Business Failure Rates

Business bankruptcies reported by Experian Business Information Services for the second quarter of 2011 show some interesting results.  The most interesting being that the largest companies had the biggest failure rate.

While the publicly released data doesn't give the actual number of bankruptcies, they are represented by categories of colors from tan (least bad) to dark red (worst).  I'll represent them with numbers from least bad (1) to worst (5).  For the period ending June 2011, the breakdown in bankruptcies by business size, in terms of number of employees, is as follows:

Company Size Bankruptcies

1 - 4 4

5 - 9 4

10 - 19 4

20 - 49 3

50 - 99 3

100 - 249 4

250 - 499 4

500 - 999 4

1,000+ 5

It's not surprising that the smallest companies had a high bankruptcy rate.  But it does seem surprising to me that the largest companies had the highest rate.  Anyone have an explanation for this?

I think it shows that the medium sized companies are not doing as well as the huge companies. That Microsoft and Google and Apple's of the world have cash reserves larger some some countries is well documented.  Those are gigantic companies.  But what about the medium sized companies with 1,000 - 5,000 employees?  I think this is where the problem is occurring.  These companies don't have cash reserves in the billions and also don't have good access to credit.  Thanks to TARP and a general overreaction in the financial sector to poor decisions made in the past, banks just aren't lending much money these days.  Those that want to lend are either restrained because their ratios are out of whack or have so tightened up their underwriting standards that it's difficult for all but the best companies to qualify.

Here in Alabama, we're right in the middle of the pack as far as averages are concerned.  What is it that makes a state like Florida good and Texas bad?  That's a question for another day.

Why do you want to start a business?

Starting a new business is a scary and risky proposition.  Starting a new business can be extremely time consuming and may require participation from your family or your absence from family events.  Starting a business may require you to use your life’s savings or borrow money from the bank for which you’ll be personally responsible.  So why do you want to do this?

  

For some people, it’s just a no brainer.  They HAVE to start their own business.  They’ve been working for ‘the man’ for too long or are just tired of seeing a business run into the ground.  For others, they have an idea that just needs to get out.  If not them, who?

  

For still others, they want to start a business out of necessity.  That is, they don’t have a job and have no good prospects for finding one anytime soon.  They see starting a business as a necessary evil.

  

If you plan to make your fortune in a few months and start living the good life, think again.  Most new business owners make little or no income for the first few years in business.  In fact, many times, your employees will make more than you until your business is well established and financially stable.  You need to clearly understand your motivation for starting a business and then decide if starting a business will help you achieve your goals.  

Selling into a non-market

Do you understand who your customers are and what they want?  I think many small businesses don’t really understand this.  They think more about their product and how to sell something that they want to produce, rather than what the market wants to buy.  

  

Hugh MacLeod, author/blogger/artist one of my favorite entrepreneurs (gapingvoid.com) calls these businesses the Middle Seat Guys.  He likens businesses that sell stuff that their customers don’t want to airlines who sell middle seats.  Hardly any airline passenger wants the middle seat.  In fact, with rare exception, if you were given a choice between the aisle, middle or window seat, the middle seat will go unclaimed every time.  Hugh wonders why the airlines still offer a middle seat when they know their customers don’t want them. 

   

The ideal situation for a small business person is to find a niche within their market segment to operate.  Look at the market and the competition and figure out what the customer wants.  What are the trends in the market that aren’t being addressed?  The way we do business in almost every market is changing.  What areas of business do your competition or market leaders fail to adequately serve?

  

Yeah, this is hard.  But if you can find a niche where there is actual demand and there aren’t 100 other companies in the market already trying to serve, then maybe you’ve found a place for your company.