Thursday, December 4, 2008

Business Failures

If you drive around, you'll see many empty store fronts, previously occupied by the small businesses of your community. A large number of them have disappeared lately, with the bad economy blamed for most of this. What non business owners probably don't realize is that many small businesses are regularly on the edge of failure. The first couple of years is the most vulnerable time for a small business, usually because most are under-capitalized and have failed to realize the extent of their start-up losses. Some of these new businesses have inexperienced owners who were unaware of the commitment required. So after those first couple of years, things improve, right? The failure rate goes down past this period, but it remains constant for the life of the business.

The idea that your chance of failure in year three is just as high as year ten or twenty is kind of frightening if you own a small business. It just doesn't get any easier. Worse, the risk in a small business is exceedingly high. To more conservative folks, the personal financial risks in running a small business are downright irresponsible. You have no unemployment or disability insurance. Your personal savings and credit are tied up in your small enterprise. You work longer hours without days off, sick days and most holidays. You have no 401K or health insurance unless you pay for it, a cost vastly higher than the average employee pays. In exchange for your life and financial security, you gain job satisfaction. Or at least you should.

Many small business owners who take all these risks, risks that do not subside over time, eventually burn out or decide they want the good life, like vacations, eventual retirement or college tuition for their children. Being an employee, even a low paid one, is often more financially rewarding than small business ownership. Then again, you need all those employee benefits to help you in your life of unhappy labor. Anyway, a recession on the horizon is the final straw that pushes many small business owners to close their businesses. In most small businesses there are limits to the likely financial rewards you can reap and no limit to the depths you can fall if you fail. Knowing you'll have a year of losses to make up with a razor thin margin in the future is enough to make many small business owners call it quits now, before the bloodletting.

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