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Many U.S. businesses don't survive their first decade, with failure rates reaching 23.2% within a year, 48% within five years and 65.3% within ten. Strategic missteps, financial instability and external forces can doom businesses. |
What percentage of businesses fail? It's a question many entrepreneurs dread.
Recent data reveals that a significant portion of businesses don't make it past their first few years of operation. Understanding the reason is crucial for building a resilient enterprise. We analyzed the root causes of business failure to gain valuable insights into how to improve the odds of success.
In the following sections, we'll delve into the key reasons why businesses fail and offer actionable advice for finance teams and business leaders to help their organizations overcome challenging market conditions and thrive.
We'll also explore real-world case studies of companies that made smart business pivots to illustrate these concepts and provide practical guidance.
Within the first year, 23.2% of new businesses fail, with rates increasing to 48% after five years and 65.3% after 10 years.
Industries such as information technology, mining and construction face consistently higher business failure rates, while sectors such as agriculture, retail trade and accommodation and food services demonstrate greater resilience.
Washington and the District of Columbia consistently have higher failure rates, while Montana and Minnesota tend to have lower rates.
A lack of market research, inadequate financial planning, poor management, ineffective marketing and external factors all contribute to high business failure rates.
According to data from the U.S. Bureau of Labor Statistics (BLS)1, a significant portion of businesses don't survive their first decade. Within the first year, 23.2% of new businesses fail. This rate increases to 48% within five years and 65.3% within 10 years.
|
Time Frame |
Business Failure Rate |
Change YoY |
|
Within 1 year |
23.2% |
– |
|
After 2 years |
32.8% |
+9.6% |
|
After 3 years |
36.2% |
+3.4% |
|
After 4 years |
43.2% |
+7% |
|
After 5 years |
48.0% |
+4.8% |
|
After 6 years |
52.9% |
+4.9% |
|
After 7 years |
56.6% |
+3.7% |
|
After 8 years |
59.6% |
+3% |
|
After 9 years |
62.2% |
+2.6% |
|
After 10 years |
65.3% |
+3.1% |
While the overall trend shows a decline in survival rates over the first 10 years, there are also periods of relative stability or even slight improvements. For instance, between the third and fourth years, the failure rate increased by 7%, but then slowed down to increases of only 4.8% and 4.9% in the following two years.
The data, tracked by the agency's Business Employment Dynamics (BED) program, is calculated by tracking cohorts of businesses "born" in the same year and monitoring how many survive from year to year. The data offers a national perspective, but failure rates can vary by industry, location and economic conditions.
|
State |
Failure Rate After 1 Year |
Failure Rate After 5 Years |
Failure Rate After 10 Years |
|
