What Are The Real Small Business Survival Rates?

Those of us who converse with small businesses on a daily basis are well aware that many of them will fail in the first five years. In fact, these odds are a big reason why I assist people in buying well-established businesses that will provide a higher probability of success than a start-up. But what are the real numbers of small business survival? Many people believe that 80 to 90 percent of start-ups will fail in their first 5 years, but is that accurate? Let's take a look at the facts: 

"About half of all new establishments survive five years or more and about one-third survive 10 years or more. As one would expect, the probability of survival increases with a firm’s age. Survival rates have changed little over time.”
- Source: U.S. Bureau of Labor Statistics, BED

 The latest data from the Small Business Administration (SBA) states that nearly 66 percent of small businesses will survive their first two years. That means only about one third of total businesses will actually fail in these first two crucial years, the main cause being a lack of experience. When the data is extrapolated four years out, the number of surviving businesses has been consistently near the 55 to 60 percent mark. This same data shows a five year survival rate that has historically hovered around the 50 percent mark, a far cry from the 80 to 90 percent failure rate so commonly claimed. 

For a full chart of the data click here

Rather than 9 out of 10 businesses failing, as is commonly stated, the data shows us that approximately 50 percent will actually survive through their first five years. But even this information is open to interpretation, depending on what you define as a “failure.” As anybody who investigates this information further can see, there's a large difference between the approximately 33 percent of businesses that failed financially (or were shut down through legal action) and the nearly 17 percent those that were closed voluntarily. The SBA data combines these statistics, misleading one into believing that the failure rates are actually much higher than they are.

A 2002 study by Small Business Economics ultimately discovered that about one–third of closed business were actually successful when they “failed.”

“The significant proportion of businesses that closed while successful calls into question the use of ‘business closure’ as a meaningful measure of business outcome. It appears that many owners may have executed a planned exit strategy, closed a business without excess debt, sold a viable business, or retired from the work force.”
- Brian Headd, economist for the Small Business Administration

The below pie chart illustrates the full facts of the five year SBA data:

 No discussion of start-up survival rates would be complete without a clear understanding that numbers vary from one industry to the next. Analysis by industry also involves a very different set of data compared to the 93.1 percent of small businesses that have annual revenue of less than $250,000. In many ways, the trials of a small business are not comparable to large corporations, however the similar success rates reinforce the overall conversation.

As we can see, the common belief that the vast majority of small businesses fail is a fallacy that is easily disproved by the data. That said, there's still a nearly 1 in 2 chance that a start-up will no longer be operational in five years, which is why I always advise people to buy an existing small business with a proven track record of success. They've established themselves within their market, fended off competitive elements, built up a trained and experienced staff, honed their systems & processes, learned from mistakes, made the necessary course corrections, formed supplier relationships and attracted an army of loyal, paying customers contributing to a healthy bottom line. They have beaten the odds and now they want to impart everything they've learned onto you. What more could you ask for?

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Ryan Jorden is the Managing Partner with VR Business Brokers in Calgary, Alberta, where he specializes in valuating and facilitating the sale of privately held businesses. Reach him confidentially at ryan@vrcgy.com or visit our website and blog to learn more. We can also connect on Twitter. 

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