Why Most Small Businesses Fail

Why Most Small Businesses Fail

The statistics vary on exactly what percentage of businesses fail within the first 5 years.

Some estimates put it as high as 90%. However I’ve never seen this statistic being quoted at anything less than 50%.

That means that if we’re being super-optimistic you have a 50/50 chance of still having your doors open after 5 years.

However here’s where it really gets worse. The statistics only take into account businesses that completely cease trading.

They don’t take into account the businesses that plateau at a low level and slowly kill or make the lives of their owners miserable.

Most Small Businesses Suck

Have you ever wondered why most small businesses plateau at a mediocre level?

At one end of the spectrum there’s Pete the plumber who works 16 hour days, weekends and never takes holidays while barely making enough to keep his head above water.

On the other end of the spectrum there’s Joe who runs a plumbing company with 20 plumbers working for him. It seems like his primary business activity is counting the huge sums of money that keep rolling in.

It’s very common for small businesses to never grow past the point at which they generate just enough profit for the owner(s) to make a modest living.

It seems that no matter how hard the owner(s) try, their efforts to get to the next level just lead to frustration. At this point one of two things happen. Either they get disillusioned or they just accept their fate – that their business is nothing more than a low paid, self-created job.

In fact the reality is that many business owners would probably be better off just finding a job in their industry. They would likely work fewer hours, have less stress and enjoy more benefits and more holiday time than in the prison they created for themselves.

On the flip side there are a few business owners that just seem to have it all. They work reasonable hours, have a fantastic cashflow from their enterprise and enjoy continuous growth.

The Blame Game

Many business owners who are struggling blame their industry. While it’s true some industries are in decline – examples such as book stores or video rental stores immediately come to mind. If you are in one of these dead or dying industries it maybe time to cut your losses and move on, rather than torture yourself to death financially. This may be particularly difficult if you have been in the industry for a long time.

However for the most part when people blame their industry they are just playing the blame game. Some of the most common industry complaints I hear are:

  • It’s too competitive
  • The margins are too low
  • Online discounters are taking customers away
  • Advertising no longer works

However it’s rarely the industry that is truly to blame, after all there are others in that same industry that are doing very well. So the obvious question is what are they doing differently?

The Business Owner Versus The Technician

Many small business owners fall into the trap described in Michael Gerber’s classic book, The E-Myth. That is they are a technician e.g. plumber, hairdresser, dentist etc. and they are good at what they do.

Naturally they start to think to themselves, why should I work for this idiot boss of mine. I’m good at what I do – I’ll start my own business.

This is THE major mistake made by most small business owners. They go from working for an idiot boss to becoming an idiot boss!

Here is the key point – just because you’re good at the technical thing you do does not mean that you are good at the business of what you do.

So going back to our initial example, a good plumber is not necessarily the best person to run a plumbing business.

This is a vitally important distinction to note and is the key reason that most small businesses fail. The owner of the business may have excellent technical skills but it is the lack of business skills that will cause their business to fail.

This is not meant to discourage people from starting their own businesses. However you must resolve to become good at the business of what you do – not just the technical part of it.

A business can be an amazing vehicle for achieving financial freedom and personal fulfilment – but only for those who understand and master this vital distinction.


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8 Comments

  • Doretta Genta

    Reply Reply January 19, 2012

    I always was interested in this subject and still am, thanks for posting.

  • Althea

    Reply Reply January 24, 2012

    I’ve just started reading Michael Gerber’s book and I would recommend it strongly to anyone who wants to grow a business, rather than be a sole operator. Not that there’s anything wrong with being a sole operator, but it’s important to decide from the outset how you want your career to develop.

    • Allan Dib

      Reply Reply January 24, 2012

      Althea,

      That’s a great point. It’s important that the decision is made consciously to be a self employed technician rather than a business owner. Too often business owners start and then get trapped in their self made prison.

  • google

    Reply Reply August 3, 2014

    Its very well written; I love what you’ve got to say.

  • Dr Ben

    Reply Reply October 24, 2014

    Hey Allan,
    You are right.
    Most people in business are either stuck doing the same thing feeling trapped, caged blaming the world outside of them for their situation. The govt, the economy, the competition etc.
    Some get out of the cage but are still in the zoo. that is they have a “nice” life. A life that is good, OK, not bad, alright. What I call the tepid life. A life that is neither hot nor cold.
    Then their are the few that get out of the cage and the zoo, and into the “theme park”. This is the place where life and business is exciting. Yes there are ups and downs on the way up, but there is joy and passion. A sesame of fulfilment and purpose. this life and business is exciting. This is what I call the Turned on Life.
    Whichever life you are leading Trapped, Tepid or Turned On. They are all a choice.
    Love your work. Keep pushing our buttons.
    Cheers Dr Ben.
    THE ON BUTTON

  • Joshua

    Reply Reply March 6, 2015

    This is a fact. I am currently preparing to write a operations manual for my business franchise format. You need to build the business as if you could replicate it 5,000 times as mentioned in The E-Myth if you want freedom from your business. You are not your business it is a separate entity from you!

  • De

    Reply Reply April 12, 2015

    Outstanding article Allan! Thank you so much for posting. I wish I could have read this ten years ago and prevented all the mistakes outlined above. I have just come to the realization that all the degrees and certifications are secondary to a strong business acumen. Sole proprietorship was great as a technician but the freedom both time wise and the financial rewards……PRICELESS. Once again thank you for imparting your wisdom and knowledge to all of us.

  • Rosemary

    Reply Reply May 29, 2015

    I am having this issue as a seamstress/designer. I know nothing about business, yet I get clients from thin air. So I think to myself, why not make my own business? Sure, but when? I’m busy sewing!
    How do I make something scalable, how do I make a system? How do I spin the top and let it keep turning when I’m not around?
    Thanks Allan, for always telling the truth.

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