Why Most Businesses Fail in the First Five Years

August 23, 2022

Bob Lobos

Why Do New Businesses Fail in the First Five Years?

Running a business is risky, especially considering how many new businesses fail within their first five years. According to the U.S. Bureau of Labor Statistics:

  • About 20% of new businesses fail within their first year.
  • About 40% of new businesses fail within the first three years.
  • About 55% of new businesses fail within the first five years.

If you are a small business owner or plan to start a new business, it is important to learn why new businesses fail to prevent that from happening to you. Wolf Creek Business Growth Institute lists the five reasons why new businesses fail within their first five years. If you are struggling with business growth, contact our business coaches to create an action plan to propel your business into the future.

Why Do New Businesses Fail #1: Lack of Business Planning

A lack of business planning is the number one reason new businesses fail. Business owners need a thorough and well-laid-out plan to address their company’s needs, or they will face severe adversity. What are your short-term goals? How about long-term goals? You need to have a vision of where your company will be in three, five, and ten years to focus your time and energy where it will count.


[Related: What is a BHAG and How Can My Company Achieve It?]


A business owner’s inability to be flexible is another reason why new businesses fail. If you cannot adapt to trends or major changes within your industry, or even your company, you will not last very long.

An example of companies pivoting to account for drastic changes was in 2020 during the COVID-19 pandemic. Many businesses changed how they were doing things to stay afloat, such as grocery stores providing home deliveries or other organizations including masks and hand sanitizers in their inventories when they weren’t before.

When you have a business plan, hold yourself accountable, and follow that plan. If you do not execute your plan or you make excuses for why you cannot move forward, your new business will fail. If you are considering starting a business, do not overlook the importance of effective business planning. If you need professional help crafting or revising your strategy, contact Wolf Creek BGI.

Why Do New Businesses Fail #2: Insufficient Startup Capital

Many new businesses fail due to a lack of funding or startup capital. Before opening your doors, you should have enough cash to buy the proper equipment, supplies, inventory, and more, to get your business off the ground.

Your startup capital will depend on your industry or the type of company you run. Some will invest in a lot of inventory, such as a retail store, while others will be service-oriented, such as HVAC or electrician companies, and won’t need much money to get started.

You will also need to make enough money to keep operations running daily. This includes:

  • Payroll
  • Rent and utilities
  • Unanticipated expenses
  • And more

You must be in tune with your company’s cash flow to prevent your new business from failing. Establish a realistic budget, know how much money is coming in and what needs to be put aside to expand your business, and you can avoid the pitfalls of many other failed companies.

Why Do New Businesses Fail #3: Insufficient Market Research

Business owners and entrepreneurs should have a firm understanding of their industry and competition before starting their business. Insufficient or no research will doom their new business to fail.

What does market research look like, though? Aspiring business owners should look at the market they are looking to break into and see if there is a need for their product or service. If there is a need, but the market is saturated, how will they stand out from competitors? What is the unique selling point?

Another significant indicator you need to analyze so your new business does not fail is your customers. Learn about the people who are interested in your service or product. Where are they geographically? Do you open a storefront in an area that is easily accessible for people to visit? Do you start an online store because your customer base is on a national or global scale?

Market research does not end at the beginning stages of your business. You should conduct market research on a quarterly or yearly basis to analyze trends and adjust your business plan based on your findings. Keep up with the latest industry news and stay in touch with trade organizations. Ask relevant people within the industry what they think about the current landscape and where it is going. Data collection and consistent market research are crucial to ensuring your new business does not fail within its first five years.

[Related: Business Goals for the First Year]

Why Do New Businesses Fail #4: Burnout

Business owners might work in the business and not on the business during the first couple of years. Working in multiple departments to ensure everything is operational will cause burnout in a business owner. Trying to do it all can drain you, leading to your new business failing as you are not investing enough time and energy into growth.

To combat burnout, analyze your skills, talents, and areas of weakness because you need to know what you bring to the table and how your staff can strengthen operations. Assign individuals to roles that match their skillset and experience.

Now, you’ll have staff members or departments dedicated to running operations, payroll, etc., so you can focus on running your new business, setting you up for success.

Why Do New Businesses Fail #5: Not Investing in Professional Guidance

As a business owner, you are moving extremely fast, and there’s not enough time to review if you are on the right track. You need someone to keep you from straying off the beaten path. Don’t let your new business fail by not investing in professional guidance.; contact the business coaches at Wolf Creek BGI.

Our experts can develop a growth strategy, provide helpful insight, and guide you in the right direction to bolster your company’s advancement. Call us today at 225-219-8866 for business coaches that can help prevent your new business from failing.