How many companies fail? Not as many as everyone thinks.
Small Business 2001
Death: The facts
Every year for the past several years, about 9% of companies with employees have shut down.
Of that 9%, virtually all were small companies. Then again, virtually all companies are small.
The percentage of companies closing their doors varies with the business cycle. In 1990, it was about 10.4%. The number for 2000 may be higher than the numbers for recent years.
Nobody really knows how many one-person businesses close up shop each year.
Among all the companies that close down, only about one in seven actually fails -- that is, goes out of business leaving behind unpaid debts.
The number of formal bankruptcies varies significantly from year to year. When times are good, it's less than 10% of business terminations. In 1990 it was 12%.
So most companies that go out of business don't go bankrupt and don't even leave unpaid debts. Some close up when the owner dies or retires. In many cases -- perhaps most -- the owner simply decides to do something else.
A rising failure rate is part and parcel of today's entrepreneurial economy. In the 30 years from 1950 to 1979 -- three decades of the old economy -- Dun & Bradstreet's index of business failures per 10,000 listed companies averaged 43. After 1979 it climbed sharply upward. From 1980 to 1997 it averaged 91.
Survival: The facts
Many start-ups come into existence and then disappear without ever being recorded by government agencies, Dun & Bradstreet, or other organizations. The proportion of those that fail -- that is, close and leave unpaid debts -- is unknown.
So the statistics of survival refer to companies that live at least long enough to be picked up by somebody's database.
What's more, survival means continuing to do business, not necessarily continuing under the same ownership. The founder or owner may decide to sell out -- but regardless of whether the sale means a profit or a loss for that owner, the business is considered to have survived.
Survival rates obviously depend on economic conditions and so will vary from one time period to the next. That's why researchers studying survival are careful to identify specific populations of companies and examine survival rates over a specific time frame.
A 10-year study by the SBA of companies founded in 1976 revealed that about one-quarter disappeared within two years and one-half didn't make it past four years. By 1986, only one-fifth of the companies were still in business under their own names.
Another SBA study -- this one of companies founded between 1989 and 1992 -- found that about two-thirds of the businesses remained open for at least two years, about half survived for at least four years, and about two-fifths stayed above water for at least six years.
Figures compiled by research company Cognetics for the period of 1995 to 1999 show that about two-thirds of the companies that were founded in 1994 survived until 1999.
If a company establishes itself well enough to create a few jobs, its chances of success are much higher than if it has no employees. Even in the early SBA study, which found the lowest rates of survival among new companies, far fewer companies that had created jobs went out of business in any given time period than those that had not created jobs. (See "The Key to Survival," below.)
Total number of employer companies
Number of employer companies that closed
Number of business bankruptcies
Sources: The U.S. Small Business Administration, Small Business Economic Indicators, 1998, March 2000, and Small Business FAQ, December 2000. The 1998 and 1999 numbers are estimates.
The Key to Survival
The SBA identified companies of all sizes -- soloists included -- that were founded in 1976, then followed them over a 10-year period. How many were still in business after several years? For the most part, the record looked bleak.
But if a company established itself well enough to hire a few employees, the numbers changed dramatically.
Percentage of businesses still in operation among ...
Companies of all sizes (Soloists included)
Companies that hired 1 to 4 people
Companies that hired 5 or more people
After 2 years
After 4 years
After 6 years
After 8 years
After 10 years
Source: U.S. Small Business Administration, The State of Small Business: A Report of the President, 1997. Data for year 10 are estimated by the SBA.