Why do Most Small Businesses Fail?

Most small business owners end up clicking OK when this dialog box pops up in their head.

They have had enough of their business which when they started dreamed would solve all the problems in their life.

But, it might have actually created more problems. This happens way too often, way too many times.

I wanted to know why.

In order to understand why Small Businesses fail, I found the book E-Myth Revisited by Michael E. Gerber.

It’s an amazing read and in this article, I will touch upon the first part of the book where the author discusses problems and causes of small business failure.

Gerber originally published this book in 1986 after over two decades of experience helping small business owners succeed.

It is arguably the best book for helping small businesses and though a lot has changed since Gerber’s time; the book has many golden nuggets that have to be absorbed.

How are Small Businesses started?

Technicians start most small businesses, meaning that these are people who previously worked at a job performing the craft.

For example, usually the owner of a tailor shop had worked previously as a tailor and learned the skills before starting their own shop.

Though we cannot generalize to all small businesses, we see this common pattern in most small businesses.

This is also the exact reason that many small businesses fail.

The E-Myth/Fatal Assumption

If you understand the technical work of a business, you understand a business that does technical work.

The technical work of a business and a business that does technical work are two totally different things. Yet, the technician has the assumption that if you know the craft of tailoring, a tailoring shop is the most common sense thing to do.

It’s important to first empathize with the Technician.

The principal reasons for starting a small business are freedom, satisfaction and flexibility it offers them.

You feel, well I have the skills to perform this work, why should I work for others?

In fact, one of the key qualities of meaningful work is autonomy. We dislike others micromanaging us. And when you have a vexing boss, people search for alternatives.

It’s with this dream in the back of their heads that technicians pursue to be small business owners.

However, working at a job and working on a business are two different games.

Can you expect a soccer player to succeed in rugby by playing by the rules of soccer? Definitely not.

A business requires much more than just the technical insight on performing the work. Yet, the small business owner with the background of a technician is doing exactly this.

They are playing the game of rugby with the rules of soccer.

Gerber describes this by mentioning how every small business usually has three major personalities.

The Entrepreneur, the Manager, and the Technician.

We typically see that the owner of small business has 10% of their activities allocated for entrepreneurial activities, 20% for managerial, and 70% for performing the technical aspect of the business.

And that is the core problem.

If you are playing the game of entrepreneurship while still performing the works of a technician, this is where things get problematic for most businesses.

The owner of the tailor shop is focusing most of their time on sewing the clothes themselves, cleaning up, and waiting on customers themselves.

Yet, they do not focus on the entrepreneurial aspects as much as required, such as strategizing in a way where the business gets a glorious return, marketing, accounting, and making major business decisions that help the business stand .

The lack of focus on the entrepreneurial aspect is thus causing major problems for small business owners worldwide.

The Consequence

Statistics from the Small Business Administration (SBA) for 2019 show that about 20% of small businesses fail within their first year, 30% within their second year, and by the time they reach the 5th year 50% of small businesses fail. By the time a decade crosses, 70% of such businesses would have closed down their operations.

Here’s the Real Kicker

If your business depends upon you, you don’t own a business; you have a job

And, in actuality, that can turn into the most shitty job you have.

Gerber mentions how being all 3 personalities and working long hours has made the business you started the boss you thought you left behind. Incredible, isn’t it?

The rest of the book dives deep into how this problem can be solved for small business owners in great detail.

The author argues on seeing the business as a system and “working on the business, not in it.”

If you want to change your view entirely on how a business should actually operate with an actual guide on what to do, this book is a must-read full of the principles to reach your destination.