without a business plan firms are more likely to close down

The Consequences of Not Having a Business Plan

• November 28, 2022
• Business plans

Failing to have a business plan could lead to huge consequences for your business. Read this blog to find out the disadvantages of not having a business plan.

What Is a Business Plan?

A business plan is the big-picture idea for your business. It’s usually recorded on an official document and covers your business goals and how you plan to reach them. There’s a wide range of types of business plans, some of which include:

• Opportunity
• Municipality or Non-Profit

While these business plans tackle different objectives, there are two elements that should exist in all of them: goals and strategy. Every business plan should have goals and overarching strategies that can help you reach them.

While business plans are most helpful for start-up businesses, they’re a valuable tool for every business owner interested in organizing their objectives.

There are some serious consequences to not having a business plan. Some of them include:

A Lack of Direction

A business plan ensures that everyone is on the same page and working towards a common, well-established goal. Without a detailed business plan, your business could become lacking in direction, wasting time and money on things that don’t matter as much to the success and longevity of your business. Goals can exist without a business plan, sure, but they’re probably not clearly quantified. A business plan helps you create specific, actionable goals that help you succeed.

A business plan will also encourage you to form a strategic plan for how to reach your goals. Strategy is as important as the goals themselves—and that’s why many businesses fail to execute. For example, you may have a goal to reach $5,000,000 in sales, but how exactly do you plan on reaching that? Many businesses set specific goals but never reach them due to poor planning. A business plan avoids this issue by establishing goals and a plan for implementing the strategies you need to reach them.

Missed Growth Opportunities

Another consequence of not having a business plan includes missed opportunities for growth. An effective business plan will identify the opportunities your business can use to succeed. This gives you an idea of what a successful trajectory looks like for your business and how you can get there. Failing to plan ahead means that every business process will have to be handled in the moment. This can lead to poor decision making (and an enormous amount of stress), and it also means that energy is focused on putting out fires instead of pursuing novel business ideas.

In today’s business environment, it can often feel like you need to innovate or fail. Businesses need to be constantly looking for new opportunities to survive. A business plan could give you the time to make sure that your business is conducting marketing analysis and identifying growth opportunities you can take advantage of.

• Wasted Resources

Business plans are designed to maximize your organizational efficiency. Not planning ahead of time will lead to your business making inefficient budgeting, inventory, and operational decisions. This leads to:

• Inaccurate Budgets and Financial Projections
• Disrupted Project Timelines
• Inventory Strain
• Operational Disruptions

The above failures could compromise your business’s overall financial security and turn away potential investors. Failing to secure investments could seriously compromise your business’s stability, especially if you’re dependent on maintaining consistent working capital.

Unclear Organizational Structure

A business plan also defines clear roles for staff. Organizational hierarchy is key to making sure that your business has an effective line of communication and a level of accountability that keeps everyone honest. Without a business plan in place, there can be confusion and important tasks that fall through the cracks.

Having clear structures in place also makes it easier for employees to get answers to critical questions. Have you ever worked in a business where you weren’t sure who to contact when you had work-stopping issues? If so, you know that these kinds of problems can lead to colossal wastes of time and efficiency. The average employee takes 23 minutes to recover from an interruption to their work . A business plan could keep these interruptions from happening.

Don’t Know Where To Start With a Business Plan?

Learn more about business plan options today.

Failing to Prepare is Preparing to Fail: A Case Study

To illustrate the consequences of not having a business plan, let’s examine what happened when a real-world business failed to prepare.

Borders is a name you may remember. Established in 1971, it was a national bookstore chain that found high levels of success for decades. Borders got comfortable coasting on their tried-and-true business model and weren’t innovating when new technologies began to change the retail landscape in the 2000s. Borders was forced to make a fast decision—or shut down.

They thought the answer to their struggling business was more volume. They tried opening up more stores across the country, thinking that they weren’t targeting the right locations. Unfortunately, this ended up being the wrong decision. They declared bankruptcy in 2011, being forced to close 399 stores and lay off 10,700 employees. Borders could have avoided this by planning ahead. Instead of being prepared for changes to the business environment, they were addressing issues as they came, and they ended up paying the consequences.

Partner With GreenGate for the Plan Your Business Needs

Still not sure where to start with creating your next business plan? GreenGate can help! We’ve helped found over 400 businesses in the United States, and we want you to be our next success. Contact us today to take your business to the next level.

Welcome to Greengate Consulting, it’s great to see you here.

Recent Posts

Understanding the L-1 Visa: Key Requirements and Benefits

Understanding the E-2 Visa: Key Requirements and Benefits

E-2 vs. EB-5: Which Visa Is Right for Me?

• Business Loans
• Investment Solutions

Sign up for our Newsletter, and we will e-mail you important industry updates and company developments.

Greengate Consulting, LCC is a privately held company located in Atlanta, GA that services international investors, U.S. immigration attorneys, and U.S. domestic businesses to reach their goals in the most efficient way.

Atlanta, USA

• [email protected]
• 404-602-0012

Brighton, UK

Madrid, spain.

• 2021 • All rights reserved • Greengate Trading

Do You Need a Business Plan? Scientific Research Says Yes

Noah Parsons

13 min. read

Updated November 20, 2023

Should you spend some time developing a plan for your business, or just dive in and start, figuring things out as you go? There has been plenty of debate on this topic, but no one has pulled together the scientific evidence to determine if planning is worthwhile—until now .

With the help of my friend Jeff, from the University of Oregon, I’ve been looking at academic research on business planning—the actual science around planning and how it impacts both startups and existing businesses.

But, before we dive into the data, why do we even need to look at research on business planning? It seems like most advice on  starting a business  includes writing a business plan as a necessary step in the startup process. If so many people encourage you to write one, business plans must add value, right?

Well, over the past few years, there’s been a lot of controversy about the value of business plans. People look at certain companies that have been very successful but haven’t written business plans and conclude that planning is a waste of time.

After all, taking the time to plan is a bit of a trade-off. The time you spend planning could be time spent building your company. Why not just “get going” and learn as you build your company, instead of taking the time to formulate a strategy and understand your assumptions about how your business might grow?

Well, the research shows that it’s really not a “write a plan” or “don’t write a plan” conversation. What really  matters is what kind of planning you do  and how much time you spend doing it.

• Planning can help companies grow 30 percent faster

One study (1) published in 2010 aggregated research on the business growth of 11,046 companies and found that  planning improved business performance . Interestingly, this same study found that planning benefited existing companies even more than it benefited startups.

But, this study still doesn’t answer the question it raises:

Why would planning help a business that has a few years of history more than one that is just starting up?

The answer most likely lies in the fact that existing businesses know a bit more about their customers and what their needs are than a new startup does. For an existing business, planning involves fewer guesses or assumptions that need to be proven, so the strategies they develop are based on more information.

Another study (2) found that  companies that plan grow 30 percent faster  than those that don’t plan. This study found that plenty of businesses can find success without planning, but that businesses with a plan grew faster and were more successful than those that didn’t plan.

To reinforce the connection between planning and fast growth, yet another study (3) found that fast-growing companies—companies that had over 92 percent growth in sales from one year to the next—usually have business plans. In fact,  71 percent of fast-growing companies have plans . They create budgets, set sales goals, and document their marketing and sales strategies. These companies don’t always call their plans “business plans” but instead often refer to things like strategic plans, growth plans, and operational plans. Regardless of the name, it’s all forward-looking planning.

Action:  Carve out some time to set goals and build a plan for your business. More importantly,  re-visit your plan as you grow  and revise it as you learn more about your business and your customers.

Business planning is not an activity you undertake only when you’re getting your business up and running. It should be something you return to, time and time again, to revise and improve upon based on new knowledge.

Brought to you by

Create a professional business plan

Using ai and step-by-step instructions.

Secure funding

Validate ideas

Build a strategy

• The quality of the plan matters

But, it’s not as simple as it might appear. Just having a plan doesn’t guarantee faster growth.  It’s the kind of plan you have and how you use it that really matters .

It turns out that startups, especially ones building highly innovative businesses, should create shorter, less detailed plans (4). That’s because these innovative startups are learning new things about their product and customers at a very fast pace and their strategies change more frequently. Simpler plans get updated more frequently and are more helpful to these companies because they can review their strategy at a glance.

Meanwhile, more established companies know a lot more about their products and customers and can craft more detailed strategies that are less likely to change as quickly. For these companies, more detailed planning is generally more helpful.

And it’s not just the size of the plan that matters. What you include in your plan is important as well.

The same study we talked about above—the one that found that businesses grow faster with a plan—also found that companies that did a good job defining their  value proposition  do even better than companies that have a hard time defining their customers’ needs.

These researchers also found that  having a plan is less about accurately predicting the future, and more about setting regular goals, tracking your actual progress toward those goals and making changes to your business as you learn more about your customers.  Silicon Valley businesses like to call the act of changing strategic direction “pivoting.” All it really means is that you need to stay nimble, keep your eyes open, and be willing to make changes in your business as you compare your actual results to your goals and gather additional feedback from your customers.

Action:  Skip the 40-page business plan and instead focus on simpler planning that defines your goals and documents your customers’ needs. Adjust your plan frequently as you learn more about your business.

Being prepared matters when you’re seeking funding

Over and over again, you hear venture capitalists talk about how much the team matters in a funding decision. Beyond just the team, you also hear them talk about passion—how much the entrepreneur believes in the idea.

But, it turns out that there is something that trumps passion when VCs make their decisions. Research shows (5) that how well an entrepreneur is prepared is much more important than how much passion they have.

This doesn’t mean that VCs will ask for a business plan. In fact, they probably won’t ask for one.

What it means is that entrepreneurs need to have done some planning, in some form, so that they can be prepared to talk intelligently about their idea, their target market, their sales and marketing strategies, and so on.

So, the formal 40-page business plan document may not be useful when you’re pitching VCs. But, you’d better have done some planning, so that you can communicate verbally or through a  pitch deck  what would normally have been found in that written document.

And, not only will business planning help you be more prepared, it will actually improve your chances of getting funded. A study at the University of Oregon (6) found that  businesses with a plan were far more likely to get funding than those that didn’t have a plan .

Action:  Know your business inside and out. Document your strategy in an internal document, but skip all the time and effort creating a well-crafted business plan document.

When you start planning is important—the earlier the better

So, if business planning increases your likelihood of success, and in fact helps you grow faster, when should you start working on a business plan?

