Top Reasons for Small Business Failure and Factors to Consider

Only about half of new small businesses survive five years or more, reports the Small Business Administration (SBA). Why is that so many small businesses fail? What should potential small business owners consider when thinking about starting their own business?

As reported by the SBA, there are ten main reasons that small businesses fail:

  • Lack of experience
  • Insufficient capital
  • Poor location
  • Poor inventory management
  • Over-investment in fixed assets
  • Poor credit arrangement management
  • Personal use of business funds
  • Unexpected growth
  • Competition
  • Low sales

 

Small law firms, like any other small businesses, are subject to these risks. Many of the reasons are directly applicable to law firms, and while a law firm does not have "inventory" or "sales," it must ensure that it is properly managing its clients, hours billed on cases, and client development.

What Does it Take to Manage a Small Business?

Given the failure rate and the reasons that most businesses go under, potential owners should take stock of their strengths and weaknesses, and determine whether or not it is the right choice for you. The SBA suggests asking yourself the following questions:

  • Are you a self-starter?
  • How well do you get along with a variety of personalities?
  • Are you good at making decisions?
  • Do you have the physical and emotional stamina to run a business?
  • How well do you plan and organize?
  • Are your attitudes and drive strong enough to maintain motivation?
  • How will the business affect your family?

 

Taking the time to objectively evaluate whether you have the skill set that lends itself to managing a business--before becoming your own boss--will save a lot of headaches in the future.

What Are Important Factors for the Success of Law Firms?

In addition to the foregoing considerations, what should you think about specifically when considering starting a law firm?

The ABA's Law Practice Management magazine discussed this issue, noting that "no one has discovered the magic formula that determines if a law firm will succeed" but there are "certain factors that can predict the probabilities of success and failure." The panel interviewed focused on the following factors: leveraging your strengths, investing in employees, following up to meet clients' expectations, and leadership qualities of management. Mistakes to avoid included: top-down management, under-reacting to market changes, stagnation, and relying too much on technology to solve all problems.

Additional Resources

Before starting your own law firm, seek out the advice of others who have already blazed this trail. This could be a mentor with whom you already have a relationship, or you could find a mentor through your law school or local bar association.

For general advice on forming and running a small business, the SBA supports the SCORE Association (Service Corps of Retired Executives), a nonprofit association that educates entrepreneurs on starting, growing and running a successful business. The SBA also runs Small Business Development Centers and Women's Business Centers.

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