business Failure Record, 1994, Dun & Bradstreet Corp., Wilton, Conn., 1995.

* * *

The riskiest industries . . .
Number of failures per 10,000 listed companies, 1994

Coal mining 251

Misc. businessservices 189

Holding companies, investment offices 179

Fishing, hunting, trapping 156

Apparel manufacturing 146

U.S. average 86

* * *

and the safest
Number of failures per 10,000 listed companies, 1994

Tobacco products 0

Pipelines (except natural gas) 0

Membership organizations 3

Depository institutions 3

Funeral services, crematoria 3

Note: Excludes private-household employers.

Source: Business Failure Record, 1994, Dun & Bradstreet Corp., Wilton, Conn., 1995.

* * *

The riskiest parts of the country . . .
States with the highest number of failures, 1994 (per 10,000 listed companies)

California 163

Arizona 116

Washington 114

Maryland 106

Nevada 106

U.S. average 86

Source: Business Failure Record, 1994, Dun & Bradstreet Corp., Wilton, Conn., 1995.

* * *

and the safest
States with the lowest number of failures, 1994 (per 10,000 listed companies)

North Dakota 35

Mississippi 37

Iowa 40

Delaware 41

Wyoming 42

* * *

Despite failures and terminations, the business population keeps growing

Year New Successor Terminations Year-end
companies companies* total
1990 769,000 146,000 844,000 5,636,000
1991 726,000 138,000 821,000 5,679,000
1992 737,000 138,000 819,000 5,735,000
1993 780,000 136,000 801,000 5,850,000
1994 807,000 137,000 803,000 5,991,000

*Successor companies are existing businesses taken over by new or existing companies.

Source: Adapted from The State of Small Business: A Report of the President, 1994, U.S. Government Printing Office, Washington, D.C., 1995.

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Research assistance for this article was provided by Mary Furash.

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