'Failure' rate may be misleading

By Rhonda Abrams
Gannett News Service

The other morning I was listening to the radio when I heard a distinguished professor from a distinguished university quoted, saying that 90 percent of new businesses fail.

Now, when I hear something like that, it gives me the creeps. I know those statistics scare people away from starting their own businesses, but I've looked at statistics of business births and deaths closely, and I know of no credible study showing anything close to a 90 percent failure rate.

So I picked up the phone and called the good professor. He couldn't remember where that number came from, and he quickly backed away from it.

"How do you define failure?" said David Blanchflower, professor of economics at Dartmouth University, explaining that failure didn't really mean failure. "Failure usually includes companies that change their name or ownership or a person who is self-employed who moves to employment."

There's the rub: Statistics that you hear about business "failures" are likely to mean business "closures." In some cases, not even closures, just business changes.

For instance, I had my own — successful — consulting practice for many years. Like most sole proprietors, I reported my business income on my personal income tax return, using my own Social Security number. When I incorporated, the business got its own tax identification number. So my first business probably shows up in statistics as a business "death" even though it was actually getting larger.

Overwhelmingly, businesses don't die or fail; owners close them for reasons unrelated to whether the business makes money.

Take restaurants, for instance. Restaurants have a notoriously high failure rate. You'll often hear that 90 percent of restaurants fail in the first year; that's what they said on the TV reality show, "The Restaurant." Well, don't believe everything you hear on a reality show.

H.G. Parsa, a professor at Ohio State University, tracked new restaurants in Columbus, Ohio, from 1996 through 1999. In the first year, 26 percent closed. Another 19 percent closed the second year and 14 percent the third. Collectively, 59 percent of restaurants that opened in 1996 closed within three years. By the way, the failure rate wasn't very different between franchised restaurants, 57 percent, and independent restaurants, 61 percent.

Now, even though these numbers are much better than the 90 percent failure rate bandied about on television, it's not particularly heartening to know that six out of 10 restaurants closed in three years.

However, Parsa found that reasons other than economic necessity made the owners decide to close. They cited divorce, poor health, and most importantly, an unwillingness to make the immense time commitment necessary as reasons for shutting their doors.

In other words, they had what David Birch, former head of a research firm specializing in studying small business data, calls the "I had no idea" syndrome. Would-be entrepreneurs don't realize what's truly involved with running a business.

So what is your chance of success? I think Birch's statistics are probably as accurate as any. His survival rates:

• First year: 85 percent.

• Second: 70 percent.

• Third: 62 percent.

• Fourth: 55 percent.

• Fifth: 50 percent.

• Sixth: 47 percent.

• Seventh: 44 percent.

• Eighth: 41 percent.

• Ninth: 38 percent.

• 10th: 35 percent.

"Once you've hit five years, your odds of survival go way up," Birch said.

The lesson? To greatly increase your chance of success:

• Find out as much as you can before you open your doors.

• Talk to people who run their own businesses, especially businesses similar to yours, and get a realistic understanding of the time, financial and emotional resources necessary.

• Keep your eyes open — not to the possibility of failure, but to the very real demands of running your own business.

Rhonda Abrams is the author of "The Successful Business Plan: Secrets & Strategies."