Entrepreneurship, Second Edition

2.2. Evaluating Opportunities for New Businesses

Let's assume you believe that you have found a great opportunity for starting a new business. How should you evaluate its prospects? Or, perhaps more importantly, how will an independent person such as a potential investor or a banker rate your chances of success? The odds of succeeding appear to be stacked against you because, according to small business folklore, only 1 business in 10 will ever reach its 10th birthday. This doesn't mean that 90% of the estimated 3 million businesses that are started every year go bankrupt. ^[] We know that even in a severe recession, the number of businesses filing for bankruptcy in the United States has never surpassed 100,000 in any year. In an average year, the number is about 35,000. Even in 2008, when small businesses were hit hard by a severe recession, the number of bankruptcies was less than 45,000. ^[] So what happens to the vast majority of the ones that do not survive 10 years? Most just fade away: They are started as part-time pursuits and are never intended to become full-time businesses. Some are sold. Others are liquidated. Only 700,000 of the 3 million are legally registered as corporations or partnerships—a sure sign that many of the remaining 2.3 million never intended to grow because, in general, an entrepreneur will go to the bother and expense of registering a new venture as a separate legal entity only if it is expected to become a full-time business with employees. Hence, ...