Research shows (7) that entrepreneurs who started the business planning process early were better at what the scientists call “establishing legitimacy.” That’s a fancy way of saying that these entrepreneurs used business planning to start the process of talking with potential customers, working with business partners, starting to look for funding, and gathering other information they needed to start their business.

Entrepreneurs that did a good job of using their business plan to “establish legitimacy” early were more likely to succeed and their businesses tended to last longer.

Not only that,  starting the planning process before starting marketing efforts and before talking to customers reduces the likelihood that a business will fail ( 8). 

That said, planning should never take the place of talking to customers. An ongoing planning process—one in which the plan is constantly revised as new information is gathered—requires that you talk to your potential customers so that you can learn more about what they need, what they are willing to pay, and how you can best reach them.

Action:  Start the planning process early. Even if all you do is build out a simple  elevator pitch  to try your idea on for size, it will help you begin the conversation with potential customers and kick-start your business.

• Planning makes you more likely to start your business

If you’re like me, and like most entrepreneurs, you like to dream up new business ideas. You constantly think of new ways to improve existing businesses and solve new problems.

But, most of those dreams never become a reality. They live on as ideas in your head while other entrepreneurs see the same opportunity and find a way to make it happen.

It turns out that there’s a way to turn more of your ideas into a viable business. A study published in  Small Business Economics  found that  entrepreneurs that take the time to create a plan for their business idea are 152 percent more likely to start their business ( 9). Not only that, those entrepreneurs with a plan are 129 percent more likely to push forward with their business beyond the initial startup phase and grow it. These findings are confirmed by another study that found that entrepreneurs with a plan are 260 percent more likely to start their businesses (10). 

Interestingly,  these same entrepreneurs who build plans are 271 percent more likely to close down a business . This seems counterintuitive to the stats above, but when you think about it a bit more, it makes a lot of sense.

Entrepreneurs with plans are tracking their performance on a regular basis. They know when things aren’t going to plan—when sales aren’t meeting projections and when marketing strategies are failing. They know when it’s time to walk away and try a different idea instead of riding the business into the ground, which could have disastrous results.

Action:  If you really want to start a business, start committing your goals and strategy to paper. Even if it’s just a simple  one-page business plan,  that will help you get started faster. And, once you do start, track your performance so you know when to change direction and try something different.

You’re less likely to fail if you have a plan

Nothing can absolutely prevent your company from failing, but it turns out that having a plan can help reduce your risks.

Yet another study of 223 companies found that having a plan reduced the likelihood that a business would fail. Having a plan didn’t guarantee success, unfortunately. But, those companies with a plan had better chances of success than those that skipped the planning process.

Having a plan and updating it regularly means that you are tracking your performance and making adjustments as you go. If things aren’t working, you know it. And, if things are going well, you know what to do more of.

Action:  Build a plan, but don’t just stick it in a drawer. Track your performance as you go so you can see if you’re reaching your goals. Your plan will help you discover what’s working so you can build your business.

• Your success depends on the type of planning you do

In the end, creating a business plan seems like common sense. You wouldn’t set out on a trip without a destination and a map, would you?

It’s great to see research back up these common-sense assumptions. The research also validates the idea that the value of business planning really depends on how you approach it.

It’s not a question of whether you should plan or not plan—it’s what kind of planning you do.  The best planning is iterative; it’s kept alive and it adapts.

It’s not about predicting the future as if you’re a fortune teller at a carnival. Instead, it’s a tool that you use to refine and adapt your strategy as you go, continuing to understand your market as it changes and refining your business to the ever-changing needs of your customers.

I recommend starting with a one-page plan. It’s a simpler form of planning where you can start by documenting your business concept on a single page. From there, iterate, gather feedback, and adjust your plan as needed. If you need some inspiration, check out our gallery of over  550 free sample business plans .

Finally, a big “thank you” to  Jeff Gish at the University of Oregon , who was immensely helpful in gathering and analyzing the research mentioned in this article.

What has your experience with business planning been like? Will you approach the planning process differently in the future? Tell me on Twitter @noahparsons.

References:

1 Brinckmann, J., Grichnik, D., & Kapsa, D. (2010). Should entrepreneurs plan or just storm the castle? A meta-analysis on contextual factors impacting the business planning–performance relationship in small firms.  Journal of Business Venturing,  25(1), 24-40. doi: 10.1016/j.jbusvent.2008.10.007

2 Burke, A., Fraser, S., & Greene, F. J. (2010). The multiple effects of business planning on new venture performance.  Journal of Management Studies,  47(3), 391-415.

3 Upton, N., Teal, E. J., & Felan, J. T. (2001). Strategic and business planning practices of fast growth family firms.  Journal of Small Business Management, 39(1), 60-72.

4 Gruber, M. (2007). Uncovering the value of planning in new venture creation: A process and contingency perspective.  Journal of Business Venturing,  22(6), 782-807. doi: 10.1016/j.jbusvent.2006.07.001

5 Chen, X.-P., Yao, X., & Kotha, S. (2009). Entrepreneur passion and preparedness in business plan presentations: A persuasion analysis of venture capitalists’ funding decisions.  Academy of Management Journal,  52(1), 199-214.

6 Ding, E., & Hursey, T. (2010). Evaluation of the effectiveness of business planning using Palo Alto’s Business Plan Pro. Department of Economics. University of Oregon.

7 Delmar, F., & Shane, S. (2004). Legitimating first: Organizing activities and the survival of new ventures.  Journal of Business Venturing,  19(3), 385-410. doi: 10.1016/s0883-9026(03)00037-5

8 Shane, S., & Delmar, F. (2004). Planning for the market: Business planning before marketing and the continuation of organizing efforts.  Journal of Business Venturing,  19(6), 767-785. doi: 10.1016/j.jbusvent.2003.11.001

9 Hechavarria, D. M., Renko, M., & Matthews, C. H. (2011). The nascent entrepreneurship hub: Goals, entrepreneurial self-efficacy and start-up outcomes.  Small Business Economics,  39(3), 685-701. doi: 10.1007/s11187-011-9355-2

10 Liao, J., & Gartner, W. B. (2006). The effects of pre-venture plan timing and perceived environmental uncertainty on the persistence of emerging firms.  Small Business Economics,  27(1), 23-40. doi: 10.1007/s11187-006-0020-0

See why 1.2 million entrepreneurs have written their business plans with LivePlan

Noah is the COO at Palo Alto Software, makers of the online business plan app LivePlan. He started his career at Yahoo! and then helped start the user review site Epinions.com. From there he started a software distribution business in the UK before coming to Palo Alto Software to run the marketing and product teams.

Table of Contents

• Being prepared matters when you’re seeking funding
• When you start planning is important—the earlier the better
• You’re less likely to fail if you have a plan

Related Articles

10 Min. Read

When Should You Write a Business Plan?

Use This Simple Business Plan Outline to Organize Your Plan

3 Min. Read

How Long Should a Business Plan Be?

7 Min. Read

8 Business Plan Templates You Can Get for Free

The Bplans Newsletter

The Bplans Weekly

Subscribe now for weekly advice and free downloadable resources to help start and grow your business.

We care about your privacy. See our privacy policy .

The quickest way to turn a business idea into a business plan

Fill-in-the-blanks and automatic financials make it easy.

No thanks, I prefer writing 40-page documents.

Discover the world’s #1 plan building software

Were small businesses more likely to permanently close in the pandemic?

• Open access
• Published: 08 August 2022
• Volume 60 , pages 1613–1629, ( 2023 )

Cite this article

You have full access to this open access article

• Robert Fairlie 1 , 2 , 3 ,
• Frank M. Fossen 4 , 5 ,
• Reid Johnsen 6 &
• Gentian Droboniku 6  

6658 Accesses

12 Citations

6 Altmetric

Explore all metrics

Previous estimates indicate that COVID-19 led to a large drop in the number of operating businesses operating early in the pandemic, but surprisingly little is known on whether these shutdowns turned into permanent closures and whether small businesses were disproportionately hit. This paper provides the first analysis of permanent business closures using confidential administrative firm-level panel data covering the universe of businesses filing sales taxes from the California Department of Tax and Fee Administration. We find large increases in closure rates in the first two quarters of 2020, but a strong reversal of this trend in the third quarter of 2020. The increase in closures rates in the first two quarters of the pandemic was substantially larger for small businesses than large businesses, but the rebound in the third quarter was also larger. The disproportionate closing of small businesses led to a sharp concentration of market share among larger businesses as indicated by the Herfindahl–Hirschman Index with only a partial reversal after the initial increase. The findings highlight the fragility of small businesses during a large adverse shock and the consequences for the competitiveness of markets.

Plain English Summary

Small businesses were more likely to close permanently during the early stages of the COVID-19 pandemic than large businesses. Although they rebounded strongly thereafter, market concentration remains higher than before the pandemic. We obtain these results from analyzing administrative firm-level data covering all businesses filing sales taxes in California. Our analysis contributes to research by demonstrating the fragility of small businesses during a crisis relative to large businesses. Our findings imply that small businesses may need additional support given the trend toward purchases from large online retailers.

Similar content being viewed by others

Small firms and the COVID-19 insolvency gap

Julian Oliver Dörr, Georg Licht & Simona Murmann

Assessing the impact of COVID-19 on economic recovery: role of potential regulatory responses and corporate liquidity

Renzao Lin, Xianchang Liu & Ying Liang

COVID-19 and The Corporate Sector: Winners, Losers, and What Lies Ahead

Avoid common mistakes on your manuscript.

1 Introduction

The coronavirus pandemic led to unprecedented, widespread shutdowns of businesses in the USA and around the world. Stores, restaurants, factories, professional offices, and many other businesses shut down in the first few months due to policy mandates, downward demand shifts, health concerns, or other factors. A small but rapidly growing literature documents these impacts. For example, Fairlie ( 2020 ) finds that the number of active business owners in the USA plummeted from 15.0 million in February 2020 to 11.7 million in April 2020 and only partially rebounded by June. Losses to small business revenues and sales were also found to be large in the early stages of the pandemic with estimates ranging from 30 to 50% (Bloom et al., 2021 ; Fairlie & Fossen, 2022 ; Kim et al., 2020 ), and owners’ demand expectations were one-third lower than before the crisis (Balla-Elliott et al., 2022 ). Examining financial account data, Farrell et al. ( 2020 ) find that as early as by the end of March 2020, cash balances were 12% lower for all firms.

