If you start a new business this year, the odds are pretty good you'll still be going strong in 2020. About four out of five small businesses survive their first year. But after that, the statistics aren't so encouraging.
Only about 50 percent of small businesses make it for five years or more. The reasons they fail can be complicated—or alarmingly simple. Here are eight of them.
1. Not doing enough market research. You may be passionate about gluten-free kale donuts, but is anyone else? Research on the front end will tell you whether there is a viable market for your product or service. The research phase gives you a chance to test and adjust your concept and to see who your customers might be—before you invest your life savings in a kale farm.
2. Not having enough money. It's common to both underestimate startup costs and be overly optimistic about how long it will take your business to turn a profit. Other money problems can include poor budgeting, taking on too much debt, and not keeping enough cash reserves to carry the business through seasonal ups and downs and unexpected slow periods. When the economy took a nosedive in 2009, more than a few small businesses went down with it.
3. Putting together the wrong team. You might be able to design a great product that everyone wants, but that doesn't mean you and your partners are skilled at finances, procurement, marketing, human resources, or simply have all necessary qualities of a great team member. Trying to do it all yourself, promoting people out of loyalty, and hiring friends and family are just a few of the ways you can fail at team-building. Personalities play a role, too—your team needs to be able to work together toward a common goal.
4. Having disagreements among partners. Partnerships are great—until they're not. When partners can't get along with one another, don't share the workload fairly, or have different visions for the company, the whole business suffers. To decrease the chances that your partnership will turn sour, communicate honestly and regularly, and create a procedure for resolving disagreements.
5. Not focusing on marketing. Without marketing, you won't have customers. Without customers, you won't have a business. Many small business owners don't realize they need to be strategic about marketing. This means having a plan, some measurable goals, and a way to track whether your efforts are working. Business owners get into trouble when they don't have a marketing strategy, spend too much money on something that's not working, or get so busy that they neglect marketing altogether.
6. Relying too heavily on one customer. It's thrilling to land a big customer or client, but it's risky to depend on one customer to support the majority of your business. Even the biggest and most reliable customer can go bankrupt, be acquired by another company, change management, or just change directions—leaving you and your business scrambling to replace them.
7. Getting beaten by competition. The classic story of a startup that failed to a competitor is personal finance website Wesabe. It got off to a good start in 2006, until Mint.com came along in 2007 with a catchier name and a friendlier user interface. Unable to compete, Wesabe went out of business in 2010. Sometimes you can survive strong competition by adjusting your business model, but sometimes you can't.
8. Picking the wrong location. Location can be everything for a brick-and-mortar business. There's a lot that goes into picking a location, including customer convenience, visibility, parking, nearby competition, the image you want to project, and your budget. It's not easy to get out of a commercial lease and switch locations, so a bad choice at the beginning can be a business breaker.
If you're starting a small business, it's good to be aware of the common pitfalls and try to avoid them. But if you spend too much time worrying about all the ways your business might fail, you risk failing in the easiest way of all—by never getting your business off the ground.
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