What is the failure rate of small businesses?  Many people allege that
"X% of small businesses fail in the first Z years" with most variables
at 80-90% in 2-3 years.  Yet, this article from USAToday
(http://snipurl.com/fgbv) suggests that not only are the numbers
suspect but that even the definition of "failure" is questionable.

What is a reliable figure for the failure rate of small businesses in America?

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Request for Question Clarification by pafalafa-ga on 09 Jun 2005 10:48 PDT

According to the US Small Business Administration, keeping a small
business going -- while tough to do -- is not quite as tough as the
80-90% failure numbers you cited would suggest.


Actual survival rates of small businesses can be seen here:

=====
http://app1.sba.gov/faqs/faqindex.cfm?areaID=24


What is the survival rate for new firms? 

Two-thirds of new employer firms survive at least two years, and about
half survive at least four years.

Owners of about one-third of the firms that closed said their firm was
successful at closure. Major factors in a firm's remaining open
include an ample supply of capital, the fact that a firm is large
enough to have employees, the owner's education level, and the owner's
reason for starting the firm in the first place, such as freedom for
family life or wanting to be one's own boss.

Business survival also varies by industry and demographics. The
industry with the highest 1992-1996 survival rate for firms owned by
white non-Hispanics was oil and gas extraction (82 percent survival
rate over the four-year period). African Americans were most
successful in legal services (79 percent), and Hispanic and Asian
Americans in health services (66 percent and 76 percent,
respectively).
=====


Put another way, one could say:

50% of new small businesses have closed their doors four years later;
among the firms that closed, 1/3 of owners report their businesses
were successsful (but they closed anyway, perhaps due to personal
reasons, returning to full-time employement, etc).


The source for these numbers is the SBA's FAQs page -- the same source
cited in the comment, below.  Hard to ask for a more definitive source
than that.

I posted here to make sure you saw the information, since I had been
working on the question anyway.

Let me know if there's anything else you need. 

pafalafa-ga

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Clarification of Question by tonyrush-ga on 09 Jun 2005 18:12 PDT

Great answer!  Thanks very much for your assistance!  

Tony

First, the site you linked to has some rather ... sketchy info itself:

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"I think Birch's statistics are probably as accurate as any. His survival rates: 

? First year: 85%
? Second: 70%
? Third: 62%
? Fourth: 55%
? Fifth: 50%
? Sixth: 47%
? Seventh: 44%
? Eighth: 41%
? Ninth: 38%
? Tenth: 35%

"Once you've hit five years, your odds of survival go way up," Birch
said. "Only two to three percent of businesses older than five shut
down each year." "
-------------------------------------------------------------------------

Doing the math using Birch's statistics, here are the non-survival
rates from years 5-10
from year 5 to 6: 50% to 47% is a 6% drop.
Perhaps that sounds odd, but imagine 100 businesses.  50% have not
survived to year 5, so there are 50 left.  If by year 6 there are only
47% surviving then there are 47 left in year 6.  A drop from 50 to 47
is a 6% drop.
from year 6 to 7: 47% to 44% is a 6.4% drop
     year 7 to 8: 44% to 41%      6.8%
          8 to 9: 41% to 38%      7.3%
          9 to 10: 38% to 35%     7.9%
So as you can see, the failure rates are far larger than Birch
suggests (using Birch's own data), and the Birch character is supposed
to be the expert on the matter.
The lesson?  Learn how statistics are often missused and learn to make
reasonable arguements using reliable data.

Now, as far as reliable data goes, you will find no better source than this:
http://www.sba.gov/advo/stats/sbfaq.pdf
Scroll down to page 2 and look at "What is the survival rate for new firms?"
They claim that 2/3 survive 2 years and 1/2 survive 4 years.  Further,
they claim 1/3 that closed said the firm was successful at closure. 
They don't however specify that 1/3 of new firms are successful when
they close, so I'm not sure that would be the case (be sure when
reading statistics that you don't read what they don't say... they are
often purposefully or unknowingly deceptive).
It is also good to find multiple statistics using slightly different
but similar numbers (this means that they used different sources of
information but found similar results).  The USAToday article has
similar (yet more specific) numbers as the SBA site.

I think the 90% number came out of thin air, although it might be
closer to reality if you define small business in a more liberal way. 
Many people today claim to have started their own business when they
become self employed through a large business such as Amway or
Primerica.  Although some become very successful in these ventures,
almost all fail in the first year or 2.  I doubt these self employed
people are counted in the "small business" category when the better
looking statistics were created.