Why Do So Many Small Businesses Eventually Fail

Each year there are over 1,000,000 small businesses started in North America. 800,000 of these fail in the first five years. Of those 200,000 that make it past five years, 160,000 fail in the next five years says, Michael Gerber, the author of the E-Myth, one of my favorite business books, and one of the top 5 best selling business books of all time.

Recently, I participated in a conference call with Michael Gerber who said, “I know more about small business than any human on the planet”. It would be hard to disagree with a man who has consulted with over 10,000 small businesses since 1977.

In this conference call, Gerber said the biggest problem small business owners have is that they are too busy “doing it, doing it, doing it” to really develop the systems that are necessary to run their businesses without them. He went on to say that owners of businesses who don’t have systems to run their businesses without them don’t really own a business. They own a job. He further stated that in this scenario the owner is not really building an asset to sell because no investor wants to buy a job.

He mentioned that McDonald’s is the classic and perhaps best example of a business that is run entirely on systems. These systems allow them to run a worldwide business that does hundreds of billions of dollars per year even though they have a 400% annual turnover rate and employee primarily teenage labor. Their secret? SYSTEMS RUN THE BUSINESS NOT PEOPLE. This reliance to systems is hugely successful and requires no day to day involvement from the franchise owner.

When questioned why small businesses fail he mentioned several reasons:

1. In most cases the owner got their start as a really good “doer of the thing” they are now in business to do.

He mentioned that most small business owners lack the full range of business skills necessary to effectively manage and run a high level organization. As owners, they still think like technicians or sales people, and as a result have not elevated their business management skills beyond that of a “doer”.

2. Arrogance and Ignorance.

Because the owners are technically good at what they do, they think they know how to run a business. However, most of them have had little if any formal business education other than running their own business, attending industry trade shows, and modeling whatever is considered accepted “industry business practices”. They suffer from the myopic “herd” mentality and lack innovation or imagination, which is the currency of 21st century business leadership.

3. They don’t realize that they are the primary obstacle to their business growth.

Instead of being open minded, they think they have the answers. The reality is that they don’t know what they don’t know.

4. They mistaken think that whatever business strategies and practices that worked in the past will work in the future.

As a result, they make faulty business decisions about the future, fail to implement effective systems, and their business falls further and further behind the change curve until one day they wake up and realize that the world has changed and passed them by. By then it is usually too late.

Because of changing market conditions, increased competition and technology, the lack of systematic processes and methodologies that allowed a business to succeed previously will not be good enough to sustain it at its current level long term, much less take it to the next level.

As surely as the sun will rise tomorrow, change will happen in business. The only question is will a business owner proactively choose to embrace change or will they be forced to change by external circumstances?

To quote Jack Welch, the former CEO of General Electric, “when the change outside your business is greater than the change inside your business the end is in site”.

Good Selling

Steve

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5 replies
  1. Michael Krumme
    Michael Krumme says:

    I agree, almost same in Guatemala.
    Operative stress replaces intelectual planning.
    To put it in another words, it is difficult to see your own label when You are inside the bottle. Or another way round, you are too close to the trees to see the forest.
    Some people and organizations realize that the small business is the biggest employer in the country, so there is some help. Some organizations start helping out new ideas by accompanying the BASIC homework: what, when, how, what if, financial scenarios. The best plans get some financial help or at least they are ripe to show to a bank. Interestingly, I heard Taiwan does it ALL THE TIME (but I can not assure)having some sort of breeding institute for new businesses.
    You stop learning, you stop earning. But nevertheless, if You want to be really good, You must learn from the master. Steve Clark is surely one of them.

    Reply
  2. Sally Elwin
    Sally Elwin says:

    Very interesting article. It has made me aware that I need to run my business more on systems not on people.

    Reply
  3. Joshua Stevens
    Joshua Stevens says:

    Michael Gerber has great perspective. I have his audio cassette book E-Myth and it gave me a really clear and fresh perspective about business before my WOA affiliation (& btw, now that tape decks are approaching extinction alot of good it’s doing me). Systems make business redundant so that anyone can do it, and that’s good for the owner b/c the work gets done, and gets done right. But having worked in and out of small business job shop I don’t think systems account for whether an individual employee has commitment to the work, which may explain turnover rates at cos. w/ systems in place. Commitment is probably best shown by the employee if he’s willing to take on Special Project work (per Gerber) either assigned to him, or better still if he creates that work for himself (outside of his job description) for the benefit of the co. So philosophically speaking the best employees are those who’re willing to fit into Gerber’s system, but who also willingly exhibit a commitment to the co. by asserting himself outside of the system. Don’t you think that’s the rare employee, of a systematical commitment (if you will), who has his co. logo emblazened upon his heart?

    Reply
  4. Geri Seiberling
    Geri Seiberling says:

    You can’t see it, but I’m giving a standing ovation. E-Myth is a business classic, a must read for all small business owners, as not all are entrepreneurs. A true entrepreneur can take a month vacation from their business- maybe longer- and actually relax while they are gone, and come back to business as usual. I confess to not having reached this level- but continual improvement of systems will get you there. I wish every one of my start up clients would read E-Myth before opening their doors. Perhaps your ‘book review’ above would be a great teaser to encourage them to buy it for themselves. Thanks for sharing!

    Reply

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