Anecdote Small Business Failures

In New York City, two out of every five new restaurants close within one year. Nationwide, the best estimates suggest that about 90% of all restaurants close within two years. If successful, the average restaurant earns a return of about 10% per year. Owners seem to lose money on average. So, why open yet another restaurant? I mentioned earlier (Page 13) that restauranteurs may just enjoy owning restaurants. But a more likely explanation is that restauranteurs are overly optimistic, and just do not realize how tough it is to profitably run a restaurant. More generally, a Small Business Administration study of small business failures from 1989 to 1992 found that 33% of businesses failed within 2 years, 50% within 4 years, and 66% within 6 years. Yet in a survey of about 3,000 entrepreneurs, 81% of entrepreneurs believed that their chances of success were at least 70%, and 33% believed that they had zero chance of failure!

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