Beyond the Failure Statistics.

How to get your small business beyond the failure statistics.

Learn from the business failure statistics, instead of being a part of the failure stats, and build a business that will last.

Most small businesses don’t fail in the first year, but half won’t survive past five years; here’s how to be on the winning side of that statistic.

In episode The How of Business podcast, Henry Lopez breaks down the often-cited small business failure statistics and, more importantly, what they actually mean for small business owners and entrepreneurs. While over 20% of small businesses fail in their first year, it’s the year five mark where nearly 50% have closed that should truly capture our attention.

But this episode isn’t about fear; it’s about insight and action.

Henry draws from a recent LendingTree analysis of U.S. Bureau of Labor Statistics data to examine why failure rates rise over time. He identifies two key variables that significantly influence business survival: where you start your business (geography) and what type of business you launch (industry segment).

As an example, high-cost states like Minnesota and D.C. have higher failure rates, while California and Iowa show stronger business survivability. Similarly, sectors like trades and professional services tend to outperform restaurants and retail.

The real takeaway, however, is not just about picking the “right” place or business. It’s about developing and evolving a strong, profitable, and scalable business model, and ensuring you have enough capital runway to survive the early phases of growth. With real-world insights and practical recommendations, Henry challenges listeners to validate demand, remain adaptable, and avoid falling in love with an idea that doesn’t work.

Whether you’re in startup mode or reassessing your current business, this episode offers the strategic clarity you need to beat the odds.

Beyond the Small Business Failure Statistic – Q&A:

Question: What are the top reasons small businesses fail within five years?
Answer: While passion and ideas are important, businesses often fail due to poor business models, lack of adequate capital, and the inability to adapt. Geography and industry also influence failure rates, but survivability hinges on building a scalable, profitable model, validating market demand, and managing cash flow effectively.

Episode 532: Is Your Business Model Broken?

Episode 439: Cash Flow Management

Episode 554: When to Quit

Transcript:

Henry Lopez (00:12):

Welcome to this episode of The How of Business. This is Henry Lopez, and on this episode, I’m going to explore business failure statistics, the numbers that show how small businesses fail in those first few years of operations, but instead of being part of the failure stats, how do we build a business that will last? Did you know that over one in five small businesses fail in their first year? But really that’s not that bad of a stat, right? That means four in five live past that first year. So why is that? I’ll share some thoughts on that. I think what’s more ominous is this statistic that by year five, 48%, so almost half of businesses have failed by the time we get to year five. This is all based and was influenced for me on a Lending Tree article that was an analysis using data from the Bureau of Labor Statistics.

Henry Lopez (01:01):

So that’s the source of this information. But this episode is not about fear. I’m not trying to scare you about starting a business or your current business. It’s about maybe gleaming some insight. Why does that happen to so many businesses and what can we possibly avoid there? In particular, I want to highlight two critical reasons that so many small businesses fail after the first couple of years. And again, what can you do about it? If you’re thinking about launching or have already started a small business, then I think understanding these failure rates and what goes into it can help you make smarter decisions about your small business. You can find all of the Howa business resources, including the show notes page for this episode and learn more about my one-on-one and group coaching programs at The How of Business.com. I also invite you to join The How of Business community on Patreon, and please subscribe wherever you might be listening, so you don’t miss any new episodes.

Henry Lopez (01:53):

Let’s start by looking at the stats again. First year failure rate is around 21%, 21 and a half percent. So again, not bad. It’s not until you get towards year five that we really have that dramatic drop off or increase rather in failures. And as I look at year one, based on my own experience and my experience with others and what I’ve learned and read, I think what’s happening there is that we keep these businesses afloat in those first two years, we still have more money to put in or we’ll borrow more money or we’ll take less money out or no money at all. And so we’ll keep trying to keep a business afloat in that first one or two years. And I think that businesses, realistically, that probably should be shut down, or at least it should pivot completely. We keep ’em alive. And this is a hard thing.

Henry Lopez (02:39):

This is the whole thing about failing fast and failing earlier. That’s easier said than done. The reality is that we keep fighting for this idea that we have this passion that we have, but we’ve got to learn to make sure that we are willing to adjust and adapt and pivot. And I’ll come back to this critical point in a moment. So by year five, 48% of businesses have shut down, and then by year 10 it’s roughly 65, almost 66% are no longer in operation. And so what does this data tell us? It tells us, again, most businesses don’t fail in year one, but survival over time requires strategy, adaptability, and support the right kind of help. Now, these numbers are just benchmarks. They’re not your destiny, and that’s why it’s important to look at ’em and see what we can’t learn from it. So now that we’ve looked at these numbers at a high level, what’s next?

