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Small business failure rates: Choice of definition and the size effect

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John Watson at University of Western Australia
John Watson
Jim Everett at University of Western Australia
Jim Everett
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Abstract

DR. JOHN WTXSON IS A SENIOR Lecturer IN the Department of Accounting and Finance and Dr. Jim Everett an Associate Professor in the Department of rinformation Management and Marketing, both at the University of W'esterin Australia, Australia. Results froin pre v ious studies examining the incidence of smiall business failure have reported significant variations in failure rates betxveen industry sectors. Indeed, the results from some studies are in direct coniflict. For example, Lowe, McKenna and Tibbits (1991) reported that the manufacturing sector had the highest failure rate while Bruderi, Preisendorfer H/ (d! (1992) and Phillips and Kirchoff (1989) fotund that the manufactuiring sector had the highest survival rate. Th-e significarnt variations in reported failul-e rates and the apparent conflict between th-ie findings of some studies must surelv be a souti-ce of some confusion for policx- tiiakers and others with an interest in the smiall businiess sector. The results of this sttldx su-ggest that reported failure rates iiiay (lepend heavily on the definition of tfailtui-e adopted. A better understanding of the effect that choice of failuire definiitioni may have on reported failur e rates sh(ould lead to improved policy de isions bv governments, financial instituitions an1d othtie grotips xsNitll mt11 interest in smIiall l)usilICss.
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Appendix A
Summary of Failure Rates for Retail, Service and Manufacturing
Businesses from Previous Studies.
Author Sample Failure Rates
Failure defined as 'Bankruptcy'
Fredland & US: 1971 2,080 failures from Eating places - 0.2% p.a.
Morris Dun and Bradstreet Printing & Publishing - 0.6% p.a.
1976 Furniture retail - 0.7% p.a.
Women's clothing - 0.7% p.a.
Furniture manufacture - 1.1% p.a.
Lowe Australian: 1987-89 1,977 firms Service - 0.59 times average
McKenna & from insolvency practitioners Retail - 0.5 times average
Tibbits Manufacturing - 3.19 times average
1991
Failure defined as 'Discontinuance of Ownership'
Bruderl Germany: 1,849 business founders Manufacturing - 19% p.a.
1992 Computer services - 28% p.a.
Other services - 39% p.a.
Wholesale/retail - 42% p.a.
Churchill US: 1944-51 Over 10million firms Manufacturing - 22% p.a.
1952 from Dept. of Commerce Finance, Insurance & Real Estate - 11% p.a.
Other service - 18% p.a.
Retail - 26% p.a.
Ganguly UK: 1980 1.445 million firms Finance, Property & Professional - 8.1% p.a.
1985 from VAT Register Other services - 11.4% p.a.
Retail - 11.8% p.a.
Hutchinson US: 1843-1936 11,000 firms Service - 57% within 3 yrs
et al from directories in Poughkeepsie Retail - 55% within 3 yrs
1938
Phillips & US: 1976-86 3.62 million firms Manufacturing - 53% within 6 yrs
Kirchoff from Dun and Bradstreet Service - 59% within 6 yrs
1989 Retail - 62% within 6 yrs
Stewart & UK: 1971-81 400,000 firms from Manufacturing - 7% p.a.
Gallagher Dun & Bradstreet data files Professional - 7% p.a.
Other services - 9.2% p.a.
Retail - 9.5% p.a.
Appendix B
Number of Start-ups By Business Classification.
Trade/
Business Classification No. Retail Service Food Clothing Prof.
Auto access 29 29
Baker 87 87 87
Beautician 18 18 18
Books 71 71
Butcher 117 117 117 117
Cake shop 63 63 63
Cigarette / Lottery 75 75
Coffee shop / Lunch bar 154 154 154
Confectionery 68 68 68
Deli 128 128 128
Department/Discount store 106 106
Doughnuts 32 32 32
Dry Cleaner 47 47
Electrical (Incl. Rental) 68 68
Fashion Men 155 155 155
Fashion Unisex 278 278 278
Fashion Women 466 466 466
Film Processing 93 93
Fish 60 60 60
Florist / Plants 99 99
Footware 136 136 136
Fruit & Veg 135 135 135
Gifts 200 200
Gourmet foods 46 46 46
Hairdresser - Ladies 27 27 27
Hairdresser - Men 26 26 26
Hairdresser - Unisex 134 134 134
Health food 83 83 83
Ice cream 80 80 80
Jewellery 201 201
Lingerie 32 32 32
Liquor outlet 16 16 16
Manchester 90 90
Music 99 99
Newsagent 109 109
Optician / Optomitrist 56 56 56
Paints/Wallpaper/Hardware 29 29
Pet shop 38 38
Pharmacy 101 101 101
Professionals eg Doctors 29 29 29
Real Estate 10 10 10
Restaurant 95 95 95
Retail -Other 20 20
Service - Other 49 49
Sewing / Wool 47 47
Shoe / Key Cutting 47 47
Specialities 277 277
Sporting Goods 94 94
Supermarket 48 48 48
Takeaway / Bistro 453 453 453
Toys / Hobbies 83 83
Travel Agents 63 63
Video 29 29
Totals 5196 3866 1330 1665 1067 518
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