Why Small Businesses Fail

Reason #1. They Were Started For The Wrong Reasons

We've all heard it often enough. 95% of all small businesses fail within the first 5 years. The problem is that all the knowledgeable sources never mention why they fail.

 Having dealt with numerous clients over a long period of time and having averted failure many times over, I decided to take a whack at this question. I will try to deal with this question over several posts.

So, Why Do Small Businesses Fail?

 The first and major reason for failure is that the business was created for the wrong reasons. There should be one and only one reason any business is created. That there is a need in the marketplace and this business provides the solution.

Here are a few reasons I see why entrepreneurs start their own business.

1.  They've been fired, downsized, laid-off or otherwise made redundant from their work.
2. They had a fight with their boss and think that working for oneself would be better.
3. They are working way too hard at their job and think that working for oneself would be easier.
4. They know they have a marketable skill and friends say they should make a business out of it.
5. They see someone else making money and decide they want to do the same thing.
6. They see an establishment going out of business and think they can do better.
7. They start a business to save on taxes.
8. They retired from a job and need a new source of income.
9. They have a hobby that they want to make money from.
10. They invented a better mousetrap and think the world will beat a path to their door.

By no means do I imply that your business is certainly doomed to fail; if you've done your homework before starting your business.

 Identify your market before you start your business.

Better still - Identify your market before you identify your product!

Most people first come up with a doohickey which they try to sell. This is a great mistake made by many rookie entrepreneurs. To be able to sell something to a market, you need to know the market intimately. You need to know their likes, dislikes, the jargon they are familiar with and the dominant emotions in their minds. You need to identify the current conversation going on in the market and know exactly what it is they are concerned with. In short you need to uderstand that market inside-out.

Many entrepreneurs I know and respect don't put their money in things they cannot understand. Case in Point is Warren Buffet. He decided to stay out of the dot com fantasy since he had no understanding of the market. And we can safely say that he came out of the Dot Com Bust without a scratch.

 Start your business only when you find a need that you can solve in the market.

Go out and find the most pressing need in your market. Ask questions to your consumers. Find not only what they need, but also whether they are willing to pay money for it. The more pressing the need the more likely that you will succeed.

You are passionate about the solution.

After you fulfill the first two criteria, the most important need is for you to be passionate about your product or service.  If you are shy or unsure about it, stay out of business. If you are hesitant to ask your mom to buy it, dont get in to business.

Takeaway:

The most prominent reason why most small businesses fail is that those businesses were not based on a real problem/solution equation in the market.