The 90% Business Failure Myth
The 90% failure rate is marketing fiction. Here's what real data reveals about business survival.
Now that I have your attention, let me say this straight. The 90% figure is wrong and always has been wrong (I dug up some history, it’s at the end of this article).
But facts, as we all know, should never get in the way of a shock horror headline. Thank you for reading.
The real picture
USA
Let’s start with the US Bureau of of Labor Statistics. Their data looks like this:1
Roughly one-fifth of businesses close in their first year
Around half are gone by year five
About two-thirds have shut their doors by year ten.
There’s a kicker to even this data - the BLS data only includes employer firms, meaning solo operators (technically, nonemployer firms) are counted in a completely different series. And nonemployer firms, we are told, comprise 82.3% of all US small businesses.
The only conclusion we can reach is, for US solo operators, we just don’t know how many survive and for how long.
Australia
The Australian Bureau of Statistics reports things a bit differently. We know that, for nonemploying firms:2
72.3% are still operating after one year
43.3% are still in business after three years.
What’s telling, though, is that after three years 61.0% of employing businesses are still operating. That’s a 17.7% gap.
Why? I’ll get into that further down but for now, I want to talk about churn.
The churn factor
No every business closure is a failure. Some close for other reasons:
Some nonemploying businesses take on employees because they’re onto something good. They’ve figured it out. So they exit the nonemploying cohort and join the employing cohort. That’s great for everyone.
Some nonemploying businesses are set up for a specific purpose, such as self-managed super funds or trustee organisations. No problems there either. They fulfill their purpose and exit gracefully.
Then we have the solo operations that make a ton of cash for their founders, who then buy a private jet and go live tax free in Dubai. Good for them, no need for a local business.
Finally, we have the businesses that merge with others, or close down due to owner health, personal circumstances, or it simply wasn’t worth their time any more.
In other words, voluntary exits and acquisitions. Not just collapses. So the figures that get quoted at us are not as bad as they’d have us believe.
I think that’s incredibly positive news.
How do I make sure my business survives?
And now we get to one of the core Banana Stand maxims: its all about cash flow.
The art of survivorship is mastering a set of boring, repeatable habits that almost all business owners ignore because there’s always something more interesting to do. Some examples:
Check your cash position weekly, not monthly, and not from memory.
Know your runway in weeks, not a vague sense of ‘we’re fine for now’.
Treat the first sign of declining inquiries or slipping margins as a fire alarm, not background noise you’ll deal with once things calm down. They never calm down on their own.
The businesses that survive are the ones whose owners notice the bleed early and act while acting is still cheap and easy.
Because by the time the bleed is obvious, all the cheap fixes are gone. You have to choose between painfully expensive fixes and shutting shop.
Where the danger hides
The danger, the existential threat, isn’t where most small business owners normally look. They worry about competitors, about marketing, about whether the idea is good enough.
Meanwhile the thing that kill the business is sitting ignored in a spreadsheet they haven’t opened in weeks.
If you want one piece of practical paranoia to take from this article:
Pull up your cash flow forecast right now and look at it honestly.
If you can’t say with confidence how many weeks of runway you have, that’s the real number you should be losing sleep over.
Fun fact: Where did the 90% come from?
In 2003 an NBC reality show called ‘The Restaurant’ was fronted by celebrity chef Rocco DiSpirito.
I can’t find exactly who said it first.
One study traced the line to an American Express advertisement that ran during the broadcast, claiming ninety per cent of restaurants fail in their first year of operation.
Other retellings have DiSpirito saying the line on air, repeating that ninety per cent of new restaurants fail in year one while he could beat those odds. Specifically:
I’m opening a third restaurant on national television in a time when nine out of ten restaurants fail in the first year.3
Either way the line landed on millions of screens with zero source attached, and from there it just metastasised. No one ever tracked down where the number originally came from, which is the whole point: The statistic was marketing. An alarming number, repeated often enough that people stopped asking where it came from.