The emerging literature on the effects of COVID-19, however, has three major limitations. First, it provides limited information on the impacts on small businesses. There is a debate in the literature on whether small firms have a disadvantage during recessions in comparison to large firms due to their fragility or an advantage due to their flexibility, and empirical results are mixed. While Moscarini and Postel-Vinay ( 2012 ) find relatively stronger growth performance of small employers relative to large employers during economic downturns, Fort et al. ( 2013 ) report that small firms—both young and old, and especially small and young firms—are more sensitive to local cyclical shocks than large firms in the USA. Bartz and Winkler ( 2016 ) find that young firms, not small firms in general, were disproportionately negatively affected by the 2009 financial crisis in Germany. Footnote 1 However, the COVID-induced recession is very different from previous recessions; for example, no previous recession experienced a drop in gross domestic product (GDP) of 31% in one quarter and then rebounded the next quarter with an increase of 34% (U.S. Bureau of Economic Analysis 2022 ). As this recession was triggered by an exogenous health crisis, unlike other cyclical economic downturns that may be related to endogenous creative destruction (Schumpeter  1934 ), it provides an opportunity to study the resilience of small versus large businesses toward a large, aggregate negative shock.

Second, there is very little evidence on permanent closures (Crane et al., 2022 ). Because of the difficulty in finding timely panel data and measuring long-term business closures, the important question of whether small businesses permanently closed in disproportionate numbers in the pandemic remains unanswered in the literature. Federal government sources of data are often not released quickly enough and the approval processes for gaining access to these confidential microdata sources are too slow to study permanent business closures in the pandemic. Footnote 2 Third, following from the aforementioned limitations, the empirical literature is silent on the effects of permanent small business closures on the competitiveness of the market.

These gaps in the literature are important because small businesses might have been especially devastated by the shutdowns during the pandemic due to lost revenues, limited cash reserves, and continuing expenses. Footnote 3 Many of the early-stage shutdowns of small businesses might have turned into permanent closures. Small businesses likely had less ability to quickly adjust to changes in regulations and demand when the pandemic hit, and may have had less ability to obtain financing needed for adjustments. Customers also might have felt fewer health concerns shopping in large retailers instead of small shops. If these permanent closures and consumer shifts disproportionately hit small businesses, then market share will be concentrated among fewer retailers lessening overall competition. Additionally, there is a concern that consumers shifted away from purchasing goods from small brick-and-mortar businesses to online retailers and large retailers with an online presence.

In this paper, we use firm-level panel data to provide the first examination of permanent closures among small businesses in the pandemic using government administrative microdata. We analyze business closures using administrative microdata from the California Department of Tax and Fee Administration (CDTFA) that cover the universe of businesses with taxable sales in the state. Our study is the first to use a similar measure as the Census and Bureau of Labor Statistics (BLS) definition of permanent business closure that requires a full year of no operations using administrative records. We address three key questions about the performance of small businesses in the pandemic. First, we explore what percentage of businesses with taxable sales closed in the first few quarters of the COVID-19 pandemic. Second, we examine whether business closure rates differ by initial business size. In particular, we test the hypothesis that small businesses disproportionately closed during the pandemic and identify how much of the differential was due to COVID-19 by adjusting for trend and seasonality. Third, we examine the resulting effects on market share concentration.

Using CDTFA administrative microdata, we find large increases in closures rates in the first two quarters of 2020, but a strong reversal of this trend in the third quarter of 2020. The increase in closures rates in the pandemic was substantially larger for small businesses than large businesses, but the rebound was also larger. The disproportionate closing of small businesses led to a concentration of market share among larger businesses. The Herfindahl–Hirschman Index (HHI) across all retail businesses in California increased markedly from the third quarter of 2019 to the third quarter of 2020 breaking a slow, steady upward trend over the prior 4 years. It only partially rebounded until the third quarter of 2021. These timely findings on permanent business closures among small businesses are crucial to adjust and calibrate adequately targeted policy responses supporting small businesses and their owners and employees. More generally, the results demonstrate the fragility of small businesses during a large adverse shock and the negative consequences for the competitiveness of markets.

2 Previous studies of closures in the pandemic

Crane et al. ( 2022 ) provide an overview of the small number of papers studying business closures during the early stages of the COVID-19 pandemic and potential data sources. They note that the statistics on business closures provided by the BLS and the Census Bureau (see below) are released with a time lag that is too long to inform timely policy responses. Therefore, some researchers conduct their own surveys of firm samples (Bartik et al., 2020a ) or analyze the narrower subset of closures that result in bankruptcy filings (Wang et al., 2020 ). The U.S. Census Bureau’s ( 2020 ) Small Business Pulse Survey provides valuable information about continuing small businesses (Mini, 2021 ) but is less useful to measure business closures because survey non-response is higher for businesses that have ceased operations (Buffington et al., 2021 ). Surveys conducted after the pandemic will likely find it very difficult to reach businesses that permanently closed and capture them in the data. The World Bank COVID-19 Impact Surveys, for example, measure whether businesses are (i) currently open, (ii) temporarily shut down (suspended services or production), or (iii) permanently closed using survey data. Footnote 4 Survey response rates are likely dependent on the outcome of interest.

Substantial efforts have been devoted to tap non-traditional “real-time” data sources collected by private companies for their business purposes. Bartik et al. ( 2020b ) use data from Homebase, a provider of clock-in/clock-out tracking software, and measure business shutdowns by firms stopping to report clock events. Kurmann et al. ( 2021 ) also use the Homebase data, but in order to distinguish between firm closures and sample churn, they additionally check whether business owners update their status in Google Places (the database behind Google Maps) or stop posting on Facebook if the authors can find a match. Rigobon et al. ( 2022 ) use data from Google Places in the retail and food service sectors in the downtown core of Ottawa/Gatineau. By comparing scraped data at two points in time, they identify business exits when a business is removed from the data. De Vaan et al. ( 2021 ) rely on foot traffic data from mobile applications provided by SafeGraph, focusing on service-oriented businesses. They identify closures by the change in the number of visitors. Yelp ( 2020 ) uses its online platform of business reviews to track business closures when owners update their Yelp pages. Chetty et al. ( 2020 ) rely on Womply, which aggregates transaction and revenue data from several credit card processors. Firms that report zero credit card revenue for 3 days in a row are counted as closures. These papers thereby focus on sectors in which time clocking or use of social media or credit cards is common. In sum, while these non-traditional data sources provide fast and important first impressions of developments, there are limits to their representativeness and ability to track permanent closures. To our knowledge, our study is the first to address these challenges using administrative panel data covering the universe of businesses with taxable sales over the first three quarters of the pandemic.

3 Measuring closures, data, and methods

3.1 census and bls approach to measuring closures.

The U.S. Census Bureau ( 2021 ) and U.S. Bureau of Labor Statistics ( 2021 ) provide measures of business or establishment closures. In both the Census and BLS, published numbers of closures are measured over a 1-year window. The Census Bureau’s Business Dynamics Series measures closures by establishments that have positive employment in the first quarter of the initial year and zero employment in the first quarter of the subsequent year. The first quarter of each year is used because of the timing of employment information (i.e., March 12 payroll). Footnote 5 The BLS publishes information from the Business Employer Dynamics on annual survival rates for establishments with employees. They also report the total number of closures each quarter. Footnote 6 The BLS has conducted analyses on different time frames for measuring closures (Sadeghi, 2008 ). Footnote 7

3.2 Measuring closures with administrative tax panel microdata

The panel microdata used here are restricted access from the CDTFA. The microdata consist of sales and use tax (SUT) returns and capture all taxable sales for the universe of businesses in California. Using these panel data, we track taxable sales over time in each quarter for the same business. To define business closures, we identify businesses that had taxable sales in one quarter but had no taxable sales in the next four consecutive quarters. If a business has no taxable sales over the next year, then we assume that the business has permanently closed. If a business has any taxable sales in a quarter, then it is not closed. It is rare for a business to come back after four quarters of no taxable sales and thus we approximate by assuming that this is a permanent closure. The use of a four-consecutive quarter (i.e., full year) closure measure allows us to examine closures through the third quarter of the pandemic. We use quarterly data through 2021Q2 to capture closures for up to 2020Q3 (i.e., the last quarter a business reported sales was in 2020Q2).

Several issues arise in using the CDTFA administrative data and taking our approach. First, not all SUT accounts file on a quarterly basis. Some small accounts (with less than $1,200 in annual tax liability) file annually in either June or December, resulting in skewed closure rates in Q2 and Q4 of each year. Further, as some of these small taxpayers grow, they may be required to change from annual to quarterly filing. We remove from our study these small accounts that at any point in time filed on an annual basis. We also aggregate monthly filers up to the quarter. Second, SUT accounts do not necessarily correspond 1:1 to businesses. A single business can operate more than one SUT account. This is unusual and typically relevant only for large businesses. More commonly, multiple physical sites can file under a single SUT account. In these cases, the data do not reflect individual storefront closures, only account closures. Third, in a typical year, approximately 30% of filers report zero sales tax liability. These accounts are effectively closed, although their permit remains open. We treat these accounts as closed in quarters in which they file zero or negative tax liability.

3.3 Robustness to alternative future windows for measuring closures

We define a business closure using a four-quarter forward looking window. A closure is defined as a business that does not show up with taxable sales the next four quarters. We do not check whether the business returns after these first subsequent quarters. We also examine closures using a shorter forward looking window, and define a closure with a two-quarter forward looking window. The patterns over time look similar to those for our four-quarter forward looking definition, which is reassuring. The shorter forward looking time period increases the likelihood that we will mistakenly define a business closure when that business comes back in a future quarter. We follow the BLS and Census definitions that focus on a four-quarter or full-year window.

3.4 Regression specifications

To adjust for pre-pandemic time trends, allow for seasonal (quarter) fixed effects, and provide a direct estimate of the impact of the pandemic, we estimate the following regression equation for the probability of a business closure:

where \({Y}_{it}\) is the closure for business i in quarter t , \({\mathrm{COVID}}_{st}\) are the three dummy variables for the quarters s of the three post-COVID quarters in our data with information on closure (2020Q1–2020Q3), \({X}_{it}\) includes business characteristics, \(\lambda\) is the slope of a linear time trend (with t set to zero at 2019Q4 and increasing by 0.25 each quarter), \({\mathrm{quarter}}_{st}\) is a set of quarter of the year dummy variables to control for seasonality, and \({\varepsilon }_{it}\) is the error term. The analysis sample period covers 22 quarters, with nineteen pre-COVID quarters (2015Q2–2019Q4) and three post-COVID quarters. Technically, the first quarter of 2020 includes the months of January and February which were prior to social distancing restrictions, and March only partly captures those restrictions, but as we show below large negative effects of the pandemic show up on gross domestic product (GDP) growth in 2020Q1.