Alabama |
23.5% |
45.6% |
63.9% |
|
Alaska |
27.3% |
42.7% |
60.7% |
|
Arizona |
25.7% |
50.4% |
65.9% |
|
Arkansas |
21.9% |
50.8% |
66.2% |
|
California |
18.5% |
46.2% |
64.5% |
|
Colorado |
23.8% |
50.1% |
66.5% |
|
Connecticut |
25.2% |
48.9% |
67.0% |
|
Delaware |
25.0% |
51.9% |
68.8% |
|
District of Columbia |
32.2% |
58.1% |
70.8% |
|
Florida |
22.6% |
49.2% |
65.5% |
|
Georgia |
28.7% |
51.0% |
65.3% |
|
Hawaii |
23.0% |
49.6% |
65.2% |
|
Idaho |
30.7% |
52.2% |
66.5% |
|
Illinois |
23.0% |
44.9% |
63.7% |
|
Indiana |
23.0% |
46.9% |
61.4% |
|
Iowa |
23.5% |
46.2% |
61.1% |
|
Kansas |
26.2% |
53.5% |
67.1% |
|
Kentucky |
18.8% |
47.8% |
62.7% |
|
Louisiana |
23.6% |
47.2% |
65.0% |
|
Maine |
24.0% |
46.8% |
62.5% |
|
Maryland |
25.1% |
51.0% |
66.5% |
|
Massachusetts |
19.2% |
43.3% |
61.1% |
|
Michigan |
21.9% |
45.0% |
64.8% |
|
Minnesota |
22.3% |
42.4% |
59.2% |
|
Mississippi |
23.5% |
47.9% |
65.4% |
|
Missouri |
25.4% |
55.4% |
69.3% |
|
Montana |
26.1% |
42.4% |
60.1% |
|
Nebraska |
23.2% |
49.1% |
69.7% |
|
Nevada |
28.2% |
52.9% |
66.8% |
|
New Hampshire |
25.3% |
54.0% |
66.3% |
|
New Jersey |
21.4% |
50.5% |
66.8% |
|
New Mexico |
25.7% |
51.9% |
68.3% |
|
New York |
21.5% |
50.1% |
66.8% |
|
North Carolina |
23.3% |
47.0% |
62.6% |
|
North Dakota |
22.9% |
49.0% |
67.7% |
|
Ohio |
23.8% |
47.0% |
61.0% |
|
Oklahoma |
20.9% |
48.8% |
66.5% |
|
Oregon |
25.6% |
47.8% |
61.6% |
|
Pennsylvania |
21.3% |
45.8% |
65.2% |
|
Rhode Island |
25.4% |
50.2% |
66.9% |
|
South Carolina |
22.0% |
49.4% |
65.4% |
|
South Dakota |
26.0% |
43.9% |
58.2% |
|
Tennessee |
23.1% |
46.9% |
65.3% |
|
Texas |
22.2% |
47.3% |
64.1% |
|
Utah |
23.7% |
49.5% |
62.3% |
|
Vermont |
24.6% |
49.7% |
64.2% |
|
Virginia |
22.2% |
43.5% |
68.3% |
|
Washington |
40.8% |
51.0% |
76.0% |
|
West Virginia |
23.4% |
42.9% |
63.9% |
|
Wisconsin |
21.4% |
48.1% |
63.2% |
|
Wyoming |
23.9% |
52.0% |
68.0% |
At the one-year mark, the state of Washington has the highest business failure rate at 40.8%, followed by the District of Columbia (32.3%) and Idaho (30.7%). In contrast, California has the lowest at 18.5%. After five years, the District of Columbia maintains its top position at a rate of 58.1%, while Montana and Minnesota tie for the lowest rate at 42.4%.
State trends continue as the years go by. Washington state (76%) and the District of Columbia (70.8%) lead the rankings again for highest failure rates after ten years, with Minnesota (58.2%) and South Dakota (59.2%) experiencing the lowest rates. That’s a 17.8% difference between the state with the most business failures and the state with the least at the ten-year mark.
But why do Washington and the District of Columbia consistently rank high in terms of business failures? It may be attributed to factors such as high crime rates, as seen recently in Seattle2, or increasing costs of living and doing business3.
On the other hand, states like Montana and Minnesota, which tend to have lower rates, may benefit from a more stable economy4, a lower cost of living, or appealing pro-business state policies5.