Henry Lopez (03:27):

Where do we go with this? What do we do? So let’s break this down further to uncover what’s behind a little bit at least of what’s behind these failure rates. And what the data shows and this analysis showed is that there are two biggest factors that influence whether your business survives or fails, particularly after that first one or two years. And those two factors are where you launch your business, the geography or location, and what kind of business you start, what industry or what segment. So let’s look at that a little bit deeper. We’ll start with geography because geography does matter. And even at a state by state level, the data tells us that it matters. Not all locations are created equal. Obviously we’ve heard the saying that it’s all about location, and I’m just talking about micro location like this shopping center versus that shopping center, although that matters as well.

Henry Lopez (04:13):

I can tell you that from experience. But here is we’re talking about failure data. We’re talking a little bit higher level data here. Here are the top three states with the highest failure rates according to this data. Number one was Minnesota at 27% failure rates in that first year. What are some of the reasons why? Well, the data showed higher operational costs and lower startup formation, so less businesses being created in that state. Now, listen, this is just generalizations based on the data. So if you live in Minnesota, please don’t beat me up about this. I’m not saying that you can’t start a business in Minnesota. I’m just sharing these stats to see what we can learn from it, right? Number two, highest failure rate is District of Columbia at 27% as well. There some of it is attributable to high rents and high labor costs and therefore tight margins for small businesses to operate under.

Henry Lopez (05:02):

And then thirdly, is Missouri also at about 27% failure rate. And there often it’s because of lower consumer income, so a lot less buying power for whatever it is that you’re offering. And that of course affects that early stage demand that small businesses depend on. So those are the bottom three. The highest failure rates, if you will, the lowest failure rates are the states that are doing better as regards to the success of a small business after that first year. At the top of the list is Washington with conversely a 13% failure rate in that first year. And that’s attributable in part according to the research to thriving innovation, a thriving innovation economy rather. And funding access appears to be strong in that state. California, not surprising, a very entrepreneurial state. A lot of resources, a lot of opportunity. Not surprising that a large portion of you listening to my podcast are in the state of California and in Iowa, that wouldn’t surprise me to be honest, Iowa at 19% lower cost of doing business and strong community networks.

Henry Lopez (06:07):

So those are some of the reasons why those states have some higher failure rates like Minnesota, DC and Missouri, and lower failure rates like Washington State, California, and Iowa. Again, am I telling you you shouldn’t start a business in those states? No. Am I telling you you should move to Washington, California or Iowa? No. It’s just what can we learn from that? What does it tell us that we can avoid in whatever state we are in? Now, that is a very macro level. Of course, there’s importance as well as to specifically where, but that’s not what the data speaks to. It was just more generally what did it look like by state? So location can impact survival, but of course it doesn’t determine your destiny. Access to resources, market conditions, operating costs, all of those things vary and you need to be aware of that and the impact that it will have on your particular business.

Henry Lopez (06:55):

You need to of course then consider at a more micro level access to your target customers. Are they in your area? Are they abundantly in your area? What does foot traffic look like? What do population trends look like? What’s the workforce availability and skill level? Will you be able to hire the types of people that you need to deliver your product or service? What’s the local business climate? From regulations to taxes to business support organizations, which can be very instrumental in helping a business succeed. And then of course, there’s differences whether you’re physical or online, but for those especially brick and mortar or physical locations where you’re delivering a service or a product to a specific geography, geography matters. At least it matters in the impact that it has on the overall statistics of failure or success. So that was geography. The other part of it was the industry and why that matters.

Henry Lopez (07:46):

So the industry that you’re in, probably more specifically, the segment within an industry has a big impact on the survival odds according to the data. What are some of the lower failure risk sectors or segments? Well, what was highlighted in the data is health and wellness. So businesses related to therapy, for example, or chiropractors or those types of wellness services tended to have lower failure rates. The trades, and this is not surprising to me at all, so electricians, HVAC, plumbers, handymen, those are always solid industries and segments where there seems to always be demand for those services. And so those are lower risk. It’s also the types of businesses that a lot of people start because they’re leveraging that experience that they have. Maybe they were an electrician working for somebody else and now they’ve gone on their own. So those very low risk. Now we have to be careful with those types of trade type of businesses because what can happen to you as a business owner is you get bogged down working in the business, delivering the service yourself, and then what you’ve created for yourself is really a higher paying job or maybe even a lower paying job, but you’re just a one person operation and that might be fine for you.