The parameters of interest are the \({\gamma }_{s}\) , which capture the estimates of COVID-19 effects on business closures relative to pre-pandemic levels after controlling for a time trend and seasonality. The equation will be estimated with OLS and robust standard errors. Using a linear probability model has the advantage over probit or logit of direct interpretability of the estimated coefficients of the interaction terms we introduce below. Additionally, with more than 7 million observations in the administrative data, any losses in efficiency are not a concern.

We also estimate the effects of COVID-19 on small businesses relative to large businesses. We define small businesses as those with average quarterly taxable sales annualized to less than $500,000, and calculate this measure over the previous four quarters. We estimate the following equation:

where Small is a dummy variable for small businesses. In this specification, the parameters of interest are \({\gamma }_{s}^{\mathrm{Sm}}\) , which capture the estimates of potential disproportionate effects of COVID-19 on small businesses relative to large businesses in the sense of a difference-in-differences estimator. Relative effects on business closures are estimated for each post-pandemic quarter. Pre-pandemic trends in business closures rates as well as seasonality are also allowed to differ by baseline size of the business. These estimates do not estimate causal effects of a policy change but instead capture more exploratory estimates of changes in business dynamics during the COVID-19 pandemic.

4.1 Graphical evidence

Before examining business closure rates using the universe of businesses included in the CDTFA administrative data, we present evidence on the economic disruption caused by the pandemic. Figure  1 displays quarterly GDP growth from 1947Q2 to 2021Q1. Footnote 8 Over the numerous recessions in the second half of the twentieth century and the first two decades of the twenty-first century, there has never been such a large quarter-to-quarter change in GDP as in the first full quarter in the pandemic, 2020Q2. GDP fell by 31.2% in 2020Q2 (Fig.  2 focuses on the period from 2005Q1 to 2021Q1). GDP also fell by 5.1% in 2020Q1. The next largest drops in GDP were by − 10.0% in 1958Q1, − 8.5% in 2008Q3 (Great Recession), and − 8.0% in 1980Q2. Furthermore, only three additional quarters over this time period experienced larger drops than in 2020Q1. The pandemic created an extremely severe but short recession. GDP reversed course quickly and grew by 33.8% in 2020Q3. The NBER officially dates the pandemic-induced recession as occurring from February 2020 (peak) to April 2020 (trough). As shown in Figs.  1 and 2 , both 2020Q1 and 2020Q2 were affected severely by the beginning of the pandemic.

Quarterly gross domestic product growth rate, 1947Q2–2021Q1

Quarterly gross domestic product growth rate, 2015Q1–2021Q1

Having established overall effects on the US economy, we turn to examining the total number of business closures before the pandemic and in the pandemic. Footnote 9 Figure  3 displays the total number of business closures in California by quarter from 2015Q2 to 2020Q3. As noted above, we check for four consecutive quarters to make sure the business is not active before defining a closure. Footnote 10 The number of business closures increased substantially in 2020Q1 and remained high in 2020Q2, capturing the early effects of COVID-19. Footnote 11 After those initial increases, however, the number of business closures dropped back down to below pre-pandemic levels in 2020Q3. There is a strong seasonality component to business closures that makes it difficult to identify changes in the pandemic. Focusing on pre-pandemic data (i.e., 2015 to 2019), the average number of business closures over this time period is 17,200 in Q1, 12,600 in Q2, 13,400 in Q3, and 16,500 in Q4. Given that Q2 is typically a lower quarter for the number of closures, the jump in 2020Q2 is especially large relative to pre-pandemic levels. We return to these issues in the regressions below where we control directly for season/quarter dummies.

Total number of business closures per quarter, 2015Q2 to 2020Q3

We next focus on business closure rates, which is important for comparing small to large businesses. Footnote 12 To start, Fig.  4 displays business closure rates by quarter from 2015Q2 to 2020Q3. The pandemic led to large increases in closure rates. Focusing on the YOY change, the closure rate was 3.7% in 2019Q2 and jumped to 6.7% in 2020Q2. From 2019Q1 to 2020Q1, the closure rate increased from 4.8 to 6.5%. After the initial shakeout of these two quarters in the pandemic, the closure rate in the third quarter dropped precipitously. Focusing on the YOY comparison, the closure rate in 2020Q3 was 2.9%, which was substantially lower than the closure rate of 4.1% in 2019Q3. The drop in closure rates reflects the exceptionally strong rebound in the economy in 2020Q3 as shown in GDP trends reported in Fig.  2 . Closure rates display strong seasonality patterns but no strong downward or upward trend prior to the pandemic.

Total business quarterly closure rate, 2015Q2 to 2020Q3

The large increase in the closure rate from 2019Q2 to 2020Q2, which captures the worst of the pandemic, might have been felt very differently by size of businesses. Figure  5 displays closure rates for several size categories of businesses based on the level of taxable sales in the previous quarter. There is a clear pattern of lower closure rates with initial size of the business which holds for all time periods. Closure rates are much higher for the small size classes than for the large size classes, and this differential holds prior the pandemic and after the pandemic. Another clear pattern is that all business sizes experienced an increase in closure rates in the pandemic. The jumps in closure rates disrupted the seasonality patterns. Another finding is that there does not appear to be a strong upward or downward trend prior to the pandemic in closure rates for any size class.

Quarterly closure rates by taxable sales size, 2015Q2 to 2020Q3

To focus on the experience of small businesses relative to large businesses, we simplify by collapsing categories. We also revise the definition of categories slightly. Instead of using taxable sales in the previous quarter to define the size class, we use an average of the prior four quarters to determine if a business is small or large. By averaging over the previous four quarters, we avoid some of the issues with COVID affecting which size class the business is in for calculating closure rates. Figure  6 displays closure rates for small businesses and large businesses from 2015Q2 to 2020Q3. We define small businesses as those with average quarterly taxable sales annualized to less than $500,000. Large businesses are those with $500,000 or more in annualized taxable sales over the previous 4 quarters. Closure rates are much higher for small businesses than for large businesses prior to the pandemic and in the pandemic. On average, 5.4% of small businesses closed each quarter from 2015Q1 to 2019Q4. In comparison, an average of 1.4% of large businesses closed each quarter during the same time period.

Quarterly closure rates for small and large businesses, 2015Q2 to 2020Q3

For both small and large businesses, there is a strong seasonality component with the highest closure rates happening in the first quarter of each year before the pandemic. COVID affected both small and large businesses. Closure rates increased from 4.6% in 2019Q2 to 8.5% in 2020Q2 for small businesses and increased from 1.3% in 2019Q2 to 2.7% in 2020Q2 for large businesses. The increase in closure rates is much larger for small businesses than for large businesses.

4.2 Regression estimates

To adjust for pre-pandemic time trends, allow for seasonal fixed effects, and provide a direct estimate of the impact of the pandemic, we estimate Eq.  3.1 for the probability of a business closure. Estimates are reported in Table 1 . We start with specification 1, which is the base model. After controlling for the time trend and seasonal effects, we find that COVID-19 had a large effect on business closures. In 2020Q2, business closures were 2.7 percentage points higher due to COVID. The coefficient implies a very large relative effect: the average closure rate in 2019 was 4.6%. The early effects of the pandemic were also felt in 2020Q1. Our regression model indicates an increase of 1.2 percentage points in the closure probability. By the summer/early fall of 2020 (2020Q3), we find that closure rates are lower than expected (i.e., no COVID disruption). The coefficient estimate for the 2020Q3 dummy indicator is negative implying that they are 1.4 percentage points lower than where they were expected to be.

As expected from the figures above, we do not find a strong pre-pandemic trend in closure rates over time. The coefficient estimate indicates an increase of only 0.1 percentage points each year. The coefficients do show a strong seasonality component with the highest closure rates in the first and fourth quarters and the lowest closure rates in the second and third quarters. All of the coefficients in these models are precisely estimated using the California administrative data with more than 7 million observations.

In specification 1, we compare the post-COVID effects to a pre-pandemic time period that encompasses the entire time period from 2015Q2 to 2019Q4. Our coefficient estimates of post-COVID quarters implicitly make comparisons to the average closure rate over this entire time period after adjusting for the linear time trend and seasonality. In specification 2, we alter the model to focus the comparison on 2019, which is the last year prior to the pandemic, by including a dummy variable that is one in any quarter prior to 2019Q1. We find essentially the same estimates of the effects of COVID on 2020 closure rates as noted above. We find an increase of 2.6 percentage points in the closure probability in 2020Q2. We also find an increase of 1.2 percentage points in 2020Q1, and a decrease of 1.4 percentage points in 2020Q3.

Overall, the regression estimates indicate that COVID-19 had a large effect on business closures in the first two quarters of 2020 and especially the second quarter of 2020. Business closure rates increased substantially in this quarter regardless of whether they are compared to the year just prior to the start of the pandemic or to a longer pre-pandemic period. The adverse effects of COVID already show up in the first quarter of 2020, which is consistent with the drop in GDP in this quarter shown above. Finally, the effects of COVID on closure rates reversed by the third quarter of 2020 in the economic rebound.

We turn to exploring how small businesses fared in the pandemic relative to large businesses by estimating Eq.  3.2 . The main coefficients of interest are the interactions between the small business dummy variable and the post-COVID quarter dummy variables. Specification 3 uses the entire 2015Q2 to 2019Q4 time period as the pre-pandemic comparison period whereas specification 4 compares to 2019 by including the pre 2019Q1 dummy. The results from both specifications are again very similar. Looking at the difference-in-difference (DID) estimate noted above to estimate COVID-19 effects, we find that small businesses experienced a 2.0 percentage point higher closure rate in 2020Q2 relative to large businesses due to COVID-19. Small business were also more negatively affected in 2020Q1 with a 1.5 percentage point higher increase in closure rates due to the pandemic.