|
Industry |
Failure Rate After 1 Year |
Failure Rate After 5 Years |
Failure Rate After 10 Years |
|
Accommodation and food services |
14.2% |
42.9% |
61.8% |
|
Administrative and waste services |
23.3% |
49.1% |
65.8% |
|
Agriculture, forestry, fishing and hunting |
15.1% |
34.8% |
49.5% |
|
Arts, entertainment and recreation |
17.1% |
43.5% |
64.6% |
|
Construction |
19.2% |
43.7% |
59.9% |
|
Educational services |
19.1% |
43.3% |
61.1% |
|
Finance and insurance |
22.6% |
46.8% |
62.5% |
|
Health care and social assistance |
21.1% |
42.2% |
64.3% |
|
Information |
24.1% |
55.7% |
70.9% |
|
Management of companies and enterprises |
20.0% |
49.3% |
67.0% |
|
Manufacturing |
17.6% |
42.4% |
56.4% |
|
Mining, quarrying and oil and gas extraction |
24.4% |
55.4% |
75.5% |
|
Other services (except public administration) |
15.6% |
41.3% |
60.4% |
|
Professional, scientific and technical services |
22.2% |
49.8% |
69.1% |
|
Real estate, rental and leasing |
17.8% |
40.8% |
57.8% |
|
Retail trade |
12.9% |
40.2% |
58.3% |
|
Transportation and warehousing |
24.8% |
48.4% |
66.0% |
|
Utilities |
19.6% |
42.5% |
54.3% |
|
Wholesale trade |
18.7% |
49.3% |
69.9% |
Among the industries analyzed, mining and information technology consistently experience the highest business failure rates across all timeframes. Transportation beat them both out for the highest rate after one year in business, at 24.8%. But mining came in second after one year, at 24.4%, and remained high at the five-year mark (55.4%) and ten-year mark (75.5%). Information technology was close behind, with 24.1% failing after one year, 55.7% at five years, and 70.9% at 10 years.
The frequency of business failures in these two industries may be attributed to each industry's highly competitive nature and rapid technological advancements. On the other hand, accommodation and food services, agriculture, forestry, fishing and hunting, and retail trade consistently exhibit lower failure rates, suggesting greater stability and resilience.
The project-based nature of construction and manufacturing may contribute to the relatively high failure rates in both industries, especially during the early years when these ventures are building their customer base. Economic fluctuations are another major factor, as construction companies cite6 as one of their biggest recent challenges. Regulatory changes also create a heavy burden for manufacturers, as the American Chemistry Council7 found in a recent survey.
In contrast, finance and insurance, while facing challenges in the short term, have demonstrated greater long-term survival rates. This may be due to the industry’s regulated nature and ability to adapt to changing economic conditions. For example, insurance companies are used to extensive and ever-evolving regulations8, so they’re able to adapt when they shift.
Real estate, rentals and leasing have also shown relatively low failure rates. This could be attributed to the long-term nature of real estate investments, stable rental income and the potential for property value appreciation. However, the industry is susceptible to economic downturns and fluctuations in property markets.
By examining common pitfalls, you can better equip your business to navigate potential obstacles and increase your chances of long-term success.
Let’s explore key reasons why businesses fail, to gain a deeper understanding of the factors that influence their survival.
Failing to conduct thorough market research can lead to serious consequences for a business. Without understanding your target market, you may create products or services that don't resonate with consumers, leading to low sales and customer dissatisfaction. Additionally, a lack of market research can hinder your ability to effectively market your business and keep up with competitors.
Real-world example: You might remember the “new Coke” debacle in the 1980s as a prime example. When the Coca-Cola Company decided to change the flavor formula for their signature product based on market research that focused on taste tests, the public hated the new product. The company is estimated to have lost roughly $34 million because its market research failed to consider people’s affection for the brand itself when making a purchase.
Without a solid business plan and adequate funding, you may face cash flow problems, accumulate debt and miss out on growth opportunities. These financial difficulties can ultimately lead to business failure.
Real-world example: A classic example is Webvan9, which offered grocery delivery within 30 minutes in the early dot-com days. The company raised $800 million in capital, but spent it all upfront building state-of-the-art warehouses that cost $30 million each, bought a fleet of vehicles and paid start-up expenses to launch quickly in four major cities for $50 million each. Webvan filed for bankruptcy in 2001 after burning through millions of dollars in investor capital without achieving profitability.
A lack of effective leadership can lead to low employee morale, decreased productivity and high turnover. It can also result in poor decision making, leading to strategic errors, wasted resources and missed opportunities. A rigid management style can make it difficult for a business to adapt to changing market conditions, technological advancements or economic fluctuations.
