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Why Businesses Fail – The Truth

Failure

What's been widely accepted as the reasons businesses fail such as a lack of capital, poor management, expanding too quickly, etc….is true. Those reasons fit well for established businesses with employees but do not fit for sole proprietors.

There are many reasons why businesses fail and all of them have been written and spoken about ad-infinitum. None of them are incorrect because given the same circumstances over and over the patterns become apparent. Or do they? The results are obvious because the data, no matter how skewered in the government's favor, are irrefutable. Individuals that go into a business usually fail. It’s not 50-50, 80-20 or even 90-10. It’s more like 99.9 - .01 (Point zero 1 or 1 out of 1,000) that stay in business for any length of time and then only 1% of those that survive to enjoy the real independence & freedom and business ownership is supposed to bring.

Let's look at the obvious, most publicized reasons small businesses fail:

From Investopedia https://www.investopedia.com/articles/personal-finance/120815/4-most-common-reasons-small-business-fails.asp

  • Lack of Capital
  • Inadequate Management
  • Business Plan and Infrastructure Issues
  • Marketing Mishaps

I can cite many similar examples but I don’t want to waste your time presenting information that’s already common knowledge. I would rather focus on what is not common knowledge. Information that seems to be hidden under layers of data, misused terminologies and combing of unrelated market segments.  

THE REAL REASONS WHY BUSINESSES FAIL

The first lesson I’ve learned is to not take anything for granted which is why when I look at facts and figures I go to the terminology first. For instance, what do they mean by “small business” and “fail”? For example, about 15 years ago I went on the www.sba.gov website to see how many “small” businesses there were in the USA. There was quite a bit but what shocked me was the fact that they defined a “small” business as any entity having fewer than 500 employees. 

Really??? 500 employees? The vast majority of the businesses I’ve dealt with had less than 5 employees with most having only themselves as “employees”. A business with 500 employees usually had one of those big accounting firms but the vast majority of accounting firms are small. Something did not add up because in my mind a small business was small and small meant mostly only one employee, the owner.

I can write a book on the government's warped definitions but the fact is that when “facts & statistics” are used but the fact is that there is a lot of miss-information and skewed facts. The vast majority of businesses (25m out of 30m) have no employees, zero-nada-zilch. A very large percentage of them either go out of business or never go beyond employing only themselves. 

It seems to me that there are 2 classes of businesses-sole proprietors and everyone else. The economic, social and every other factor is very different for a sole-proprietor and a business that was able to break that barrier and start to hire employees. Once that barrier is broken, a business's chances of success increase dramatically compared to sole proprietors. They have crossed the line from owning a job to owning the makings of a business.

There should be 2 sets of data. The data for sole-proprietors and everyone else. Why would you combine a 500 or even 100 or 50 employee firm with a sole-proprietor? It makes no sense because the only thing they have in common is ....??

I believe the source below is much more accurate when it comes to why small businesses fail. 

https://www.forbes.com/sites/ericwagner/2013/09/12/five-reasons-8-out-of-10-businesses-fail/#31538ad06978

  • Reason #1: Not really in touch with customers through deep dialogue

  • Reason #2: No real differentiation in the market (read: lack of unique value propositions)

  • Reason #3: Failure to communicate value propositions in clear, concise and compelling fashion.

  • Reason #4: Leadership breakdown at the top (yes -- founder dysfunction).

  • Reason #5: Inability to nail a profitable business model with proven revenue streams.

Even though the purpose of the article was not to differentiate between a sole proprietor and everyone else it hits closer to the mark and aligns better with what I believe the real reasons sole proprietors fail which are as follows:

  • HAVING THE WRONG EXPECTATIONS
  • LACK OF CLARITY-PURPOSE & EXECUTION
  • LACK OF FUNDAMENTALS
  • BAD HABITS
  • POOR TIME AND MONEY MANAGEMENT
  • NOT KNOWING & UNDERSTANDING THEIR NUMBERS
  • LACK OF ACCOUNTABILITY

Sole proprietors that can address these issues successfully have a much better chance of succeeding. In the next few posts, I will cover each reason in detail.


Joe DiChiara CPA

Joe DiChiara CPA offers Small Business Advisory Services to passionate entrepreneurs that want to Start, Build and Manage a small business successfully. He enjoys being an “Out of The Box Thinker” and has helped thousands of small business owners start, build and manage their own business. In 2009 Joe discovered a new approach to business through “The Science of Getting Rich” written by Wallace Wattles and the inspiration behind the movie "The Secret".

After successfully applying the SOGR principles as well as Napoleon Hill's "Think And Grow Rich" to his own business, Joe discovered that there is a large market segment that is being overtaxed, unprotected and unfairly targeted by IRS. Every year over 3,000,000 entrepreneurs start businesses unaware of the dangers of operating as a sole proprietor with over 25,000,000 in the process of going bankrupt.  This discovery inspired Joe to develop programs, tools, and resources to help stem the tide of these avoidable small business failures.

Currently, Joe is building an online school for small business owners www.bedrockuniversity.com and www.taxauditsmackdown.com which will help entrepreneurs create the books and records needed to survive any tax audit.  Joe is a #1 Amazon Best-Selling Author and you can Check Out Joe’s Books on Amazon by clicking here