The negative effects of the pandemic on closure rates among large businesses were large in the second quarter of 2020 but small in the first quarter of 2020. The coefficient estimates indicate that the effect of COVID-19 on large businesses was an increase of 1.3 percentage points in 2020Q2 and 0.2 percentage points in 2020Q1. The combination of these main effect coefficients and the DID coefficients indicates that small businesses experienced a total increase of the closure rate by 3.3 percentage points in 2020Q2 from COVID. In 2020Q1, the total effect on small business closure rates was an increase of 1.7 percentage points.

Although small businesses were hit harder in the first two quarters of the pandemic than large businesses, they experienced a larger rebound in closure rates. In 2020Q3, small business closure rates decreased by 1.5 percentage points more than large business closure rates. Combining main and DID estimates, we find that the total effect on small business closure rates was a rebound of 1.9 percentage points in 2020Q3.

4.3 Market concentration

Did the disproportionate closing of small businesses in the pandemic lead to an increase in the concentration of taxable sales at large businesses in California? To explore this question, we measure changes over time in market concentration using the commonly used Herfindahl–Hirschman Index (HHI). The use of administrative data covering the universe of businesses in California with taxable sales is important for an accurate measure of the HHI. Truncated, censored or windsorized data would otherwise lead to problems that we do not have with our data. For every quarter from 2015Q1 to 2021Q3, we calculate

where N is the total number of businesses and S i is the market share percentage (of taxable sales) of firm i . Footnote 13 We do not limit the HHI to a particular industry or regions within California to explore this question broadly. By taking this approach, we take into account that during the pandemic, consumers shifted away from some industries (e.g., accommodation, food services and drinking places, and arts, entertainment, and recreation) toward other industries (e.g., grocery stores, building materials, and garden equipment) (Fairlie & Fossen, 2022 ). Note that the broader the industry and the wider the geographical location included to calculate the HHI, the smaller the HHI will be due to the inclusion of more businesses with market shares. But, we are interested here in examining possible changes in the HHI over time using a consistent definition, in particular comparing periods before and after the start of the COVID-19 pandemic. The level of the HHI we calculate cannot be compared directly to industry-specific HHI measures and does not inform whether the retail market in California is concentrated or not in absolute terms. The quantitative interpretation of the HHI is the following: The HHI divided by 100 is the probability (in percent) that two dollars chosen at random among all dollars spent in California in a given quarter are spent at the same retailer. An increase in the HHI indicates an increasingly concentrated market.

We adjust for a legislation change in California that would otherwise complicate the comparison of the HHI over time. Due to California’s Marketplace Facilitators Act (Assembly Bill No. 147), several large online retailers began collecting use tax on behalf of smaller retailers that used their sales platforms beginning in 2019Q4. In many cases, these large retailers opened new SUT accounts for their marketplace sales. These accounts tend to report very high taxable sales. We manually removed 13 marketplace facilitator accounts before calculating the HHI to avoid any confounding effects. It is possible that there are more marketplace facilitator accounts, since they are not required to identify themselves as such.

The quarterly HHI series shows some seasonality with higher concentration in the fourth quarter of each year, which is presumably related to the holiday shopping period. To deseasonalize the HHI, we first regress the quarterly HHI values from 2015Q1 to 2019Q3 on dummies for Q2, Q3, and Q4 and a constant. We do not include the quarters potentially impacted by the pandemic in this regression to estimate seasonal effects. Then we use the estimated model to predict the residuals based on all quarters from 2015Q1 to 2021Q3 and add back the estimated constant. This provides a deseasonalized HHI series which equals the observed HHI in each first quarter from 2015 to 2019.

Figure  7 plots the development of the deseasonalized HHI in California over time. The figure shows that the HHI increased only slowly and mostly steadily from 19.8 in 2015Q1 to 21.4 in 2019Q3 before the pandemic. During the pandemic, however, the HHI increased to a maximum of 38.0 during the strictest lockdowns in 2020Q2 and then decreased to 26.0 in 2021Q3 (the last measurement we have), but remains far higher than before the pandemic. Footnote 14 Thus, the results show a clear increase in market concentration during the pandemic with a partial recovery in the second and third quarters of 2021. The probability that two random dollars were spent at the same retailer in California within a quarter increased from 0.214% in 2019Q3 to 0.260% in 2021Q3, which corresponds to a relative increase of 21%. This increased concentration is consistent with the evidence we provide on closures of small businesses during the COVID-19 pandemic.

Herfindahl–Hirschman index for taxable sales, 2015Q1 to 2021Q3. Notes: Seasonally adjusted Herfindahl–Hirschman Index for all businesses with taxable sales in California after marketplace facilitators have been removed

5 Conclusions

Although it is well known that COVID-19 led to a massive shutdown of stores, restaurants, and other businesses in the second quarter of 2020, surprisingly little is known about whether these shutdowns turned into permanent closures. The difficulty is in having a long enough time window to look for whether a closure is permanent and having comprehensive firm-level panel microdata. Using confidential administrative microdata from the California Department of Tax and Fee Administration, we provide new evidence on permanent closures among the universe of businesses with taxable sales in California. We find large increases in closures rates in the first two quarters of 2020, but a strong reversal of this trend in the third quarter of 2020. Regression results that control for the continuation of pre-pandemic trends indicate that COVID led to an increase of 1.2 percentage points in closure rates in the first quarter of 2020 and an increase of 2.6 percentage points in closure rates in the second quarter of 2020. Both increases in closure rates were large compared to the base closure rate of 4.6% in 2019. The rebound in the third quarter was also strong at 1.4 percentage points higher than expectations.

The novel evidence presented here on the impacts of COVID-19 on permanent closures among small business clearly indicates large disproportionate losses in the pandemic. In the first quarter of 2020, large businesses experienced only a slight increase in closure rates (0.2 percentage points), whereas small businesses experienced a substantial increase in closure rates (1.7 percentage points). In the second quarter of 2020, large businesses experienced an increase in closure rates of 1.3 percentage points whereas small businesses experienced an increase in closure rates of 3.3 percentage points due to COVID-19. The rebound in closure rates in the third quarter of 2020, however, was stronger for small businesses relative to large businesses (1.9 percentage points compared with 0.4 percentage points). The disproportionate losses among small businesses led to a concentration of market share among larger businesses as evidenced by an increase of 21% in the Herfindahl–Hirschman Index across all businesses with taxable sales in California.

The large closure rates in the first and second quarters of 2020 are worrisome for the longer-term survival of small, local businesses throughout the country. Will additional government assistance for small businesses be needed to reverse the increased concentration of market power among large businesses and keep the economy competitive? The Paycheck Protection Program targeted more than $800 billion in loans to small businesses, but currently there is no plan for additional funds. Another problem facing small businesses is that the shift in consumer behavior toward online purchasing during the mandated social distancing restrictions in the pandemic is unlikely to fully reverse. Consumers have become more accustomed to purchasing goods and services online, and small businesses are at a disadvantage in online sales relative to large retailers and online retailers. Small businesses will need to adjust and this might be an area in which government aid could be targeted. Additionally, some states and local governments have promoted shopping small and local (e.g., California’s #ShopSafeShopLocal) but can these programs counteract the closures of small businesses during the pandemic?

Our results suggest that on average, the fragility of small businesses in comparison to large businesses outweighs their higher flexibility when facing a large aggregate negative shock such as a health crisis, which is consistent with Fort et al. ( 2013 ). More research is needed on why the negative impacts of COVID-19 fell disproportionately on small businesses. Overall, small businesses might have had less ability to quickly adjust to changes in regulations and demand when the pandemic hit. Due to high fixed costs and required knowledge, small businesses may have faced larger barriers to increasing their web presence, expanding takeout services or adding delivery services, and coping with uncertainty regarding liability during the health crisis. In particular, small businesses may have had less ability to obtain financing needed for adjustments, for example, for investing in online ordering and inventory management, due to lower liquidity reserves, less collateral, and higher uncertainty from the perspective of lenders and investors during the emerging economic crisis. Customers in general might have felt fewer health concerns shopping in large retailers instead of small shops. As more data become available, these will be important questions for future research.

Similarly, previous research on the basic relationship between unemployment and entrepreneurship provides mixed results. Parker ( 2018 ) reviews the literature and cites many previous studies showing positive relationships, negative relationships, and zero relationships. See Fairlie ( 2013 ), for example, for evidence of a positive relationship between unemployment in local labor markets and business creation using time series and cross-sectional variation, and Fossen ( 2021 ) for consistent results at the individual level.

For example, the latest published US Census Bureau’s ( 2021 ) data only reports closures between 2018 and 2019.

Just prior to the pandemic when small business owners were asked what actions they would take if faced with a 2-month revenue loss, roughly half said they would use their own funds and 17% said they would close or sell the business (Mills et al. 2020 ).

https://openknowledge.worldbank.org/handle/10986/34636

https://www.census.gov/programs-surveys/susb/about/glossary.html

E.g., Chart 5 at https://www.bls.gov/bdm/entrepreneurship/entrepreneurship.htm

Three measures are compared: (i) four consecutive quarters in which there is zero employment in the third month, (ii) five consecutive quarters in which there is zero employment in the third month, and (iii) twelve consecutive months of zero employment.

The Bureau of Economic Analysis first reports quarterly GDP growth rates in 1947Q2.

Appendix Table 2 shows closure rates by quarter and business size.

For example, to define a business closure in 2020Q2, the business must have taxable sales in 2020Q1, but no taxable sales in 2020Q2, 2020Q3, 2020Q4, or 2021Q1.

There are two reasons why we might observe an increase in closures already in 2019Q4. First, about 10% of businesses usually file their sales taxes more than 30 days late. Thirty days after the 2019Q4 filing deadline was March 1, 2020. Late filers who closed in 2020 due to the pandemic may not have filed their 2019Q4 returns and therefore show up as closing in 2019Q4 although they really closed in 2020. Second, the Marketplace Facilitator Act (Assembly Bill No. 147) took effect in 2019Q4. Starting in this quarter, California required online selling platforms to collect use tax on behalf of third party sellers that sell on those platforms. This eliminated the requirement to file for some online sellers that sold exclusively through online marketplaces and were correctly collecting use tax prior to AB-147 since the marketplace facilitator collects the tax now.

We do not need to report DHS corrected closure rates that average the previous quarter and current quarter number of businesses because with microdata we can examine closure business by business.