Henry Lopez (08:59):

There’s nothing wrong with that. But if we want to scale it to a business, then you’ve got to grow beyond just yourself delivering that service. But that’s besides the point. The key is low failure rates in that segment, in those types of trades according to the data. And then another sector is professional services. Things like bookkeepers or consultants, they typically have recurring revenue and lower fixed overhead because often these businesses can be run virtually. You don’t have to lease a space somewhere. Now, the flip side of it, higher risk sectors, the first one should be obvious to everybody. Restaurants and cafes, high risk, and I get it, I get the appeal. My very first business was a pizza delivery franchise and I owned a self-serve frozen yogurt restaurant. I get the appeal. A lot of people love restaurants. That’s why there’s so many franchises in the restaurant industry, but there’s a lot of failure rates there.

Henry Lopez (09:48):

You have high fixed costs, you have tight margins, you have staff turnover issues, you have perishable inventory in the food, the raw materials in food that you can only store for so long. You have long hours, a lot of demands, weekends, holidays, evenings. So those are all reasons why not only do you fail economically often in those segments, but you burn out as a business owner. Another high risk sector is retail boutiques. So any kind of retail outfit, the competition there with e-commerce is just so fierce. Now, can you find a niche and provide it? Well, absolutely. I see those all the time, but it is the exception. You’re paying for high rent to get that high foot traffic location. And so often then that leads to tight margins. And again, you’re competing against Amazon and all of the other online retailers. And then thirdly, another high risk sector or segment is transportation or logistics startups.

Henry Lopez (10:43):

If it’s a business that requires a large upfront capital investment like in vehicles or heavy equipment, or there’s strict regulatory compliance or significant insurance costs or of course susceptible to fuel cost volatility, those are high risk sectors according to the data. I have a good quote here from Eric Reese. Eric Reese is an American entrepreneur, a blogger, and the author of the Lean Startup, a great book on the lean startup movement. The goal of a startup is to figure out the right thing to build the thing customers want and will pay for as quickly as possible. So to me, that speaks to that need to in that first year, if you can iterate and figure out the business model, adjust and adapt so that then you put yourself in a position to survive, that’s what I think he’s speaking to there in that quote. So choose a business model or probably more realistically, you’re going to have to adapt and evolve and pivot the business model that you start with that will give you that fighting chance to continue on beyond that one or two years.

Henry Lopez (11:47):

And I’ll come back to this point because it’s so critical. So you’re looking for obvious things also like low overhead, like recurring or predictable revenue if possible. Reasonable startup capital relative to the expected margins and the expected return on investment. Strong demand that you can validate before investing heavily. What does that mean? That’s that iterative approach, that lean startup approach. The MVP approach, call it what you want, start small scale over time as you validate that there really is a market that will pay and that wants your product or service avoid falling in love with a business idea. And I know that’s contrary to a lot of belief now that you have to be passionate about something. I’m not saying you’re not going to be passionate, but an idea that you’re passionate about does not necessarily translate into a business model that can be profitable and scalable.

Henry Lopez (12:38):

Instead, I want you to continue falling in love with the idea of solving problems, solving problems for that target audience that you want to help and that are willing and able to pay for your solution to their problem. So in summarizing the data at this high level, don’t get discouraged. Again, use this data to stay grounded and to make better choices, better decisions about your business, whether you’re getting ready to start a business or whether you’re in that early stage or maybe you already hit this wall where it’s just not working. What do you do? And the reality is that starting and running a business is hard. It is not easy. So here is the key takeaway that I’ve touched on now and I alluded to at the beginning. This is the key point or two points. There are two critical reasons at a high level why so many businesses will fail after those first couple of years.

Henry Lopez (13:25):

By that year five where it comes almost to 50%, you need more than just a great idea. You’ve got to have more than just passion for a particular thing. That’s great for hobbies. It’s not always so great for a profitable business. You need a strong business model, a business model that makes money and can scale and you need enough capital, enough money, enough cash to sustain operations and to allow you to grow. Yes, ideally a third thing is a little bit of luck with timing, with connections, with market conditions. We all do need a little bit of luck, but I always believe that we kind of put ourselves in the way of luck. If we’ve got those other two things in place, then hopefully we’ll get that break. A strong business model and enough cash to get through the startup. There’s a great quote from Guy Kawasaki.

