Someone else's business failure does not mean your business will suffer.
Not to sound too much like your mom here, but you only fail if you don't try. If you dream of owning a business, you should do your homework, find a niche yet to be filled, and pour yourself into it. That said, some businesses do have a higher failure rate than others. That's not to say you should avoid those businesses. It just means you'll want to go in prepared to weather the ups and downs.
The Bureau of Labor Statistics looked at business failure rates at the one-year, five-year, and 10-year marks. Here are five small business types with a high failure rate.
1. Restaurants
Independent restaurants have a failure rate of over 60% at the 10-year mark. The key to success is the ability to raise capital when needed. If a business owner cannot do that, there's not much left but to close the doors.
Caveat: The restaurant failure rate is higher in areas saturated with restaurants. If you dream of owning an eating establishment, look for a spot where you won't have to compete with hordes of competitors.
2. Retail stores
Another business with intense competition is a retail store. Not only do you have to contend with other brick-and-mortar stores, but you also have online businesses undercutting your prices. Like independently owned restaurants, retail stores have a failure rate of over 60% at the 10-year mark.
Caveat: Before deciding what kind of retail store you want to open, dive into the competition. Are you going to be competing with both brick-and-mortar stores and online businesses? If so, pivot. Find an unfilled niche in your area and decide whether you want to fill it.
3. Direct sales
Yes, it's your own business, but if a friend asks you to become part of a multi-level marketing (MLM) business, say no. What you'll hear are success stories. You won't hear that, like a pyramid scheme, 99% of direct sales reps suffer significant financial loss. It's the people at the top and the person who recruits you who makes money. Businesses like Amway, Mary Kay, Pampered Chef, and Herbalife make money on consultants who buy their products.
Caveat: There is no caveat. Instead of making a large company richer, build an emergency savings account or go on vacation.
4. Construction
Starting your own construction business is a tough gig. Not only do you have to be good at your craft, but you have to become a full-time salesperson and part-time counselor. Construction businesses also have a failure rate north of 60% at the 10-year mark.
Caveat: If you have a passion for building and offer unique touches that buyers can't get from another builder, ensure you have your finances in order before setting out. Labor shortages and supply chain issues can stretch build times and extend the time it takes for customer payments to hit your business account.
5. Insurance sales
Insurance agents face the challenge of wearing too many hats. They must be a master of administrative work, sales, and an ever-changing insurance scene.
Caveat: If you're moving from an established agency and bringing a portfolio of customers, your odds of success are higher.
The best thing you can do is learn from other businesses and discover why they failed. CB Insights researched the issue and compiled a list of the top reasons startups fail. Here are some of their findings:
- They ran out of money or could not raise new capital.
- There was no market need for their business.
- The competition beat them.
- They chose the wrong business model.
- There were too many regulatory or legal hurdles.
- They did not correctly price their products.
- They hired the wrong people.
- They failed to pivot when a change was needed.
Few things in life come easy. While each of these businesses may be challenging, don't allow someone else's business failure to prevent you from following your dream. After all, for any failure statistic, there is an even more dramatic success story to be told.
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