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How long do small businesses survive?

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One way to answer the question of how long small businesses survive is to determine the probability of survival based on predictable factors. Geographic location, type of industry, size and age are some useful factors in predicting how long a business stays active. Other, unforeseen, factors can also affect the survival of a business, including general economic conditions, as well as market influences such as the number and size of competitors and new entrants.

The probability of survival is defined as the percentage of new firms that continue to operate when they reach a given age. Table 4 presents survival rates for the 1994 cohort of start-ups that are microenterprises (those with fewer than 5 employees) and other small businesses (those with between 5 and 99 employees) by sector. As shown in Table 4, the majority of start-up firms do not operate for very long. For example, 72 percent of micro-enterprises that entered in 1994 survived for one year, 54 percent survived for two years and 46 percent survived for three years.

The percentage of new firms that remain in business declines rapidly over the first three years. In other words, failure rates for micro-enterprises and other small businesses are high the first three years but decline more slowly over time. There is little difference in survival rates between micro-enterprises and other small businesses, although micro-enterprises were somewhat more likely to survive their first full year, whereas other small businesses were slightly more likely to survive after that.

Table 4 also shows survival rates by goods-producing industries, service-producing industries and public industries. Although sectors generally follow the same trends as the industry aggregate over time, there are differences across sectors. Firms in public industries had the highest survival rates among micro-enterprises; among other small businesses, firms in public industries had slightly lower survival rates than other sectors for the first two years and had higher rates after that. Firms in this sector typically operate in industries that are sheltered or completely free from competition. Goods-producing industries had the lowest survival rates in both size categories, likely because the high capital investments usually required in these industries may strain a business' cash flow.

Table 4: Survival Rates of Micro-Enterprises and Other Small Businesses (Employer Businesses Only) by Sector and Size (Percent), 19942003
Duration (years)Micro (14 employees)Other Small (599 employees)
Industry Aggregate Goods- Producing IndustriesService- Producing IndustriesPublic IndustriesIndustry AggregateGoods- Producing IndustriesService- Producing IndustriesPublic Industries
17269768370687364
25452577157545956
34644486448465050
44039415842414347
53535365438373844
63132325034343542
72829294731313240
82626264429282938
92324234126262637

Source: Statistics Canada, special tabulations of data from the Longitudinal Employment Analysis Program (LEAP), 19942003.

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