Is it really risky to start a small retirement business?
Often one reads in the newspapers or online that starting a small business is very risky because so many fail. For example, according to Forbes magazine 80% of small businesses fail in first 18 months. And Senator Rand Paul recently stated that 90% of businesses fail. Many other articles say that 70% of small businesses fail in 5 years. Time and time again article writers pull out these statistics to warn you against starting a small business.
ALL THESE STATISTICS ARE WRONG
Small businesses are not risky
Read more about why starting a business is not that risky
So where do these statistics come from?
Most such business articles are written by recent journalism graduates who have never owned or managed a business. Their stories are mostly published in media journals that concentrate on large companies, Forbes, Bloomberg, Fortune, and the Wall Street Journal. These writers have never been responsible for selling a product, marketing a service, or even promoting their own book. These writers simply repeat what they have read in other articles written by other journalists like themselves. Frankly, they are lazy and so are their editors.
For example, the Bloomberg study that Forbes refers to was never written. The story is simply not true. In fact, Bloomberg itself says that failure rates for small business are highly overstated.
Is there a failure rate among small businesses?
Of course there is. But the risk is greatly exaggerated. The truth is that small businesses are not risky.
Business “failure” rates are overinflated because they count as “failure” any business which simply “goes out of business”. One place where they get these numbers are from businesses that fail to renew their business licenses. They also get the number of “failures” from sole proprietors who no longer file a Schedule C or corporations who stop filing an income tax return. Simply because a business is no longer functioning does not mean it was closed because it was a failure.
Some business owners sell their business to someone else or merge with another. Many people simply close a profitable business to pursue other interests, or to get a job, or they simply die. One cannot automatically assume that a business was a failure simply because it was closed down.
Another example. You might have made some money on eBay by selling all your old stuff. If you reported the income to the IRS one year and then decided not sell anything on eBay the next year, then your business will be considers as a failure – even if you made a ton of money on eBay.
So what is the REAL small business failure rate?
More reliable statistics come from various government agencies instead of anecdotes.
The US Bureau of Labor statistics, for example, says that 50% of small businesses survive 5 years and 1/3 survive 10 years and that these rate have changed little over time. That is very far from an 80-90% “failure” rate.
The Small Business Administration says that 66% will survive first 2 years. And according to SBA about 17% of the businesses were closed voluntarily. Only 33% of small businesses “failed” by going out of business against the owners’ wishes.
The truth is that starting a small business is not as risky as has been reported. In fact in the last decade small businesses have generated 60% to 80% of net new jobs. According to the SBA as many as 53% of small businesses are home-based. Many of these people do not bother to take out a business license and do not report themselves as sole proprietors on their IRS forms. Therefore, these small businesses are not in the statistics at all.
Are any small retirement businesses risky?
Indeed, some businesses are more risky than others which is why we do not recommend them. For example, opening a restaurant or bar appears to be very risky as they go in and out of business. The National Restaurant Association reports that 80% of independently owned eateries close within their first two years. (Although they call them all failures there are no studies on why they really closed.) We don’t suggest opening any barr, store-front, or restaurant because these types of businesses do not meet our criteria for a retirement business.
You can greatly lower your risks of “failure” by offering a product or service that requires little investment and which allows you to work in your own time, where you want, and how you want. See our list of Best Retirement Business Ideas for some examples.
In conclusion – Small businesses are not risky if you start small and invest little capital.
Small businesses are a success not a risk.
“The significant proportion of businesses that closed while successful calls into question the use of ‘business closure’ as a meaningful measure of business outcome. It appears that many owners may have executed a planned exit strategy, closed a business without excess debt, sold a viable business, or retired from the work force.”
– Brian Headd, economist for the Small Business Administration.
Read more about Small Business Risks.