As usual for the HHI, the shares are expressed as a percent, not a fraction, for example, 5 if a firm has 5% of taxable sales in an industry, not 0.05.

The observation that the HHI starts increasing in 2019Q4 already is consistent with the observed increase of closures attributed to 2019Q4 and is likely to be due to late tax filers who closed in 2020 due to the pandemic (see footnote 11).

Balla-Elliott, D., Cullen, Z. B., Glaeser, E. L., Luca, M., & Stanton, C. (2022). Determinants of small business reopening decisions after COVID restrictions were lifted. Journal of Policy Analysis and Management, 41 (1), 278–317. https://doi.org/10.1002/pam.22355

Article   Google Scholar  

Bartik, A. W., Bertrand, M., Cullen, Z., Glaeser, E. L., Luca, M., & Stanton, C. (2020a). The impact of COVID-19 on small business outcomes and expectations. Proceedings of the National Academy of Sciences, 117 (30), 17656–17666. https://doi.org/10.1073/pnas.2006991117

Bartik, A. W., Bertrand, M., Feng, L., Rothstein J., & Unrath, M. (2020b). Measuring the labor market at the onset of the COVID-19 crisis. Brookings Papers on Economic Activity, Summer 2020. https://www.brookings.edu/wp-content/uploads/2020/06/SU20_S4_Bartik-et-al_-final-paper-1.pdf

Bartz, W., & Winkler, A. (2016). Flexible or fragile? The growth performance of small and young businesses during the global financial crisis—evidence from Germany. Journal of Business Venturing, 31 (2), 196–215. https://doi.org/10.1016/j.jbusvent.2015.10.002

Bloom, N., Fletcher R. S., & Yeh, E. (2021). The impact of COVID-19 on US firms. NBER Working Paper No. 28314, National Bureau of Economic Research . https://doi.org/10.3386/w28314

Buffington, C., Chapman, D., Dinlersoz, E., Foster, L., & Haltiwanger, J. (2021). High-frequency data from the US Census Bureau during the COVID-19 pandemic: Small vs. new businesses. Business Economics, 56 (3), 155–167. https://doi.org/10.1057/s11369-021-00229-0

Chetty, R., Friedman, J. N., Hendren, N., Stepner, M., & The Opportunity Insights Team. (2020). The economic impacts of covid-19: evidence from a new public database built using private sector data. NBER Working Paper No. 27431, National Bureau of Economic Research . https://doi.org/10.3386/w27431

Crane, L. D., Decker, R., Flaaen, A., Hamins-Puertolas, A., & Kurz, C. J. (2022). Business exit during the Covid-19 pandemic: Non-traditional measures in historical context. Journal of Macroeconomics, 72 , 103419. https://doi.org/10.1016/j.jmacro.2022.103419

Vaan, De., Mathijs, S. M., Nagaraj, A., & Srivastava, S. B. (2021). Social learning in the COVID-19 pandemic: Community establishments’ closure decisions follow those of nearby chain establishments. Management Science, 67 (7), 4446–4454. https://doi.org/10.1287/mnsc.2021.4033

Fairlie, R. W. (2013). Entrepreneurship, economic conditions, and the great recession. Journal of Economics & Management Strategy, 22 (2), 207–231. https://doi.org/10.1111/jems.12017

Fairlie, R. (2020). The impact of COVID-19 on small business owners: Evidence from the first three months after widespread social-distancing restrictions. Journal of Economics & Management Strategy, 29 (4), 727–740. https://doi.org/10.1111/jems.12400

Fairlie, R., & Fossen, F. M. (2022). The early impacts of the COVID-19 pandemic on business sales. Small Business Economics, 58 , 1853–1864. https://doi.org/10.1007/s11187-021-00479-4

Farrell, D., Wheat, C., & Mac, C. (2020). Small business financial outcomes during the onset of COVID-19 . JPMorgan Chase & Co.

Google Scholar  

Fort, T. C., Haltiwanger, J., Jarmin, R. S., & Miranda, J. (2013). How firms respond to business cycles: The role of firm age and firm size. IMF Economic Review, 61 (3), 520–559. https://doi.org/10.1057/imfer.2013.15

Fossen, F. M. (2021). Self-employment over the business cycle in the USA: A decomposition. Small Business Economics, 57 , 1837–1855. https://doi.org/10.1007/s11187-020-00375-3

Kim, O. S., Parker, J. A., & Schoar, A. (2020). Revenue collapses and the consumption of small business owners in the early stages of the COVID-19 pandemic. NBER Working Paper No. 28151, National Bureau of Economic Research . https://doi.org/10.3386/w28151

Kurmann, A., Lalé, E., & Ta, L. (2021). The impact of Covid-19 on US employment and hours: Real-time estimates with Homebase data , working paper, https://drive.google.com/file/d/1KNpXO_9mLvtj2Yd2JQlz1tB12rs8mV0t/view (last accessed 8/2/2022)

Mills, C. K., Battisto, J., de Zeeuw, M., Lieberman, S., & Wiersch, A. M. (2020). Small Business Credit Survey . Federal Reserve Banks.

Mini, F. (2021). Measuring the effect of COVID-19 on U.S. small minority businesses using public data from the Small Business Pulse Survey . SSRN Working Paper No. 3963382. https://doi.org/10.2139/ssrn.3963382

Moscarini, G., & Postel-Vinay, F. (2012). The contribution of large and small employers to job creation in times of high and low unemployment. American Economic Review, 102 (6), 2509–2539. https://doi.org/10.1257/aer.102.6.2509

Parker, S. C. (2018). The Economics of Entrepreneurship (2nd ed.). Cambridge University Press. https://doi.org/10.1017/9781316756706

Book   Google Scholar  

Rigobon, D. E., Duprey, T., Kotlicki, A., Schnattinger, P., Baharian, S., & Hurd, T. R. (2022). Business closures and (Re) openings in real-time using Google Places: Proof of concept. Journal of Risk and Financial Management, 15 (4), 183. https://doi.org/10.3390/jrfm15040183

Sadeghi, A. (2008). The births and deaths of business establishments in the United States. Monthly Labor Review, 131 (12), 3–18.

Schumpeter, J. A. (1934). The theory of economic development: An inquiry into profits, capital, credit, interest, and the business cycle . Harvard University Press.

U.S. Bureau of Economic Analysis. (2022). Gross Domestic Product Data , https://www.bea.gov/data/gdp (last accessed 8/2/2022)

U.S. Census Bureau. (2020). Small Business Pulse Survey , https://portal.census.gov/pulse/data/ (last accessed 8/2/2022)

U.S. Census Bureau. (2021). 2019 Business Dynamics Statistics Data Tables , https://www.census.gov/data/tables/time-series/econ/bds/bds-tables.html (last accessed 8/2/2022)

U.S. Bureau of Labor Statistics. (2021). Business employment dynamics, establishment age and survival data: Table 7. Survival of Private Sector Establishments by Opening Year , https://www.bls.gov/bdm/us_age_naics_00_table7.txt (last accessed 8/2/2022)

Wang, J., Yang, J., Iverson B. C., & Kluender, R.( 2020). Bankruptcy and the COVID-19 Crisis , SSRN Working Paper No. 3690398. https://doi.org/10.2139/ssrn.3690398

Yelp. (2020). Yelp: local economic impact report , https://www.yelpeconomicaverage.com/business-closures-update-sep-2020

Download references

Acknowledgements

We would like to thank Isabel Guzman at the California Governor’s Office of Business and Development, and Irena Asmundson at the California Department of Finance for the earlier help with the data.

Author information

Authors and affiliations.

Department of Economics, University of California, Santa Cruz, CA, USA

Robert Fairlie

Stanford University, Stanford, CA, USA

NBER, Cambridge, MA, USA

Department of Economics, University of Nevada, Reno, NV, USA

Frank M. Fossen

IZA, Bonn, Germany

California Department of Tax and Fee Administration, Sacramento, CA, USA

Reid Johnsen & Gentian Droboniku

You can also search for this author in PubMed   Google Scholar

Corresponding author

Correspondence to Robert Fairlie .

Ethics declarations

Any opinions and conclusions expressed herein are those of the authors and do not necessarily represent the views of the CDTFA. All results have been reviewed to ensure that no confidential information is disclosed.

Additional information

Publisher's note.

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Rights and permissions

Open Access This article is licensed under a Creative Commons Attribution 4.0 International License, which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons licence, and indicate if changes were made. The images or other third party material in this article are included in the article's Creative Commons licence, unless indicated otherwise in a credit line to the material. If material is not included in the article's Creative Commons licence and your intended use is not permitted by statutory regulation or exceeds the permitted use, you will need to obtain permission directly from the copyright holder. To view a copy of this licence, visit http://creativecommons.org/licenses/by/4.0/ .

Reprints and permissions

About this article

Fairlie, R., Fossen, F.M., Johnsen, R. et al. Were small businesses more likely to permanently close in the pandemic?. Small Bus Econ 60 , 1613–1629 (2023). https://doi.org/10.1007/s11187-022-00662-1

Download citation

Accepted : 19 July 2022

Published : 08 August 2022

Issue Date : April 2023

DOI : https://doi.org/10.1007/s11187-022-00662-1

Share this article

Anyone you share the following link with will be able to read this content:

Sorry, a shareable link is not currently available for this article.

Provided by the Springer Nature SharedIt content-sharing initiative

• Small business
• Entrepreneurship
• Self-employment
• Coronavirus
• Shelter-in-place restrictions
• Social distancing restrictions

JEL Classification

• Find a journal
• Publish with us
• Track your research

WHY IS IT SO MANY COMPANIES ARE WITHOUT A FORMAL BUSINESS PLAN?

So many of the companies I’ve taken on don’t have an ongoing business plan. They may have had one once, possibly when they took on external investors or other refinancing, but have since drifted away from having a proper plan that sets out exactly how the business will be taken forward. It amazes me that external investors such as private equity firms allow this situation. What I can tell you is that every single troubled company I have taken on has been without a current business plan!

A business plan for each fiscal period is an absolute must in my view. No company under my care will be without a deep and comprehensive roadmap. Business is like any journey. If you don’t have a map with specific directions and milestones you will likely end up somewhere you don’t want to be.

It’s not the job of investors to insist on a business plan. It’s management’s duty to provide one. A duty also to themselves, the business itself and the staff who all depend upon clarity of thinking and planning for the way forward, so not just to investors.

