Starting a business is a lot harder than most people think. Rarely is a business so in tune with its niche that it can float along with minimal effort.  But why do so many businesses fail?  For that matter, how many of them actually do fail?  The reasons run deep, but here is what you should know before starting your own business.

How Many New Businesses Fail?

Before we can answer that question, we have to look at some definitions.  Did you know that the Small Business Administration defines a small business as an operation with fewer than 500 employees?  That means there are a lot of businesses out there that are technically “small” even though they seem very large. These small businesses, as per the definition, make up over half of the working population in the US, so their growth and success is vital to the U.S. economy.

Every month, over half a million new businesses are started. This seems like a lot, but keep in mind that 30 percent of those businesses will go under within two years.  Half of them will close their doors for good before they hit five years. In fact, only 25 percent can stand the test of time for 15 years or longer. With the majority of these small businesses being home-based due to low overhead and non-employer due to low management needs, why don’t more last longer? (For more, see the Investopedia tutorial Starting A Small Business.)

Reasons for Failing

If you poll former business owners, you will get a wide variety of reasons as to why their businesses failed.  

Money Ran Out: This widely given reason doesn’t really explain why a business failed. The money ran out because it stopped coming in, so why did the cash flow dry up?  Using the excuse of running out of money is like saying your car stopped running. Dive deeper and correct the underlying problem.

Wrong Market: Too many people try to start a business targeting everyone as their demographic. This doesn’t work out well. Next, they try to target everyone in their town. Again, too broad. The more narrowly defined your niche is, the easier it will be to market to the right audience.  

Lack of Research: You have to know what your customers want.  Too many would-be entrepreneurs go into the market thinking they have a great service or product to offer, but they fail to realize that nobody wants that service or product.  By doing your homework and researching your market, you will know exactly how to meet your potential customers’ needs.

Bad Partnership: Often, when starting a business, a partner is needed.  One of you is an expert in one area, and the other is an expert in another one.  Your ideas for the company will conflict, and without a clear resolution, it starts internal strife. You work harder and your partner works less, but your partner thinks he or she is working harder than you. Ultimately, the business dissolves because the partnership didn’t work.  By having a clear business plan that lays out the duties of each partner, you can avoid most conflicts before they even arise.

Bad Marketing: It could be said that a business boils down to two aspects: marketing and bookkeeping. If you excel at both, it doesn’t matter what you are selling or offering because someone will buy it. The sad truth is that most entrepreneurs know their craft and little else. Instead of fumbling through your marketing campaign, hire out that aspect of your business. It costs money, but if done right, it will bring in much more than what you spent.

Not an Expert: Too many entrepreneurs start their business because they need a job.  They have a vague idea of what they are doing, and they think that because they’re better than their peers, they should make a living doing it.  The sad truth is that without business skills and real expertise, these entrepreneurs are destined to struggle.

How to Avoid Failing

It seems that most businesses are destined for failure.  But there are key points to not becoming one of the 30 percent that fails right off the bat.

Set Goals: Know exactly where you need to be and where you want to be.  Without a goal, you’re just wandering aimlessly.

Research: Know everything about your market.  Know what customers want. Know that they will pay $9 but not $10. Know their incomes, their desires and what makes them tick.  The more you know, the more you can pitch to them.

Love Your Work: If you don’t love what you do, it will show.  You must be passionate about your business, or it will just be a job.

Don’t Quit: No matter how great of a business you have, you are going to have down times.  There will be periods when things are dragging along and you question your decision to embark on this path.  This is a time to put in extra hours, press harder and make it work.

The Bottom Line

There are a lot of claims going around that 8 out of 10 new businesses fail.  What those claims often don’t give you is a timeframe: after 20 years, it is very likely that 8 out of 10 businesses will have closed shop. Fortunately, you can be one of the 20 percent that succeed.  To do this, you need to follow the four tips outlined above, and, most importantly, you have to test your idea, do your homework and make sure it will work before you jump in with both feet.