Real-world example: The bankruptcy of Blockbuster10, the video rental giant that dominated the 1990s and early 2000s, is often attributed to the poor decisions and lack of adaptability of the company’s CEO, John Antioco. With a revenue model that relied on customer late fees and an unwillingness to adapt in order to compete with Netflix’s disruptive subscription model, the former titan ultimately crumbled.
Poor marketing strategies can lead to decreased sales, as potential customers may not be aware of your products or services. It can also result in low brand awareness, making it difficult to attract and retain customers. Ineffective marketing spend and outreach efforts can waste valuable time, money and resources, and often illustrate a poor partnership between the Finance and Marketing departments.
Real-world example: Facing pressure to compete with an up-and-coming social network known as Facebook and internal financial expectations, MySpace leaders were desperate11 to make money. They spread themselves thin with paid sponsorships for verticals that didn’t align with their users. They also turned off users with repetitive monetized ads for contests and prizes. Eventually, MySpace users left the chat.
Economic downturns, technological disruptions and regulatory changes can significantly challenge a business’s success. These factors can impact consumer spending, disrupt existing business models and increase costs. Failure to anticipate and adapt to these factors can decrease profit margins and limit business operations.
Real-world example: The COVID-19 pandemic and resulting global supply chain shortage are prime examples of external elements that can harm a business. For instance, car sales were heavily impacted by the production shortage of silicon chips12 used in various parts of a car’s manufacturing process. Without those small chips being produced in a timely fashion, auto industry giants such as Ford, Audi and Mazda couldn’t manufacture new cars.
Economic challenges can arise unexpectedly, disrupting even the most stable businesses. However, many companies have demonstrated remarkable resilience and adaptability in the face of adversity.
By implementing proactive planning strategies and leveraging data-driven insights, these organizations have successfully navigated economic downturns and emerged stronger than before.
Saint Mary's University faced a significant challenge when the pandemic disrupted in-person learning. To adapt to a new reality dominated by online education, they implemented a new enrollment planning model powered by Vena. This model provided real-time insights into student registrations, enabling them to forecast revenue more accurately and allocate resources effectively.
By streamlining its financial operations, Saint Mary's gained the agility to respond to changing enrollment trends and reallocate resources, such as marketing spend, as needed. This adaptability proved crucial, allowing Saint Mary's to weather the storm of the pandemic and emerge with a more resilient financial footing.
Footwear retailer Schuh faced challenges with inefficient budgeting and siloed data. By implementing a centralized data platform, Schuh gained real-time insights into their operations at the individual product line level.
This empowered them to make data-driven decisions that optimized inventory management, improved pricing strategies and catered to evolving customer preferences. This agility was crucial for navigating the dynamic retail landscape and maintaining a competitive edge.
The Museum of Science and Industry (MSI) in Chicago faced financial challenges during the pandemic due to declining visitor numbers. By implementing a streamlined reporting platform, MSI gained the agility to conduct scenario planning and identify cost-saving measures.
Using this data-driven approach, they were able to analyze various financial models and identify cost-saving opportunities across different departments. This pivot helped them survive the pandemic and maintain their position as a cultural cornerstone.
Building a sustainable business requires careful planning, execution and adaptability. While there is no guaranteed formula for success, certain strategies can significantly increase your chances of survival.
Conducting more frequent forecasting allows you to gain valuable insights into your financial efficiency and identify potential risks or opportunities. Vena’s FP&A software can significantly enhance your financial management capabilities by providing real-time data, automating processes and enabling advanced analytics. Through more frequent forecasting, you can:
Improve cash flow management: By tracking your cash inflows and outflows more closely, you can identify potential cash shortages and take proactive measures to address them.
Enhance decision making: Accurate forecasting provides valuable data to support informed decision making, such as resource allocation, pricing strategies and investment decisions.
Identify potential risks: By analyzing different scenarios and forecasting future trends, you can identify potential risks and develop contingency plans to mitigate their impact.