Writing a worthy business plan is not a breeze. It’s long and hard work to get a quality plan together. A business plan is a test and challenge of your strategic thinking and the writing of the plan force you to rethink or re endorse the validity of your business choices and activities.

It requires considerable discipline to write a good plan. I’ve seen business plans that wouldn’t qualify to be on the back of a cigarette packet. What use are they to anyone other than to demonstrate you haven’t the first clue how you are going to build the business. A good plan is your chance to demonstrate your grasp over market opportunities, your strategic thinking and discipline of business execution. It is also a powerful tool for getting investors onside and co-owning the way forward. Importantly, a business plan provides the performance criteria upon which success or failure is measured or judged.

I have coached and mentored many a CEO through the building of a business plan and helped them do the same down the line helping staff to contribute well to this important process. When the plan is complete, everyone has the same hymn sheet, investors, management and key staff. Everyone knows what is expected of them and why. Despite the intense work involved I have never had anyone say it was of dubious value. Quite the contrary, without exception, everyone has agreed the huge benefits of the process.

Below is a framework I generally follow for writing a business plan:

• Confidentiality statement
• Introduction
• Description of business and history
• Profile on management team, current structure and method of operating
• Markets and competition
• Top level summary of historic financial performance
• Customer base profile, trading history by account, individual analysis on top customers, security of revenue stream and potential for new sales
• In-depth analysis/assessment of current new sales pipe-line
• Assessment/Forecast for coming periods
• Products/Services – state of play on products and R&D programme
• SWOT analysis, special considerations and conclusions
• Mission and vision for the business
• Key goals and objectives
• Top level summary of financial goals
• Method of accomplishment – strategy and key underpinning programmes and initiatives (Specifics and substance)
• Sales strategy and organisation
• Human resources plan and organisation chart
• Board structure
• Exit strategy
• Financial plans (Spreadsheets – P&L, Balance Sheet & Cash Flow)

Michael Tait is available to help you write your strategic and business plans – contact Mike on 07831 105345 or [email protected]

HOW DOES A PRIVATE EQUITY FIRM SELECT AN INVESTMENT?

Share this:

• Click to share on Twitter (Opens in new window)
• Click to share on Facebook (Opens in new window)
• Click to share on LinkedIn (Opens in new window)

See also: www.ceo-mentoring.com

Privacy Policy | InterimChairman.com

• SUGGESTED TOPICS
• The Magazine
• Newsletters
• Managing Yourself
• Managing Teams
• Work-life Balance
• The Big Idea
• Data & Visuals
• Reading Lists
• Case Selections
• HBR Learning
• Topic Feeds
• Account Settings
• Email Preferences

Research: Writing a Business Plan Makes Your Startup More Likely to Succeed

• Francis J. Greene
• Christian Hopp

It’s particularly important if you plan to raise money.

When asked about an opponent’s plan for their impending fight, former world heavyweight champion Mike Tyson once said: “everyone has a plan until they get punched in the mouth.” It is a school of thought now fashionable in entrepreneurship circles. The truth, though, is that we just don’t know if it pays to plan. For every study that shows that it does, another study comes along and says that start-ups should just learn by doing. We wanted to study entrepreneurial planning, but with more context than previous efforts. We found that it pays to plan. Entrepreneurs who write formal plans are 16% more likely to achieve viability than the otherwise identical non-planning entrepreneurs. More than that, we were also able to see what makes people write business plans in the first place.

When asked about an opponent’s plan for their impending fight, former world heavyweight champion Mike Tyson once said: “Everyone has a plan until they get punched in the mouth.”

• FG Francis J. Greene is Chair in Entrepreneurship in the University of Edinburgh Business School.
• CH Christian Hopp is Chair in Technology Entrepreneurship in the TIME Research Area, the Faculty of Business and Economics, RWTH Aachen University.

Partner Center

Were Small Businesses More Likely to Permanently Close in the Pandemic?

Previous estimates indicate that COVID-19 led to a large drop in the number of operating businesses operating early in the pandemic, but surprisingly little is known on whether these shutdowns turned into permanent closures and whether small businesses were disproportionately hit. This paper provides the first analysis of permanent business closures using confidential administrative firm-level panel data covering the universe of businesses filing sales taxes from the California Department of Tax and Fee Administration. We find large increases in closures rates in the first two quarters of 2020, but a strong reversal of this trend in the third quarter of 2020. The increase in closures rates in the first two quarters of the pandemic was substantially larger for small businesses than large businesses, but the rebound in the third quarter was also larger. The disproportionate closing of small businesses led to a sharp concentration of market share among larger businesses as indicated by the Herfindahl-Hirschman Index with only a partial reversal after the initial increase. The findings highlight the fragility of small businesses during a large adverse shock and the consequences for the competitiveness of markets.

We would like to thank Isabel Guzman at the California Governor’s Office of Business and Development, and Irena Asmundson at the California Department of Finance for earlier help with the data. Any opinions and conclusions expressed herein are those of the authors and do not necessarily represent the views of the CDTFA. All results have been reviewed to ensure that no confidential information is disclosed. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.

MARC RIS BibTeΧ

Download Citation Data

Published Versions

Working groups, more from nber.

In addition to working papers , the NBER disseminates affiliates’ latest findings through a range of free periodicals — the NBER Reporter , the NBER Digest , the Bulletin on Retirement and Disability , the Bulletin on Health , and the Bulletin on Entrepreneurship  — as well as online conference reports , video lectures , and interviews .

Small Business Retirement Plans: How Firms Perceive Benefits & Costs

Issue Brief by Anqi Chen

The  brief’s  key findings are:

• Our  2023 Small Business Retirement Survey looks at why some small firms offer a retirement savings plan and others do not.
• Factors that affect whether small firms offer a plan include firm size, wages, and industry, as well as beliefs on whether it will help attract workers.
• The main barriers to offering a plan are concerns about the stability/size of the firm and the perceived costs of a plan.
• Concerns about costs are driven by misperceptions; many firms are unaware of lower-cost options for employers and tax credits.
• The results also suggest that state auto-IRA programs are more likely to encourage than discourage firms from offering their own plan.

Introduction 

At any given time, only about half of U.S. private sector workers are covered by an employer-sponsored retirement plan, and few workers save without one.  The coverage gap, which undermines the retirement security of the nation’s workers, is driven by a lack of coverage among small employers.  Interestingly, however, about half of firms with less than 100 employees do offer a plan for their employees.  This brief, which is based on a recent study, presents the results of a new survey of small employers to understand why some offer retirement plans and others do not. 1 Chen (2023).

The discussion proceeds as follows.  The first section describes the new survey and identifies factors that make a firm likely to provide coverage.  The second section reports the barriers that firms perceive to offering a plan and assesses the accuracy of these perceptions.  The third section examines whether the presence of state-sponsored retirement programs – which generally require firms without a plan to enroll their workers in the state program – shifts firm perceptions. 

The final section concludes that important drivers to offering a plan, currently or in the near future, are a firm’s beliefs, such as whether they think retirement plans matter for employee hiring and retention.  Importantly, many employers without a plan hold misperceptions about the financial and time costs of offering one.  Therefore, better awareness of the many available options for small firms may help close the coverage gap.  Finally, state-sponsored retirement programs are more likely to encourage than discourage the adoption of employer plans.

The 2023 Small Business Retirement Survey

The 2023 Small Business Retirement Survey, which was produced in collaboration with the Employee Benefit Retirement Institute (EBRI) and Greenwald Research, was conducted between February and April 2023 and includes 703 firms with 100 or fewer employees.  This survey replicates the last major survey focused on small business retirement plans, which was conducted in 1998 by EBRI and Greenwald Research.  What is unique about the 2023 survey is that it includes a sample of 100 firms with 0-4 employees – a group usually excluded from surveys of small employers.  Among all firms sampled, 46 percent offered a retirement plan, while the other 54 percent did not.  Since 92 percent of all small firms have fewer than 20 employees, this pattern is fairly consistent with nationwide data (see Figure 1). 2 U.S. Bureau of Labor Statistics, Business Employment Dynamics (2022).

The survey responses can relate various factors to the likelihood of a firm offering a plan (see Figure 2).  As expected from earlier studies, firms with 50-100 employees, those with higher average salaries, and firms in professional, technical, and scientific services industries are much more likely to offer a retirement plan.  Meanwhile, firms in retail sales, wholesale sales, and accommodations (hospitality and food services) are much less likely to offer a plan.  But other factors also mattered.  Beliefs about whether having a retirement plan is important for hiring and retaining good employees are also a strong driver.  Notably, a firm’s beliefs about revenue growth had little to no effect on having a retirement plan.  Interestingly, for firms without a plan, beliefs are also an important predictor of their likelihood of adopting a plan in the near future. 3 For example, similar to firms currently offering a plan, firms without a plan that believe having one is important for hiring and retaining good employees are more likely to offer a plan in the near future.  In addition, firms without a plan that think they will have strong future revenue growth are also more likely to adopt a plan in the future.

What Keeps Firms from Offering a Plan? 

Historically, small firms that do not offer a plan have cited three main reasons: 1) uncertain revenues; 2) costs; and 3) employee preferences for wages.  The third reason, employee preferences for wages, has dropped down the list, but costs remain important, while concerns about revenue stability/size have grown to become the biggest barrier (see Figure 3). 4 The 1998 survey did not include firms with fewer than 5 employees.  If we compared the share of firms with 5-100 employers, the main takeaway remains the same; a rise in the share of firms – from 49 percent to 56 percent – that cite revenue stability or being too small as a major barrier to offering a retirement plan.

As one would expect, concern about revenues declines as firm size increases (see Figure 4). 5 It is important to note that revenue predictions are not the same as citing a concern for revenue stability.  Figure 2 shows that revenue expectations do not influence the likelihood of offering a retirement plan, all else equal.  But firms can expect higher revenue growth next year and still feel uneasy about revenue stability.  For example, over half of the firms that believe revenue growth will be more than 10 percent higher next year still cite revenue stability as a major barrier to offering a plan.   Indeed, close to 80 percent of firms with 0-4 employees cited revenue and size as a major barrier to offering a plan.  The smallest of these small firms may simply have too much on their plate to add an additional benefit. 6 Some respondents provided explanations of why they did not offer a retirement plan.  Many firms with 0-4 employees were self-employed or worked with part-time employees or contractors on an as-needed basis.  They may not be aware of options such as solo-401(k)s and SEP IRAs or they may not consider having a retirement plan for themselves as “offering” a retirement plan.   For established firms, costs and administrative burdens become the most important factor for not offering a plan. 

