Why Small Businesses Fail and How to Avoid Failure

Small business owner working in the cafe

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According to Innovation, Science & Economic Development Canada statistics, thousands of businesses exit the marketplace every year in Canada. Business failure statistics show that about 96 percent of small businesses (1–99 employees) that enter the marketplace survive for one full year, 85 percent survive for three years and 70 percent survive for five years (Key Small Business Statistics). Approximately 7,000 businesses go bankrupt every year in Canada.

Microenterprises (businesses with 1 to 4 employees) have a slightly lower business failure rate than other small businesses; after five years in business, 70.4 percent of micro-enterprises survived compared with 66.9 percent of other small businesses (Ibid).

Why Small Businesses Fail

According to an Industry Canada study, "the main reason for (business) failure is inexperienced management. Managers of bankrupt firms do not have the experience, knowledge, or vision to run their businesses" Failing Concerns: Business Bankruptcies in Canada. But, the main reason why small businesses fail can be more specifically pinpointed; the main reason why small businesses fail is poor planning. Here is a list of things to do to avoid failure.

Do Market Research

This is one of the most common reasons for failure; people start businesses because they want to do a particular thing or love a particular product. I don't know how to put this any more strongly; it's not about you, it's about them - your potential customers.

That's why everyone thinking of starting a small business should do a business plan. A business plan is your ultimate planning tool and safeguards against business failure. When you work through it, you'll do the market research you need to do and find out whether there is a market for your product. Need a business plan template? A business plan outline will lead you through the process.

Get the Money Sorted

Before starting a small business, you need to figure out how much money you need to live and how much money is needed to run your business. You can't ignore the money and just assume that somehow enough of it will come in each month. Nor can you ignore your bills.

One local business person started a retail bakery on such a shoestring she was trying to sell potential customers product 'batches' ahead of time (invest $200 now; get x number of loaves in the future) to keep her business going. Within six months she was behind on her retail rent. Within another six, her business had gone under.

Choose a Feasible Business Model

This is the part that's about you and you have to get it right or your small business is doomed. Too many people leap into selling their product or service without even considering the answer to this basic question.

One small business owner decided to start a business selling cut flowers. She had the property and the garden for it already. She had even lined up distribution for her bouquets. Her business lasted three months - because she discovered that there was just no money in it.

Plan for Growth

For example, Joe* and Tammy* started a bison ranch and within two years became so successful they can't keep up with demand for bison meat. But Joe and Tammy are of retirement age and don't have the energy or desire to continue with the business or do what needs to be done to grow it on. They've put the business up for sale.

How much better it would have been if they had planned for their success. At this point, instead of hunting for a buyer and putting things on hold, they could have already have brought a manager into the company or a new partner who would be interested in carrying the business on - and created a transition plan so the business would be moving forward rather than stagnating.

Plan an Exit Strategy

So many small business people work hard creating small businesses and building them into successful enterprises. And so many of these same people have no plan for what will happen to their successful small business when they're done working so hard. If you ask them, many say they'll sell their business.

But this is a hope, not an exit plan. If you want to sell a business, it has to be salable. Many small businesses aren't because they're dependent on one person's talents and personality. Others might be if a person gets their business into selling shape.

But is selling in the open market the best possible exit strategy for you? Exit Strategies for your Small Business presents other possibilities. If your small business is a family business, Family Business Succession Planning provides tips for planning a smooth transition to the next generation. The best time to choose an exit strategy is when you're starting a business, not when you want to get rid of it.

The Good News About Small Businesses Failure

Business failure because of poor planning is completely avoidable. Once you know what kinds of planning you should do before you start your small business, it's just a matter of educating yourself and getting it done.

Planning is always harder than doing. It takes more brainwork, it takes more time, it requires delaying your personal gratification. But the cliché is true; businesses that fail to plan, plan to fail. Don't let it happen to you.

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