What Percentage of Companies Fail Each Year?

By Tom Grandy, Founder

What percentage of companies fail each year and why?  Well, that depends on whose statistics you read.  If you check out the Internet there are as many opinions as there are organizations.  According to data from the Bureau of Labor Statistics approximately 20% of all businesses fail within the first year. By the end of the second year, 30% of businesses will have failed. By the end of the fifth year, about half will have failed. And by the end of a decade, only 30% of businesses will remain — a 70% failure rate.

The actual percentages may vary but the bottom line is that there are a lot of companies that fail each year.  The question is why?

Perhaps looking at franchises may just give us a few clues.  Statistically, 97% of all franchises make it through their first year and 95% make it through their first five years.  What is the difference between a franchise verses the rest of us.  Let’s look:

  • Investment – Who owns most franchises? Right, rich people!  The total investment in a McDonald’s franchise is between $1,000,000 and $2,000,000.  Sure, there are some minor franchises out there for less but the nationally known ones require a huge investment.
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  • Training – Does the owner run the franchise? Not at McDonalds.  The managers are hired and are sent to McDonald’s University in Chicago for training.  Other franchises may not have their own University but they do have extensive training programs.
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  • Budgets – Before a franchise can be purchased, the potential owner needs to create a budget for at the least the first year and often for the first one to three years. Within that budget they are told what percentage should be spent on marketing, advertising, etc. When the budget is completed, the potential owner will have a clear picture of the costs of running the business as well as the potential profit, if goals are met.
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  • Accountability – Once the franchise is open the new owner will be required to submit monthly reports based on their budgets. It’s called accountability.  If profit goals are not met, the monthly review will pinpoint what areas need work.
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  • Cash Flow – Cash is king in any business. As a company grows, significant amounts of cash will be needed to fund growth.  In addition to the initial investment, a stated amount of “cash” must be available to cover everything from increased inventory to slow times during the year.  Each franchise has specific amounts of cash the new owners must have on hand BEFORE the doors are opened!

 

Now, think about the typical trades company:

  • Investment – The only investment needed to start a trades company is the willingness to work, a supplier willing to provide 30-day terms and enough cash or credit to buy a new or used vehicle and a few tools.
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  • Training – Training for the new company owner usually consists of their experience working for someone else…usually as a technician. Business training.  What is that?
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  • Budgets – Creating a budget is another way of saying “Count the cost”. Very few new trades company owners have ever created a budget, therefore have little idea of what it takes to run a company much less what profit might be expected.
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  • Accountability – About the only accountability most trades companies have is their spouse who might ask questions like; “How are we going to meet payroll this week?”, “Our supplier wants to put us on COD.” or “Dear, how are we going to pay the mortgage this month, we haven’t received a paycheck in three weeks!”.
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  • Cash Flow – Trades companies have huge needs for cash. Cash is needed to fund increasing inventory and receivables.  Cash is also needed to fund those slow times during the year, not to mention funding the increased costs of doing business as the company grows and expands.  How much “cash” does the typical trades company start out with?  Usually between zero and borrowed! 

Are there some things failing trades companies could learn from successful major franchises?  You bet there are.  Check out the fruit of each and then glean what makes sense to you in your situation.

Did you know that the most profitable trades companies are owned and run by people who understand the business side of their businesses and who may or may not understand the technical side?  If you are serious about learning the business side of your business, then I would strongly encourage to you to attend Grandy & Associates two-day Planning for Profit workshop.  It can be attended in person or through online, instructor- led training, whichever best meets your needs. 

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