Many new small businesses do go under within their first couple of years.

“What he [President Obama] misunderstands is that nine out of 10 businesses fail, so nine out of 10 times, he’s going to give it to the wrong people. ” — Sen. Rand Paul (R-Ky.), interview on CNN’s “State of the Union,” Jan. 26, 2014

There’s a problem with his statement, however. It’s a gross generalization and completely inaccurate.

  1. What’s the time frame he’s using? Timeframe is an important distinction. There is a big difference between two years and fifty years.
  2. What do you mean by “fail?” Did the company close because it was not financially stable? Does that include mergers and acquisitions?
  3. Are failure rates different for different industries? How does it make sense to lump all categories and industries together?

There are usually reasons that can explain a company’s failure. Two things that destroy more businesses than any other are leadership and systems. Often, people start businesses because they are trying to get away from a current employer or industry. In other cases, people have been told that they are good at something and want to make a go of it.

1. Don’t start a business you know nothing about.

If you’re going to invest time and money into a business, make sure you know what you’re doing. Invest in what you understand.

If you’re a electrician, it might not be a great idea to open a restaurant. Experience, skill, knowledge and continued growth and development are key to your success.

Do your research.

  • Is the product or service you want to offer in demand?
  • Do you understand the systems and structure that you will need to run a business?
  • Who are you going to market to?
  • How are you going to market to them?

2. Look at the competition.

Who is your competition? What is their competitive advantage? Knowing your competition is key in understanding what your competitive advantage is or could be. Every successful, lasting business has an advantage over their competition.

“If you don’t have a competitive advantage, don’t compete.” – Jack Welch

3. Set up a written business plan.

A written business plan is like a road map that details the design of your business growth.

It can help you organize a team of people who have strengths where you are weak. It will also help you determine how you will obtain funding.

One final note on funding. Many of the new businesses that truly fail, do so because of a lack of adequate funding when getting started. Make sure you have enough money to keep the business going a while and make sure you have enough to live on. Most new businesses don’t generate income immediately and that can lead to a closed sign if you aren’t prepared.