According to SCORE, an association of retired executives, about half of all small businesses fail within their first five years of operation. Yet this statistic conceals the real story -- failure rates among small businesses vary by the type of business being started. And while success is possible in any industry, it's wise to be aware of the types of small businesses which are most prone to failure.
Independent restaurants suffer from a failure rate that's substantially higher than the average -- some estimates place the failure rate as high as 60 percent over the first five years. Reasons for restaurants' higher failure rates vary by the skill and experience of the owner, the level of capital available and other key business factors. But, restaurants in particular also suffer from several difficulties: inventory and portion control can be especially difficult for restaurants, are usually dependent on a larger-than-average number of employees to operate, and penetrating the market with a new, unknown name and cuisine can be a substantial barrier to success.
Direct sales businesses -- that is, businesses such as Quixtar, formerly Amway, Pampered Chef and others that rely upon the business owner directly selling products to customers -- also suffer from a higher-than-average failure rate among small businesses. These businesses often require little in start-up capital and promise participants quick, easy results, sometimes attracting business owners that lack the patience and persistence required to successfully start a new business. Direct sales business are heavily dependent on the individual owner's drive, stamina and sales ability for success. Many companies lack the requisite training and support required to help participants succeed.
Retail stores such as apparel, shoes, consumer goods and grocery stores form a third category of small businesses that fail more frequently than the average small business. One reason is the hyper-competitive nature of retailing as many brands and stores compete for a limited number of consumer dollars. Also impacting the failure rate of retail stores is the high overhead usually associated with stating a retail store: leasing store space can be exceedingly expensive for prime locations, and stocking the store with inventory demands a substantial up-front investment of capital before the business earns its first dollar.
Consulting and Business Services
A final type of small business that's especially prone to failure represents independent business services such as consulting, business "coaching", independent human resource services and similar business service models. Anyone can claim to be a business coach or consultant, and the relative lack of barriers to entry creates a glut of consultants, many with no real business experience to draw upon for their clients. What's more, there are no licensing requirements to become a "coach" or consultant, and the industry's reputation sometimes suffers from the number of poorly prepared "professionals" in the field.
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