In this article, we will take a look at the 5 small businesses that have high failure rates. If you want to read our detailed analysis, you can go directly to 5 Small Businesses That Have High Failure Rates.

Why Do Businesses Fail?

On February 10, Forbes published a comprehensive analysis of why startups fail. According to the report, 5.4 million businesses started in 2021 in the United States, of which only 35% are expected to last over 10 years. The report suggests that most businesses fail because business owners fail to effectively run or manage a business, especially from a manager’s perspective. Moreover, most businesses fail to account for cost structures in the long run. Not accounting for hidden costs in the beginning may lead to cash flow problems in the future. Lastly, most business owners often fail to ask the right questions or seek mentorship at the right time, leading them to make hasty decisions. You can also check out the biggest mistakes business owners make.

WeWork Inc. (OTC:WEWKQ), a provider of co-working spaces, on November 6, filed for Chapter 11 bankruptcy in New Jersey, United States. According to the report by BBC, the shares of the global co-working company fell drastically, causing its value to fall to $50 million. While some locations are still open, the company has been closing down offices across the globe. The company’s failure stemmed from the rising trend in work-from-home arrangements, suggesting the company failed to adapt to changing trends. You can also check out some of the biggest startup failures in the world.

On November 21, Reuters reported that WeWork Inc. (OTC:WEWKQ) secured almost $682.5 million in debtor-in-possession financing from a few lenders. WeWork Inc. (OTC:WEWKQ) stated that it signed a commitment letter on November 15 for a letter of credit facility with major parties, including Goldman Sachs International Bank, JPMorgan Chase Bank, and SoftBank Vision Fund 2. Following this, the future of the company seems rather uncertain.

What Are Some Companies Doing Differently?

Not all companies in the industries listed below are bound to fail. Some of the industries in which small businesses have faced high failure, according to our methodology,  include electronics, internet software, and reinsurance. Some companies in these industries that have been quick to adapt to changing trends and boast notable success stories include nVent Electric plc (NYSE:NVT), Cadence Design Systems, Inc. (NASDAQ:CDNS), and Reinsurance Group of America, Incorporated (NYSE:RGA). Let’s take a look at some updates from them.

nVent Electric plc (NYSE:NVT) is an electronics company engaged in the designing and manufacturing of electrical connection and protection products. On July 11, nVent Electric plc (NYSE:NVT) announced the acquisition of Texa Industries. Texa Industries is set to operate in the Enclosures business segment. The acquisition helps nVent Electric plc (NYSE:NVT) enhance its product portfolio to become a global systems provider. Texa Industries specializes in developing advanced cooling technologies, industrial air conditioners, and chillers.

nVent Electric plc’s (NYSE:NVT) commitment to diversify its offerings explains the company’s financial results. On October 27, nVent Electric plc (NYSE:NVT) reported earnings for the fiscal third quarter of 2023. The company reported earnings per share of $0.84, beating estimates by $0.11. The company also reported revenue of $858.80 million during the quarter, with a year-over-year revenue growth of 15.24%.

Cadence Design Systems, Inc. (NASDAQ:CDNS) is a software company based in the United States. On November 13, Cadence Design Systems, Inc. (NASDAQ:CDNS) announced a collaboration with Autodesk. This collaboration will be aimed at providing solutions that boost the use of intelligent system design using Autodesk Fusion and Cadence PCB. This collaboration will help users benefit from seamless transitions between electronic and mechanical engineering for the development of smart products. Additionally, the collaboration is focused on addressing the challenges electrical and mechanical engineers face in delivering products on time.

Cadence Design Systems, Inc.’s (NASDAQ:CDNS) commitment to expand via strategic partnerships explains the company’s strong financial results. On October 23, Cadence Design Systems, Inc. (NASDAQ:CDNS) reported earnings for the fiscal third quarter of 2023. The company reported earnings per share of $1.26, beating estimates by $0.04. The company also reported revenue of $1.02 billion during the quarter, ahead of market consensus by $18.25 million, with a year-over-year revenue growth rate of 13.36%.

