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Key Small Business Statistics - January 2009
How long do small businesses survive?
One way to answer the question of how long small businesses are likely to 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.
Survival is defined as the percentage of new firms that continue to operate when they reach a given age. Failure rates for small businesses in Canada decline over time. About 96 percent of small businesses (1–99 employees) that enter the marketplace survive for one full year, 85 percent survive for three years and 70 percent survive for five years.
Figure 3 presents survival rates for the 2001 cohort of start-ups that are micro-enterprises (those with 1 to 4 employees), other small businesses (those with between 5 and 99 employees) and those with revenues of less than $30 000. Figure 3 shows that slightly more micro-enterprises survived in comparison with other small businesses. For example, 96.4 percent of micro-enterprises that entered in 2001 survived for one year, whereas 94.8 percent of other small businesses that entered in 2001 survived for one year. The gap in survival rates between the two categories almost doubles, however, as the number of years in business increases. In fact, 85.3 percent of micro-enterprises created in 2001 survived for three years, whereas 82.2 percent of other small businesses created in 2001 survived for three years.
[Description of Figure 3]Source: Statistics Canada, Small and Medium-Sized Enterprises Data Warehouse, July 2008.
The percentage of new firms that remain in business declines steadily for both categories over the five-year period observed. After five years in business, 70.4 percent of micro-enterprises survived compared with 66.9 percent of other small businesses.
Survival rates of businesses with revenues of less than $30 000 are significantly lower than those observed for businesses with revenues of more than $30 000. Of those businesses with revenues of less than $30 000 that started in 2001, 55.0 percent survived after three years and only 36.1 percent survived after five years.
Data sources and methodology
Statistics Canada's SMEs Data WarehouseFootnote 3 provides information on general business demographic statistics, including business counts, employment and revenue by industry, size and geography.
In previous editions of Key Small Business Statistics, exit and entry figures were derived through special tabulations of data from the Longitudinal Employment Analysis Program (LEAP). There are a few differences between LEAP and SMEs Data Warehouse methodologies that explain the change in figures in this publication and previous editions. First, the count of the number of businesses differs. For example, LEAP counts business establishments rather than enterprises, which results in LEAP including considerably more firms than the SMEs Data Warehouse. Second, the count of entries and exits differs. For example, in a case of two companies merging, LEAP preserves the business number of the larger company and counts it as "continuous," while the smaller business number no longer exists and is labelled as an exit. In the case of the SMEs Data Warehouse, both business numbers would be destroyed (two exits) and a new number would be created for the new business, counted as an entry. Overall, the new figures using the SMEs Data Warehouse show lower entry and exit rates, mainly due to a higher number of entries and exits at the establishment level, which are captured by LEAP only.
Small and Medium-Sized Enterprises Data Warehouse
SMEs Data Warehouse was developed by Statistics Canada with the objectives of providing general characteristics and performance indicators of small and medium-sized enterprises and supporting future research on SMEs. The first release of data was in July 2008 on firm entries and exits.
The Data Warehouse contains information on the following: new enterprise entries and exits, business performance (survival rates) and high growth companies (gazelles). These indicators are distributed by revenue, employment size and industry sector, and cover the period from 2001 to 2006.
The Data Warehouse is based on the Statistics Canada Business Register and administrative tax data (incorporated (T2) and unincorporated (T1) tax declaration, GST remittance and payroll deduction accounts (PD7)) from the Canada Revenue Agency (CRA). These data contain a list of small and medium-sized enterprises in Canada from 2001 to 2006, based on the Business Register. The enterprises included are those with fewer than 250 employees and less than $50 million in total revenue. The data also contain information on business entries and exits. If a business is observed to exist in the base year but not in the following year, it is considered to be an "exit" and vice versa for an "entry." Although there may be other reasons why a business cannot be found in either year,Footnote 4 the data give a good overall picture of the turbulence (often called "churn") of new and disappearing businesses.
Results from the SMEs Data Warehouse are an important contribution to the Entrepreneurship Indicators program of the Organisation for Economic Co-operation and Development and Eurostat. The first results from this program on developing indicators of entrepreneurial performance were published in November 2008. A copy of the report can be found at www.oecd.org/statistics/entrepreneurshipindicators.
Footnote 3. See text box for more details.
Footnote 4. Reorganization in a firm may involve name changes, mergers, a division of existing payroll accounts or more. To the greatest extent possible, false signals about deaths and births are deleted from the data. A legitimate firm death can occur in certain merger cases, as a result of an owner's decision to cease operations, because the firm has gone bankrupt or for a number of other reasons. For more on bankruptcies, see Bankruptcy statistics.