Reasons Why Small Businesses Fail: And How to Avoid Failure

Abstract

INTRODUCTION The increase in entrepreneurial activity is a significant trend in the US economy. Unfortunately, small business owners often face the reality of failure. The important role of small business suggests that an understanding of why firms fail and succeed is crucial to the stability and health of economy (Gaskill, Van Auken & Manning, 1993). Of major concern to any would-be entrepreneur is the chance of success or failure of the proposed business. It appears critical for researchers and business owners and managers to better understand the factors contributing to the failure of small business. Success versus failure research benefits entrepreneurs, those who assist, train and advise them, those who provide capital for their ventures, suppliers, and public policy makers (Lussier, 1995a: 1995b). REASONS WHY BUSINESSES SUCCEED AND FAIL: LITERATURE REVIEW There are many studies to better understand business success versus failure. However, as Gaskill, Van Auken and Manning (1993) stated: there are many questions still to be resolved and warrant additional exploration ... previous studies do not provide a comprehensive or unified explanation for small firm failure. There is no generally accepted list of variables distinguishing business success from failure. Prior researchers have created discrepancies within the literature by reporting different variables as contributing factors to success or failure. The two most commonly stated distinguishing variables are capital and management experience. However, in 22 journal articles only 14 (64%) specifically state that these two variables contribute to success versus failure; while 5 (20%) other studies claim they do not, with 3 (14%) not identifying the variable as a contributing factor. The literature list of success versus failure variables in this study was developed by including the fifteen major variables, identified in 22 journal articles as contributing to success versus failure. See Table 1 for an explanation of the 15 variables, and Table 2 for a comparison of the 22 studies that support, do not support, or do not mention each variable. As shown in Table 2, there are discrepancies among several studies. Clearly, there is no generally accepted set of reasons why businesses fail or succeed. Based on a lack of agreement on why businesses fail, the reasons given by 100 entrepreneurs may have significant value in helping to understand, explain, predict, and control small business failure. SURVEY METHODOLOGY The population from which the sample was selected for this study was limited to the six New England states (Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, and Vermont). According to Dun & Bradstreet (1995), the population of failed business includes both Chapter 7 (liquidated) and Chapter 11 (restructuring debts to stay in business) companies. Firms that go out of business without loss to creditors are not considered failures: they are discontinued businesses. The population of failed businesses includes both Chapter 7 and Chapter 11 companies. However, once a business has liquidated under Chapter 7, its owner is very difficult to locate to answer the questionnaire. Based on a cost-benefit analysis, the questionnaire was only sent to Chapter 11 companies. Chapter 11 firms are early representatives of closed businesses. Wood (1990) reported that less than 5 percent of Chapter 11 companies survive whereas Flynn (1989) reported a 10 to 12 percent survival rate. In previous business failure studies, Corman and Lussier (1991), Lussier and Corman (1995) and Lussier (1995a; 1995b) used a sample of Chapter 11 firms. Based on bankruptcy court records, the questionnaire was mailed to the owner/CEO of each company filing Chapter 11 during the most recent year. There were 100 usable questionnaires returned yielding a 38 percent response rate. Even though the questionnaire was mailed to Chapter 11 companies, most businesses eventually convert to Chapter 7. …

Cite this work

No public copy is stored for this record, so only the metadata is cited.

Stored only when both papers are in the corpus — 55 citations exist upstream.