Businesses are born and businesses die every day. Unfortunately, the death rate is increasing and now exceeds the birth rate. This has obviously been caused by the change in the economy. Unfortunately, with small businesses being so vital to the economy, it is also a cause for the continued recession! It's a vicious cycle, but one that can be stopped...
In The E-Myth Revisited (Michael Gerber) published in 1995, Michael Gerber reported that 80% of businesses fail in the first 5 years of trading, and that 80% of those that survive the first five years don't make it past their 10th birthday. Meaning only 4% of new businesses will celebrate their 10th anniversary.
The Office of National Statistics in the UK publish statistics on the "births and deaths" of UK businesses every year. The key statistics from this report are:
The number of business closing their doors rose by 20,000 (7.4 per cent) to 297,000 for the year between 2009 and 2010
The number of businesses started remained broadly flat with a small decrease of 1,000 (0.4 per cent)
For the second consecutive year businesses that stopped trading outnumbered those that started resulting in a 1.8% drop in the number of active businesses
The data also provides information on the survival rates of businesses.
From this we can see that around 40% of all businesses started in 2005 were still trading in 2010. Somewhat higher than the 20% suggested in the E-Myth.
While there is no data for 10 year survival, modelling the data you can predict that 17% of businesses started in 2005 should see their 10th birthday.
However, the numbers also suggest a decline in survival rates since 2008 as you might expect given the economic conditions. As a result, the average life expectancy for a new business has dropped from 5 years for businesses opened in 2005 to a predicted 4 years for businesses started in 2010.
This is considerably better than the 3 years suggested by the survival rates quoted in the E-Myth. This may mean that things overall are better than they were in 1995. Or it may mean that businesses are more durable in the UK than they have ever been in the US. Or both...
Regardless, if the aim of business is to generate long-term profitable enterprise for individuals and their employees, then the absolute numbers don't matter too much. Most business owners don't start a business expecting it to be there for only four to five years on average.
What to do about it?
While the economy is accelerating the closure of businesses, one of the main underlying causes for the majority of business failures is that most business owners never manage to build a fully systematised business.
Research shows that while the majority of business owners know they need to systematise their business, almost 99% of business owners have been unable to do so. It isn't their fault. No one has ever shown them how to do it.
The business remains for the most part in the head of the owner and so the business cannot function without them. Over time this grinds the owner down until they've had enough and close their doors, never realising the dreams they had when they opened for business in the first place. Even worse, without business systems in place, it cannot adapt in a declining economy.
Writing systems isn't difficult and yet most businesses don't achieve it. There are many reasons. It doesn't seem like profitable work so isn't a priority... It isn't very exciting/interesting work... It isn't something the owner is good at... there are too many distractions from customers, employees, suppliers, etc.
And yet when it is achieved it can and does result in sustainable, durable, scalable and more profitable businesses. So it must be worthwhile putting time aside to start.