Page 14 - Business Plans that Work A Guide for Small Business

Entrepreneurs Create the Future • 5

as follows: 19 percent fail within one year, 35 percent fail with two years,
and 60 percent fail within five years. Although these numbers hold over
time, they vary by industry and company type. We believe that you can
move those percentages in your favor by gaining a deep understanding of
your capabilities as a founder, what it will take for the business to succeed,
and how to create ways to make this happen. Business planning is part of
that process. It is a useful tool for understanding the potential, the risks,
and the payoff for a particular opportunity.

Durable Organizations

Who are the survivors? What new businesses ultimately transition into
the sustainable business mode? The odds for survival and a higher level
of success change dramatically if the venture reaches a critical mass of at
least 10 to 20 people with $2 million to $3 million in revenues and is cur-
rently pursuing opportunities with growth potential. One-year survival
rates for new firms jump from approximately 78 percent for firms having
up to 9 employees to approximately 95 percent for firms with between 20
and 99 employees. After four years, the survival rate jumps from approxi-
mately 35 to 40 percent for firms with fewer than 19 employees to about
55 percent for firms with 20 to 49 employees.
Growth is implicit in entrepreneurship. The entrepreneur’s goal often
includes expansion and the building of long-term value and durable cash
flow streams. McDonald’s founder Ray Kroc said, “Green and growing
or ripe and rotting.” However, it takes a long time for new companies to
become established and grow. Historically, two of every five small firms
founded survived five or more years, but few achieved growth during
6
the first four years. The study also found that survival rates more than
double for firms that grow, and the earlier in the life of the business that
growth occurs, the higher the chance of survival. The 2009 Inc. 500
7
8
exemplifies this, with a five-year growth rate of 881 percent. The lesson

6 Bruce D. Phillips and Bruce A. Kirchhoff, “An Analysis of New Firm Survival
and Growth,” in Frontiers in Entrepreneurship Research: 1988, Eds. B. Kirchhoff,
W. Long, W. McMullan, K. Vesper, & W. Wetzel. Wellesley, MA: Babson College.
266–67.
7 This reaffirms the exception to the failure rule noted above and in the original edition
of this book in 1977.
8 “The 2009 Inc. 500: The Demographics,” Inc. Magazine, www.inc.com/magazine/
20090901/the-2009-inc-500-the-demographics.html.