Being able to adapt to changing conditions enables you to seize new opportunities, mitigate risks and maintain a competitive edge. To foster adaptability, consider the following strategies:
Prioritize scenario planning: Develop plans for various potential scenarios, such as economic downturns, technological advancements or changes in consumer preferences. This will help you be prepared for unexpected challenges and seize opportunities when they arise.
Invite continuous learning: Encourage continuous learning and innovation through cross-departmental collaboration to stay ahead of industry trends. Doing so will help your business remain relevant as technology advances and the market changes.
Encourage agile decision-making: Foster a culture of agile decision making, where teams can quickly adapt to changing circumstances and make informed decisions. This is possible through effective communication, collaboration and a focus on data-driven insights. And, with self-service data, teams can access the information they need when they need it, empowering them to make decisions quickly and efficiently.
By effectively communicating your value proposition to your target audience, you can attract new customers, retain existing ones and drive sales growth. A strategic marketing approach involves:
Understand your target market: Clearly define your ideal customer and tailor your marketing efforts to their needs and preferences.
Develop a compelling brand: Create a strong and memorable brand identity that resonates with your target audience.
Use the right channels: Choose the marketing channels that will reach your target audience most effectively, such as social media, content marketing, public relations or traditional advertising.
Measure and analyze results: Track the performance of your marketing campaigns and use data to make informed decisions and optimize your strategy.
Monitor marketing spend and ROI: Continuously monitor your marketing expenses and measure their return on investment to ensure you are allocating resources effectively.
Striving for continuous improvement is essential for building a resilient business. By seeking out opportunities for growth and development, you can stay ahead of the competition, adapt to changing market conditions and enhance your overall performance. Businesses can achieve this through:
Employee development: Invest in training and development programs to help your employees acquire new skills and knowledge. This will improve their productivity, job satisfaction and overall contribution to the business.
Customer feedback: Actively seek feedback from your customers to identify areas for improvement and enhance their satisfaction.
Process optimization: Continuously review and optimize your business processes to improve efficiency, reduce costs and enhance customer experience.
Innovation: Encourage a culture of innovation and creativity to develop new products, services or business models. This can help you stay ahead of the competition and capture new market opportunities.
By understanding the challenges businesses face in terms of failure rates and the reasons why many succumb to these pitfalls, your own team can make informed decisions and take proactive measures to improve the company’s chances of success.
Vena’s FP&A Software can help your finance team significantly enhance planning and data-driven decision making, giving your business the tools to thrive even in challenging markets.
Sources:
https://www.king5.com/article/news/local/seattle/major-seattle-retailers-closed-stores-2023/281-8f94d2cd-bace-41e7-a7a2-44ad3125fe5b
https://www.washingtontimes.com/news/2024/apr/9/dc-businesses-expect-to-be-worse-off-financially-i/
https://mn.gov/deed/joinusmn/why-mn/our-economy/
https://www.washingtontimes.com/news/2024/apr/9/dc-businesses-expect-to-be-worse-off-financially-i/
https://www.csemag.com/articles/construction-industry-struggling-with-inflation-changing-economic-dynamics/
https://www.americanchemistry.com/chemistry-in-america/news-trends/press-release/2024/new-survey-finds-dramatic-rise-in-regulations-undercuts-american-manufacturing-and-national-priorities
https://www.mckinsey.com/capabilities/risk-and-resilience/our-insights/insurance-transforming-risk-and-compliance
https://techcrunch.com/2013/09/27/why-webvan-failed-and-how-home-delivery-2-0-is-addressing-the-problems/
https://www.forbes.com/sites/gregsatell/2014/09/05/a-look-back-at-why-blockbuster-really-failed-and-why-it-didnt-have-to/
https://www.theguardian.com/technology/2015/mar/06/myspace-what-went-wrong-sean-percival-spotify
https://arstechnica.com/cars/2021/02/a-silicon-chip-shortage-is-causing-automakers-to-idle-their-factories/
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