Henry Lopez (14:10):

Guy Kawasaki is an American marketing specialist, an author and a Silicon Valley venture capitalist. He was one of the Apple employees or originally responsible for marketing the Macintosh computer line back in 1984. And it’s a very short to the point. Ideas are easy, implementation is hard. I think that says it all. You can have an idea relatively speaking, I’ve always said this on this podcast, the idea relatively speaking is the easy part. It’s the execution and planning that are the hard part. So a few more thoughts here on how to improve your odds of being on the successful side of these statistics instead of the failure side. If you’re getting started, do your research. Know what industry you’re getting into and specifically this segment, you must know and continue to know your target customer. Not everybody but that niche, that avatar, that target customer that you are going to serve initially.

Henry Lopez (15:06):

And you must know your competition respect and study and understand your competition. And if at all possible, you cannot skip market validation. How can you validate with a startup that’s smaller, a popup, whatever the case might be to validate there is in fact a market that will pay for your product and service beyond your family members are the people who love you, who are going to tell you what you want to hear. So do the research and then this comes back to one of the two key ones. Build the buffer. You got to have enough working capital. You need to have enough runway for the business to ramp up because all of us have a tendency to predict and be overly optimistic as to how quickly we will get to break even. But how do we carry ourselves to break even? Do we have enough money into business to do that?

Henry Lopez (15:52):

Do we have enough money for ourselves to make up for that lost income if that’s something that’s necessary? Do I have enough money saved to allow me to allow the business enough time to get to profitability? I have an episode I want to recommend on this topic of cashflow, episode 4 39 on cashflow management. You can find that at the how of business.com, and I think it’s a great episode to learn more about how to manage your cashflow, choose your location wisely. Of course, that was part of the statistics breakdown. Your location does matter. And again, the data shows that some states with lower cost and higher consumer income and strong support ecosystems, well that’s going to improve your odds. Does it mean you can’t do business in those places? No, of course not. Plenty of people do. But cities or locations with dense markets and strong infrastructure and perhaps even targeted incentives, well, that helps you beat the odds.

Henry Lopez (16:42):

I also want to encourage you to get guidance, get help, hire a coach like myself, build a plan, avoid the common mistakes and accelerate your learning so that you have a higher probability of success and you’ve got to be ready to adapt. So this relates back to the business model I mentioned earlier. When do we know if we need to quit what we’re doing and pivot or abandon it altogether? That’s got to be the toughest thing, the toughest decision that we have to make as a business owner. So I recently released episode 5 54, when to quit or Pivot, and it’s based on a great short book by Seth Godin titled The Dip that I highly recommend on this topic. How do we know if it’s just a matter of continuing to persevere and I’ll get this business turned around, or no matter how much I persevere and bang my head against the wall, I’m not going to get there with this business model.

Henry Lopez (17:30):

I need to adjust or pivot or abandon it. And again, those are hard things to do, but that’s what we must do. That’s what our survivability in our business depends on. And so then finally, develop a profitable and scalable business model. I recommend episode 5 32 is your business model. I take you step by step in this episode to help you hopefully determine if your business model is broken at the end of the day or at the end of a couple of years. A strong and healthy business model supports a small business that is consistently and sufficiently profitable and that can scale. So I hope now you’ve got a clearer picture of what these failure rates really mean or what they can mean to you. They’re not a verdict. Hopefully it’s a wake up call if you hadn’t really thought about or looked at or analyze these numbers, obviously we’ve touched on ’em here on a very high level, but you can absolutely beat the odds.

Henry Lopez (18:25):

If you plan well, you stay flexible and you get help. Focus on building a business that can survive those early challenges and then grow with intention. You’ve got to have a business model that is sufficiently profitable and scalable, and so you’ve got to be willing to adjust, to pivot to correct course so that you can get there and get past that five-year mark in particular and have a long-term successful and profitable business. This is Henry Lopez and thanks for joining me on this episode of the How of Business. I wish you the best as you start and grow. You’re successful and profitable business. I release new episodes every Monday morning, and you can find the show anywhere you listen to podcasts, including the How of Business YouTube channel, and at my website, thehowofbusiness.com. Thanks for listening.