Business Success and Failure

Analyzing Business Success and Failure Rates Across Life Cycle Stages in the United States

Starting and maintaining a successful business is no easy feat. The likelihood of a business surviving and thriving varies greatly depending on its stage in the business life cycle—whether it’s a startup, in its mid-life phase, or a more established entity in its later years. Additionally, certain industries are more prone to failure due to factors like market saturation, economic pressure, or rapid changes in technology. Below, we compare the industries with the highest failure rates versus those with higher success rates, examine the business life cycle stages, and explore which industries are most likely to require restructuring and turnaround counsel. We’ll also look into the longevity of family businesses.

1. Startup Stage (0-5 Years)

The startup stage is often the most challenging for businesses, as they face high initial risk, cash flow constraints, and the pressure to establish a brand identity in a competitive market. According to data from the U.S. Small Business Administration, around 20% of new businesses fail within the first year, with nearly 50% closing within the first five years.

Industries with High Failure Rates in the Startup Stage:

1. Retail: Traditional brick-and-mortar retail businesses face significant challenges in the age of e-commerce. With changing consumer behaviors, tight margins, and high overhead costs, it’s no surprise that this sector has a high failure rate.
2. Construction: The construction industry faces cyclical demand and intense competition, often leading to financial instability and failure, especially for new entrants. In fact, this industry sees about 53% failure in its early years.
3. Information Technology: Startups in the technology sector often fail due to the rapid pace of innovation, competition, and the challenge of monetizing new products.

Industries with High Success Rates in the Startup Stage:

1. Health Care and Social Assistance: This sector tends to have a higher success rate due to the consistent demand for health services and the aging population. Startups in this field often find a steady customer base and growth opportunities.
2. Professional Services: Consulting firms, law firms, and other professional services generally have a higher success rate in the early years. Their ability to scale without significant overhead costs makes them more resilient.
3. Educational Services: With increasing demand for specialized training and lifelong learning, educational services (such as tutoring or vocational training) often thrive in the startup phase.

2. Mid-Life Cycle Stage (6-10 Years)

Businesses that survive the startup phase face new challenges, such as market competition, maintaining profitability, and scaling their operations. The risk of failure remains significant, but businesses that make it past the five-year mark have often developed the processes and customer base needed to grow further.

Industries with High Failure Rates in the Mid-Life Cycle Stage:

1. Transportation and Warehousing: This industry, while essential, is prone to market fluctuations, rising fuel costs, and regulatory changes, leading to closures and consolidation.
2. Manufacturing: Due to its capital-intensive nature, manufacturers that fail to innovate or adapt to new technologies face significant risks in the mid-life phase. This sector has a failure rate of around 51%.

Industries with High Success Rates in the Mid-Life Cycle Stage:

1. Finance and Insurance: With the stability that comes from essential services like banking and insurance, businesses in this sector tend to remain profitable and grow steadily.
2. Real Estate: Real estate businesses—especially those in the rental and leasing sector—benefit from long-term demand and the ability to weather economic cycles better than many other industries.
3. Information Technology (successful startups): Technology startups that survive the initial years often see rapid growth due to ongoing digital transformation, making this sector one of the more successful mid-cycle industries.

3. Late Life Cycle Stage (11+ Years)

Businesses in the late life cycle stage have established their brands and customer bases, but they must continually innovate and adapt to market changes to remain competitive. While many companies experience growth, others struggle to stay relevant and keep up with market trends.

Industries with High Failure Rates in the Late Life Cycle Stage:

1. Energy and Utilities: This sector faces high operational costs, regulatory burdens, and fluctuating energy prices, leading many businesses to experience financial distress and, ultimately, restructuring.
2. Automotive: Established automotive companies face challenges due to economic conditions, technological shifts, and changing consumer preferences, leading to a high failure rate in the late life cycle.

Industries with High Success Rates in the Late Life Cycle Stage:

1. Consumer Goods: Established brands in the consumer goods sector—especially those with strong brand recognition—tend to have more stability and success during the later stages.
2. Health Care: Given the ever-increasing demand for medical services, companies in the health care and social assistance sectors tend to have long lifespans if they manage to adapt to changing regulations and technologies.

Industries Likely to Require Restructuring and Turnaround Counsel

Certain industries are more susceptible to financial distress and may require restructuring or turnaround counsel, especially in response to economic downturns or strategic missteps.

1. Retail: Many brick-and-mortar retailers face bankruptcy or restructuring due to competition from e-commerce, changing consumer habits, and high operational costs.
2. Automotive: Changes in consumer preferences, the rise of electric vehicles, and economic challenges lead automotive companies to seek restructuring or turnaround strategies.
3. Energy: Fluctuating energy prices, environmental regulations, and the shift toward renewable energy sources have forced many energy companies to reorganize or restructure.
4. Technology: Rapid changes in technology and shifting business models may require established tech companies to pivot, restructure, or pursue mergers to remain competitive.
5. Telecommunications: Intense competition and regulatory changes in the telecommunications sector often lead to restructuring and the need for turnaround expertise.

The Longevity of Family Businesses

Family businesses are a staple of the American economy, but they often face challenges related to succession planning, governance, and generational transitions. Research suggests that family businesses have a high failure rate when it comes to transitioning across generations.

• Generation 1 to 2: About 30% of family businesses survive into the second generation.
• Generation 2 to 3: Approximately 12% make it into the third generation.
• Generation 3 to 4: Only about 3% of family businesses survive past the third generation.

This decline is often due to a lack of proper succession planning, disagreements among family members, or failure to adapt to changing business environments.

Conclusion

The success or failure of a business is highly dependent on its stage in the life cycle and the industry it operates within. While some industries consistently outperform others, each stage—startup, mid-life, and late-life—brings its own set of challenges. Industries like retail, construction, and manufacturing tend to experience higher failure rates, while sectors like health care, finance, and real estate have higher success rates. Additionally, family businesses often struggle to survive beyond the third generation, emphasizing the importance of strategic planning and adaptability. Understanding these dynamics can help entrepreneurs and investors make informed decisions to build resilient, long-lasting businesses.

Paul Fioravanti, MBA, MPA, CTP, is the CEO & Managing Partner of QORVAL Partners, LLC, a FL-based advisory firm (founded 1996 by Jim Malone, six-time Fortune 100/500 CEO) Qorval is a US-based turnaround, restructuring, business optimization and interim management firm. Fioravanti is a proven turnaround CEO with experience in more than 90 situations in more than 40 industries. He earned his MBA and MPA from the University of Rhode Island and completed advanced post-master’s research in finance and marketing at Bryant University. He is a Certified Turnaround Professional and member of the Turnaround Management Association, the Private Directors Association, Association for Corporate Growth (ACG), Association of Merger & Acquisition Advisors (AM&MA), the American Bankruptcy Institute, and IMCUSA. Copyright 2024, Qorval Partners LLC and/or Paul Fioravanti, MBA, MPA, CTP. All rights reserved. No reproduction or redistribution without permission.

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