Your Chance of Success
After giving it careful consideration, you’ve finally decided to start your own business. But when you excitedly announce your decision at a family gathering, your brother-in-law Sheldon points his finger at you and says in his most ominous voice, “Fifty percent of all businesses fail in the first five years. Get a job.”
You’ve got far better odds of succeeding in business than is commonly believed. That’s because the statistics you’ll hear about business failures almost always mean business closings. In many cases, the business hasn’t failed, just changed.
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, and I stopped filing a “Schedule C” on my personal tax return. That means my first business probably shows up in statistics as a business “death” even though it was actually getting larger.
To paraphrase Mark Twain, “Rumors of my death are greatly exaggerated.”
Overwhelmingly, businesses don’t die or fail; the owners close them for reasons unrelated to whether the business is making money.
Take restaurants, for instance. Restaurants have a notoriously high “failure” rate. You’ll often hear that 90% of restaurants fail in the first year.
In a study in Columbus, Ohio, Professor H.G. Parsa of Ohio State University tracked new restaurants from 1996–1999. In the first year, 26% closed. Another 19% closed the second year, and 14% the third. Collectively, 59% of new restaurants closed those three years.
Businesses typically don’t die or fail; owners close them for reasons unrelated to money.
Now, even though these numbers are much better than the 90% failure rate bandied about, it’s not particularly heartening to know that six out of ten restaurants closed in three years.
However, Professor 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.
Survival Rates of Businesses
| First year: | 85% |
| Second: | 70% |
| Third: | 62% |
| Fourth: | 55% |
| Fifth: | 50% |
| Sixth: | 47% |
| Seventh: | 44% |
| Eighth: | 41% |
| Ninth: | 38% |
| Tenth: | 35% |
Source: Cognetics
In other words, they had what Dr. David Birch, former head of a research firm specializing in studying small business data, called the “I Had No Idea” syndrome. Would-be entrepreneurs don’t realize just how much is involved with running a business.
After running a business for a year or two, many people discover the effort is more than they anticipated. Suddenly, they’re the ones who have to keep the books, find the customers, pay the bills. When the reality sets in, many decide they’d rather return to the relative ease of having a job, and they close up shop.
“Historically about 95% of business endings have been because the owners have chosen to close rather than the financial condition of the company forcing a closing,” says Dr. Birch. “While about 500,000 businesses close each year, business failings are only about 50,000 … Once you’ve hit five years, your odds of survival go way up. Only two to three percent of businesses older than five shut down each year.”
The lesson? The best way to get over the first tough years is to be prepared. 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, finances, and emotional resources necessary. Create a business plan. Keep your eyes open—not to the possibility of failure, but to the very real demands of running your own business.
Once you make it over the hurdle of adjusting to the entrepreneurial life, your chances of success are excellent. And Sheldon will be wrong again.
Your Entrepreneurial Type
Most business books and experts will tell you it takes a certain type of person to be an entrepreneur. They might say you have to be outgoing, risk-taking, and able to make sales.
It’s just not true. Look around: You may know someone who’s successful but is a grouch, hates to take a risk, or doesn’t get up before noon. They can be an entrepreneur—a successful entrepreneur at that—if they find a business that suits their entrepreneurial type.
What do I mean by “entrepreneurial type”?
When they first consider being in business for themselves, most people think about their interests. But that’s just a starting point. Let’s say you’re interested in antiques. Does that mean you should sell antiques, appraise them, or refinish them? Even if you want to sell antiques, does that mean owning a retail store, selling them on eBay, or finding bargains at flea markets and marking them up for sale to retail stores? Your interest is clear—antiques—but you’ve got a number of different ways to build a business around that interest.
Based on my experience with thousands of entrepreneurs, I’ve come up with a number of entrepreneurial types. Here are a few of the most common:
