Why a High Percentage of Businesses Fail, and 4 Tips for Succeeding

Whenever a business opens, new owners are fueled with hope and optimism about its viability and prospects for long-term success. Unfortunately, statistics paint a grim picture and should serve as a cautionary tale for people considering a new business venture.

According to data from the U.S. Bureau of Labor Statistics (BLS), nearly one in four businesses (23.2%) fails within its first year of operation. Almost half (48%) of the businesses faltered after 5 years, and close to two-thirds closed after 10 years.

LendingTree, an online lending marketplace, analyzed the BLS data for 1-year, 5-year, and 10-year business survival rates, by state and by industry. The analysis looked at demographic and industry findings, reasons businesses fail, and how owners can best position their companies for success in Year One.

Business failures by state & by industry

• Washington state had the highest 1-year business failure rate (40.8%), followed by Washington, D.C. (32.2%), and Idaho (30.7%).
• California had the lowest 1-year business failure rate (18.5%), followed by Kentucky (18.8%) and Massachusetts (19.2%).
• The retail industry, which had the highest 5-year failure rate in the previous year’s report (think Covid), reported the lowest one-year failure rate at 12.9%, followed by Accommodations and Food Services (14.2%) and Arts, Entertainment, and Recreation (17.1%).

Reasons for failure

While each situation comes with a unique set of circumstances, there are some common factors that cause businesses to fail. The cost of materials is always challenging when operating a business, and inflation can cut into profit margins. Expenses such as startup costs and employee salaries and benefits must be considered in the early stages of a business. New owners may also struggle with funding if they don’t have sufficient credit or an established track record of success.

How to succeed in Year 1

Here are four ways new franchise owners can best position themselves for success at the outset of their operations.

1) Create a strong business plan. It is crucial for new owners to do plenty of research and develop a plan for the business. This includes knowing their target customers and competitors within the market. They must also conduct market analysis and know their profit margins and financial projections. Creating a sound plan can serve as a guide when starting the business, as well as a roadmap to success in future years.

2) Strengthen your credit. Most new businesses require securing a loan at the outset of operations. A very good personal credit score starts at 740, and it is recommended to increase the score as much as possible to qualify for the best interest rates. Some ways to do that are signing up for autopay, reducing credit card debt, and not applying for additional lines of credit.

3) Market the business. Potential consumers must learn about a business’s products and services if it’s new to them or to their area. There are many ways to go about building brand awareness, such as advertising, traditional and social media, networking and word of mouth. Making people aware of the business is the first step in earning customers and, eventually, profits.

4) Use available resources. Starting a business can be overwhelming, but it is not a unique experience. Get information from the SBA and Department of Commerce websites. Network with other business owners in the area or join specialty online business groups. For franchise owners, lean on the support of the franchisor and other owners in the system. Having information or knowing someone who has gone through a similar experience can prepare new owners for the path ahead and overcome unexpected bumps in the road.

Methodology: The report calculated the 1-year, 5-year, and 10-year survival rates for businesses by state and industry. One-year data looks at whether businesses opened in March 2022 remained open in March 2023, the 5-year data compared March 2018 and March 2023, and the 10-year data compared March 2013 and March 2023.

See the full article on LendingTree’s website.