Five reasons businesses fail

Business failure is rarely about bad luck or timing. The problems start early and are ignored until it’s too late

Businesses come and go. We see them opening up, struggling for a few years and closing their doors. Sometimes we only realize they existed after they’re gone, often because they offered something we were looking for.

But why do they fail?

National Federation of Independent Business (NFIB) data published in the mid-2010s found that over the lifetime of a business, roughly 39 per cent were profitable, about 30 per cent broke even and about 30 per cent lost money. More recent reporting from the NFIB focuses on sentiment, profit trends and cost pressures rather than lifetime profitability but the data still underscore how difficult long-term business success has always been.

According to Statistics Canada and Innovation, Science and Economic Development Canada’s Key Small Business Statistics 2024 report, roughly two-thirds of Canadian small businesses survive five years, while fewer than half are still operating after 10 years. In other words, business attrition remains high on both sides of the border.

Many research organizations suggest the leading cause of business failure is undercapitalization, the lack of cash a business needs to give owners enough time to reach profitability. In Canada today, that challenge is compounded by higher borrowing costs, rising commercial rents, increased insurance premiums and ongoing labour cost pressures, all of which leave business owners with less margin for error than in the past.

My experience with businesses and owners over the years suggests that while running out of money is often what finally forces a business to close, the underlying causes are usually different. Here are some of the root causes of failure that continue to surface.

Lack of clear vision

Many ventures are started because someone believes they can make a lot of money by opening a business. It means they don’t have to work for anyone else, can earn more than they would as an employee and can control their future.

What’s often missing is a concrete vision of how this is actually going to happen. Without a clear sense of direction, combined with the business experience or skills needed to execute, failure becomes far more likely.

There are a variety of tools business owners can use to clarify where they’re going. These include one-page business plans, working with startup-support organizations, and even business colleges or universities that have students eager to work on research projects.

Michael Gerber, in his book The E-Myth Revisited, suggests entrepreneurs need to think about what their business is going to look like in five, 10 or even 25 years, and start building toward that outcome.

Lack of value

Entrepreneurs often see someone else doing something and figure they can do it just as well. The problem with this model is that the established business already has customers. The new business’s value proposition is rarely strong enough to give customers a reason to switch.

Any business has to understand why its product or service is meaningfully better than the competition. What are you doing differently that makes customers want to buy from you? How does what you’re offering make their lives easier, better or less stressful? What pain are you relieving, or what pleasure are you providing?

A business can struggle for years without ever clearly understanding what went wrong or considering the opportunity costs of continuing down the same path.

Many businesses fail because they never clearly understand their value, or can’t explain it to customers in a way that matters.

Lack of business knowledge

I’ve worked with many highly skilled business owners. While their technical skills helped them succeed early, those same skills are no longer enough to run the business as it grows.

Many entrepreneurs are also blind to their own knowledge gaps. Technicians start businesses because they know how to build a product or deliver a service. What they often don’t know is how to price properly, communicate value to customers, manage cash flow or lead employees.

Micromanagement

There are only so many things a business owner can do in a day. I regularly speak with owners who work 50, 60 or 70 hours a week.

They often say that if they don’t do something themselves, it won’t get done. Or that no one can do it as well as they can. Or that they feel they need to lead by example by working harder than anyone else in the company.

The problem is that these owners burn out. They become overwhelmed by a never-ending workload. They grow resentful when staff ask for time off because they don’t give themselves that same permission.

Once burnout sets in, decision-making suffers. Owners fail to hire people who bring skills they lack, or they hire them but undermine their effectiveness through micromanagement. Over time, this lack of leadership paralyzes the business and leads to short-term thinking that eventually results in failure.

Marketing failures

Every successful business has one thing in common. It connects with customers and offers a product or service that customers are willing to exchange money for.

The road to failure is littered with businesses that had solid products but couldn’t communicate their value to prospective customers.

Some owners believe advertising is too expensive and avoid it altogether. Others advertise but pour money into campaigns based on assumptions rather than results. The belief that advertising automatically works if you spend enough is still common, and still wrong.

The problem with most advertising is that it isn’t measured. Businesses promote their products or services without knowing whether those efforts lead to customers or sales.

Great advertising produces results because it is deliberate. It starts with knowing your target market and crafting a message that resonates. When businesses do that and measure what works, their chances of success improve dramatically.

In order for a business to succeed, owners need a clear vision of where they’re going and the skills or team to take them there. They need a product or service that is priced for profit and clearly valuable to customers. And they need a reliable way to reach those customers and communicate that value.

When those fundamentals are in place, success is far more than a matter of luck.

David Fuller is a Commercial and Business Realtor with a strong reputation as an award-winning business coach and author of Profit Yourself Healthy: For Small Business Owners Who Want to Earn More and Worry Less.