Five Common Causes of Business Failure And How To Prevent It

Most of us know the unfortunate statistics that approximately 20 percent of new businesses fail in their first year, with the number increasing to 30 percent in the second year. Unfortunately, a staggering 50 percent of businesses fail by their fifth year of operations.

Have you ever wondered whether there are common causes of business failure and looked for ways that business leaders can avoid such a fate?  Unfortunately, since we—as business leaders—do not particularly like to discuss or study failure, we tend to fall prey to many of the same mistakes that our peers have made.

The Most Common Causes of Failure

In the course of conducting a survey of 100 leaders of successful small- and medium-sized businesses in a wide array of industries, including technology, manufacturing, real estate and retail, among others, it turns out that these leaders were able to identify a set of the top five most common causes of business failure:

1. Disputes between co-owners

2. Failure to pivot the business model

3. Failure to execute on a planned merger, acquisition, or sale of the business

4. Failure to build internal infrastructure to support growth

5. Failure to respond to difficulties or disasters.

Based on my experiences as an entrepreneur, executive and advisor to other small- and medium-sized businesses, it has become clear that understanding the “why” of these failures that will help leaders build better companies.

The Challenges Ahead

In this same survey that generated the five most common causes of failures, I asked business leaders what they thought would be the most challenging period or activity their businesses would face in the next five to ten years.

Some saw future challenges about their exits—either selling the business or handling succession planning. Others were concerned about the potential need to pivot their businesses to new approaches or opportunities. These future concerns are, in many ways, consistent with the past causes of business failures. That consistency provides the opportunity to prepare.

We all could likely agree that failures stem from challenges and mistakes, and the distinction between the two is important. Challenges are thrust upon businesses and can be overcome or not, but mistakes are avoidable. Whether you learn from your own mistakes or through the mistakes of others, you must make active choices.

A very common mistake, and my own Achilles’ heel in business, has been not building the right management team. This failing has often caused me to attempt to simultaneously juggle too many roles and struggle with the resulting workload. The single most trying issue for me in terms of management team composition has been my shortcomings as a sales leader and my inability to find strong sales leaders for the management teams I have led. This likely limited growth and may have undermined the potential levels of success of my businesses. In a similar vein, picking the wrong business partner, selecting the wrong business model, or not being able to pivot are all common themes that yield disastrous results.

The More Things Change

Interestingly, despite all our technological advances, tools for monitoring business performance, and self-actualization approaches, the reasons businesses fail today seem to be the same drivers of business difficulties from more than 50 years ago, as the results of my survey are aligned to the findings from similar studies from as far back as the 1960s.

Unfortunately, many leaders have not studied failure and its causes. It took me two decades of work in business to decide that examining  failure was the only way to really ensure success—as both are driven by internal business structures.

So, the most difficult phases of the business journey are all addressable in some way—as long as you use an organized approach to making key critical and strategic decisions. If you understand the difficulties that you will face and are willing to take on these challenges through an organized approach, you will be ready. Or at least you can be ready.

To succeed, business leaders must focus on creating the right structures for sustained business success and—through these efforts—avoid the five most common contributors to business failures.

Working with nearly 100 companies as an advisor and helping to lead others, resulted in the development of a simple framework for assessing, determining, planning and implementing decisions about key structural components of a business. As radical as this may sound, this opportunity to face challenges and avoid failure has been right in front of us.

Confronting Challenges and Avoiding Failures

Failure is, thus, most often caused by not following a disciplined approach to building and rebuilding internal structures. Leaders should ultimately create their own list of the most important decisions, but answering the following questions is a great starting point to avoid common pitfalls and to beat the challenges that you may face in the future.

1. How should I build my governance structure and team to meet my business goals without risking my culture, current freedoms, and successful trajectory?

2. How can I build the right management team, and what is the best way to engage and compensate my team members to meet my business goals?

3. How should I adjust or pivot my business strategy to achieve my goals?

4. What is the best way to build infrastructure to support growth without killing profitability or sacrificing the engines that are driving my business?

5. How should I manage business disputes or breakups with my business partners when relationships become frayed?

6. Should I examine opportunities to advance to an acquisition of a partner or competitor, merge with a partner or competitor, sell my business, divest a part of my business, or make a new investment to help my business (and when should I do it)?

7. What disasters may arise in the future, how should I prepare for these obstacles, and if I am experiencing a crisis now, how should I manage it?

8. What happens to my business and my family’s livelihood when it is time for me (or key management team members) to retire, or worse, meet an untimely demise?

Your thoughtful answers to these eight questions will guide your decisions about the core internal components of your business. Those decisions will help you achieve your business goals and position yourself for success, seizing opportunities as they arise, and minimizing the chances of failure.