Reinsurance Group of America, Incorporated (NYSE:RGA) is a prominent reinsurance company in the United States. The holding company focuses on health and life reinsurance. On November 21, the Middle East Insurance Review selected Reinsurance Group of America, Incorporated (NYSE:RGA) as the Life Reinsurer of the Year. The company is particularly focused on meeting customer needs and developing innovative solutions. To shed light on the achievement, Ashraf Al Azzouni, Managing Director, RGA ME, stated:

“We are incredibly proud to be named Life Reinsurer of the Year for the second year in a row. It is a true honor, and we are grateful to the judges for recognizing RGA ME. Our teams partner with clients to ensure their success and have the necessary expertise to solve client challenges and develop creative solutions that serve the financial protection needs of the region.”

Wall Street is positive on Reinsurance Group of America, Incorporated (NYSE:RGA). On November 15, Morgan Stanley analyst Nigel Delly maintained an Equal Weight rating on Reinsurance Group of America, Incorporated (NYSE:RGA) and raised his price target from $164 to $170. Over the past 3 months, 4 Wall Street analysts have recommended to Buy the stock. Reinsurance Group of America, Incorporated (NYSE:RGA) has an average price target of $171.25 and a high forecast of $185. 

Let’s now take a look at the 10 small businesses that have high failure rates.

Our Methodology

Figuring a concrete methodology for 10 small businesses with high failure rates was challenging. We first sifted through the internet to grasp an understanding of the common businesses with high failure rates. We looked through two reports, including Motley Fool and Chron. Our preliminary research concluded that businesses most likely to fail may commonly indicate losses or poor margins. Therefore, businesses with poor or negative net margins suggest high failure rates. We also hypothesized that the industry value would indicate the industry’s size and, therefore, could be used as an indicator for “small businesses”. We sourced our data for industry average net margins and aggregated industry value from NYU Stern.

The data consists of average industry net margins and the aggregated industry value across a pool of companies in the industry. We first sorted our data to curate a list of all industries with the lowest net margins. We then picked the top 20, sourced their corresponding industry value, and extracted the 10 industries with the lowest industry values. The list of the 10 small businesses with high failure rates is in descending order of the industry value. We have enlisted the common reasons for failure and possible alternatives for a better understanding. Additionally, the data is based on annual figures for the year ended 2022.

10 Small Businesses That Have High Failure Rates

10. Construction

Industry Value (2022): $780.45 Billion

Net Margin (2022): 3.04%

The construction industry has one of the highest failure rates. Starting a construction company for a small business owner can be very risky due to the high costs of materials and labor. Moreover, the industry is quite dynamic and ever-changing, often leading to failure. However, a few possible small business ideas in the industry may include starting a decor business, a landscaping business, or a renovation business.

9. Restaurant/Dining

Industry Value (2022): $721.38 Billion

Net Margin (2022): 6.27%

According to our methodology, the restaurant and dining industry has a high failure rate. Starting a dining or restaurant business is highly costly and requires significant investment to enhance the customer experience. Many business owners fail to account for unforeseen costs and discrepancies in inventory management. Such explains why the industry has a high failure rate.

8. Auto Parts

Industry Value (2022): $600.42 Billion

Net Margin (2022): 2.56%

Starting an auto parts business without a defined strategy may often result in business failure. Most business owners fail to target a niche and do not conduct thorough market research before they establish their business. However, to avoid failure, business owners may carry out market research to target a niche. Moreover, improving customer service to meet customer needs may set the business apart from its competitors.

7. Retail

Average Industry Value (2022): $536.52 Billion

Net Margin (2022): 3.14%

According to our methodology, the retail industry has the highest failure rate, with a net margin of 3.14%. Selling outdated and poor-quality products in a traditional brick-and-mortar setting is a prominent reason why retail stores fail. E-commerce and social commerce platforms provide an opportunity to business owners, however, the market saturation must be kept in mind.

6. Software (Internet)

Average Industry Value (2022): $241.41 Billion

Net Margin (2022): -13.33%

While the technology and software industry may be highly profitable, the dynamic business environment and the high competition result in a high failure rate in the industry. Most businesses in this industry fail to establish a unique value proposition, especially IT and technology consulting businesses. However, targeted automation software in a specific niche, such as marketing automation platforms, e-commerce platforms, and cybersecurity platforms, may be profitable.

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Disclosure: none. 10 Small Businesses That Have High Failure Rates is originally published on Insider Monkey.