Information that is developed on the national small business community is often misinterpreted. Take for example the often quoted statement, "80 percent of all small businesses fail within the first 10 years of operation!" How often have you heard this regarding the dire consequences of starting a small business? Research shows that this statement is incorrect.
The origin of the 10-year/80 percent failure rate comes from the misinterpretation of data published by Dun and Bradstreet in the "Business Failure Record." This annually published report contains information that shows business failures by industry and the ages of those businesses that have failed. The Dun and Bradstreet data do not compare age of business failures against the total population of American small business. Hence it does not forecast the rate of business failure. It simply shows that for those businesses that do fail, at what age are they most likely to go under.The annual small-business failure rate can be extrapolated from other national data. Basic definitions must be clarified first. For example, what is meant by a business failure?
Dun and Bradstreet separates business failures from business discontinuances. Business failures consist of businesses involved in court proceedings or voluntary actions involving losses to creditors. In contrast, businesses that discontinue operations for reasons such as loss of capital, inadequate profits, ill health, retirement, etc., are not recorded as failures if creditors are paid in full.
In 1986 (the most current year with complete data available), 61,601 businesses nationwide were reported by Dun and Bradstreet through various news releases as having failed. This number becomes the numerator for establishing the national business failure rate.
The denominator for the formula is obtained from data compiled by the United States Small Business Administration. It is the total population of American small business. This number is more difficult to identify.
One source of difficulty stems from trying to distinguish between enterprises and establishments. An establishment is defined as any single, physical location where business is conducted. An enterprise is a business organization consisting of one or more establishments under the same ownership or control. Most small businesses consist of a single establishment. However, larger firms may own many small establishments, yet they would be considered as only one.
There is also the issue of the number of employees that an enterprise has. In 1986, more than 51 percent of non-farm sole proprietorships had no employees (the owner is not considered an employee) and made less than $10,000. This raises doubts about whether these businesses are really full-time self-sustaining operations.
Having clarified these qualifications, there were 3,805,982 enterprises in the United States with one or more employees, in 1986. This number, when divided into the 61,601 business failures, yields a national failure rate of less than 2 percent for that year. Assuming that the 1986 data reasonably represent an average annual failure rate, the probability of a would-be entrepreneur failing in the first 10 years of operation would be less than 20 percent. Thus, the entrepreneur would have a four-out-of-five chance of succeeding, which is exactly opposite of what most people believe.