Interestingly, most firms surveyed that cite costs and administrative burden/compliance as barriers do not have a good sense of how much money or time is actually required to set up a plan.  A quick Google search yielded several 401(k) options where annual employer costs would only be about $2,500 for a firm with 10 employees and $5,000 for a firm with 50 employees. 7 As of late 2023, the mid-tier plan offered by Guideline costs $79 a month and $8 a month per participant.  The mid-tier plans from Betterment and Human Interest cost $150 a month and $6 a month per participant.  Fidelity offers a small business retirement plan that charges a $500 start-up fee and a $300 per-quarter administration fee.  However, it also requires employers to match employee contributions, which can increase costs.   But, over half of small firms believe providing a retirement plan would cost more than $10,000 per year; and nearly 30 percent think it would cost more than $20,000 per year (see Figure 5).

Not only do small firms overestimate the cost of offering a plan, but the vast majority – particularly those with fewer than 50 workers – are not aware that they can claim a tax credit of up to $5,000 for three years to help offset the costs of starting a plan (see Table 1).  Interestingly, about 80 percent of employers say that such a credit would make offering a plan more attractive.

Additionally, small firms do not have a good sense of how much time it would take to administer a retirement plan (see Figure 6).  Most firms believe it would take several days to a whole week every month.  But in reality, after the initial set-up, operating a retirement plan should only take a few hours a year. 8 Drobleyn (2023).

Many small firms are also unfamiliar with the various retirement plan options that are designed to help ease the cost and administrative burden of offering a plan.  While most small firms are at least somewhat familiar with 401(k)s, the vast majority are not familiar with SIMPLE, SEP, and MEP/PEP plans (see Figure 7).  And this percentage has barely budged in the last 25 years.

These results suggest that many firms overestimate the financial and time costs required to offer a plan, so better awareness of actual costs as well as available options could help reduce the barriers that small firms perceive. 

Will State-sponsored Programs Impact Firm Behavior?

Currently, 14 states have launched or are preparing to launch programs requiring employers without a plan to automatically enroll their employees in an Individual Retirement Account (“auto-IRAs”).  The survey asked all employers in the sample – not just those in states with auto-IRAs – whether the presence of such a program would make them less or more likely to have their own plan. 9 Theoretically, it is unclear how firms might respond to mandates for state-sponsored retirement programs.  Firms could stop offering their own plan and treat state-sponsored plans as an alternative to offering a retirement plan.  Alternatively, a state mandate could be the catalyst needed to encourage firms to offer their own plans and change business or industry norms.

The results show that, overall, the presence of state-sponsored programs does not make firms less likely to offer their own retirement plan (see Figure 8).  Among firms that already offer a plan, about 70 percent say they would continue to offer their own if their state introduced a mandate.  Among firms that did not offer a plan, almost 60 percent said a mandate would actually make offering their own retirement plan more attractive. 10 A recent study, linking Form 5500 data and individual-level Census data, found that auto-IRA mandates increase the probability of firms offering a retirement plan by 3 percent and the probability that a worker participates in an employer plan by 33 percent (Bloomfield et al. 2023).  A similar study by Guzoto, Hines, and Shelton (2022) also found that state auto-IRAs complement the private market for retirement plans.

The coverage gap is a pressing concern for the nation’s retirement income security, and the gap is driven by small employers.  In order to encourage growth in coverage, it is important to understand the characteristics of small firms that do and do not offer a plan.

For firms that offer or are considering offering a retirement plan in the near future, their beliefs are important – such as whether they think retirement plans matter for employee hiring and retention. 

For firms that do not offer a plan, two major longstanding barriers – revenue stability/size and costs or administrative burden of having a plan – remain top concerns among small firms today. 

Revenue concerns are highly associated with firm size, particularly firms with fewer than 10 employees.  It is understandable that firms may need to become established before setting up a workplace retirement plan is seen as a viable option.  

Views on cost or administrative burdens, however, seem to be driven by misperceptions about the financial costs and the time it would take to operate a plan.  These results suggest that better awareness of the actual costs as well as plan options designed for small firms could help reduce the barriers that small firms perceive.

Finally, the growth of state-sponsored retirement programs may actually encourage firms without a plan to adopt one. 

Bloomfield, Adam, Kyung Min Lee, Jay Philbrick, and Sita Slavov. 2023. “How Do Firms Respond to State Retirement Plan Mandates.” Working Paper 31398. Cambridge, MA: National Bureau of Economic Research.

Center for Retirement Research at Boston College, Employee Benefit Research Institute, and Greenwald Research. 2023. 2023 Small Employer Retirement Survey.

Chen, Anqi. 2023. “Small Business Retirement Plans: The Importance of Employer Perceptions of Benefits and Costs.” Special Report. Chestnut Hill, MA: Center for Retirement Research at Boston College.

Drobleyn, Eric. 2023. “How Much Time Does Annual 401(k) Administration Take?” Mobile, AL: Employee Fiduciary.

Guzoto, Theron, Mark Hines, and Allison Shelton. 2022. “State Auto-IRAs Continue to Complement Private Market for Retirement Plans.” Washington, DC: Pew Charitable Trusts.

U.S. Bureau of Labor Statistics. Business Employment Dynamics , 2022. Washington, DC.

U.S. Bureau of Labor Statistics. National Compensation Survey , 2021. Washington, DC.

Yakoboski, Paul and Pamela Ostuw. 1998. “Small Employers and the Challenge of Sponsoring a Retirement Plan: Results of the 1998 Small Employer Retirement Survey.” Issue Brief Number 202. Washington, DC: Employee Benefit Research Institute.

• 1 Chen (2023).
• 2 U.S. Bureau of Labor Statistics, Business Employment Dynamics (2022).
• 3 For example, similar to firms currently offering a plan, firms without a plan that believe having one is important for hiring and retaining good employees are more likely to offer a plan in the near future.  In addition, firms without a plan that think they will have strong future revenue growth are also more likely to adopt a plan in the future.
• 4 The 1998 survey did not include firms with fewer than 5 employees.  If we compared the share of firms with 5-100 employers, the main takeaway remains the same; a rise in the share of firms – from 49 percent to 56 percent – that cite revenue stability or being too small as a major barrier to offering a retirement plan.
• 5 It is important to note that revenue predictions are not the same as citing a concern for revenue stability.  Figure 2 shows that revenue expectations do not influence the likelihood of offering a retirement plan, all else equal.  But firms can expect higher revenue growth next year and still feel uneasy about revenue stability.  For example, over half of the firms that believe revenue growth will be more than 10 percent higher next year still cite revenue stability as a major barrier to offering a plan.
• 6 Some respondents provided explanations of why they did not offer a retirement plan.  Many firms with 0-4 employees were self-employed or worked with part-time employees or contractors on an as-needed basis.  They may not be aware of options such as solo-401(k)s and SEP IRAs or they may not consider having a retirement plan for themselves as “offering” a retirement plan.
• 7 As of late 2023, the mid-tier plan offered by Guideline costs $79 a month and $8 a month per participant.  The mid-tier plans from Betterment and Human Interest cost $150 a month and $6 a month per participant.  Fidelity offers a small business retirement plan that charges a $500 start-up fee and a $300 per-quarter administration fee.  However, it also requires employers to match employee contributions, which can increase costs.
• 8 Drobleyn (2023).
• 9 Theoretically, it is unclear how firms might respond to mandates for state-sponsored retirement programs.  Firms could stop offering their own plan and treat state-sponsored plans as an alternative to offering a retirement plan.  Alternatively, a state mandate could be the catalyst needed to encourage firms to offer their own plans and change business or industry norms.
• 10 A recent study, linking Form 5500 data and individual-level Census data, found that auto-IRA mandates increase the probability of firms offering a retirement plan by 3 percent and the probability that a worker participates in an employer plan by 33 percent (Bloomfield et al. 2023).  A similar study by Guzoto, Hines, and Shelton (2022) also found that state auto-IRAs complement the private market for retirement plans.

Chen, Anqi. 2024. "Small Business Retirement Plans: How Firms Perceive Benefits & Costs" Issue in Brief 24-7. Chestnut Hill, MA: Center for Retirement Research at Boston College.

The research reported herein summarizes the 2023 Small Business Retirement Survey, which was produced in collaboration with the Employee Benefit Research Institute and Greenwald Research. The Center for Retirement Research gratefully acknowledges Bank of America for supporting this research.

Small Business Retirement Plans: The Importance of Employer Perceptions of Benefits and Costs

Special Report by Anqi Chen

Will Changes to Multiple Employer Plans Put a Dent in the Coverage Gap?

MarketWatch Blog by Alicia H. Munnell

A Multiple Employer Plans Primer: Exploring Their Potential to Close the Coverage Gap

Special Report by Anqi Chen and Alicia H. Munnell

Privacy Overview

WORKING WITHOUT A BUSINESS PLAN: ODDS OF SUCCESS!

January 4, 2023

A business plan is like a roadmap, a few lucky organisations may thrive without having it documented – though one exists within the mind of the driver – but having a documented plan certainly reduces the chance of losing focus and getting distracted anytime a seemingly bright opportunity comes along. Enterprises, whether large or small, cannot hope to significantly compete and expand in today’s global and fiercely competitive marketplace without effective planning. A business plan is a written document that details the company’s concept and all the necessary internal and external factors involved in starting a new firm in line with its business focus. It outlines the nature, context, and strategies for utilising the business’ prospects. The functional plans in finance, marketing, production or operations, information technology, and human resources are typically integrated into the overall business plan. A business plan is also a blueprint that outlines the entrepreneur’s goals and critical factors that will determine the success of a business. It must define where you are, where you want to go and your proposed route to get there. It is a valuable document important to entrepreneurs, investors, and also employees for several reasons, some of which are outlined below:

• aids in determining the venture’s viability in a target market;
• helps entrepreneurs launch their businesses;
• the process of creating a business strategy forces the entrepreneur to consider potential obstacles to the venture’s success, as well as look deeply into its potential competitors;
• helps in defining the best capital gearing, and becomes a tool with which to obtain finance by serving as a guide to investors;
• primary stakeholders, i.e., the founders are forced to consider every possible facet of the business whilst working to develop the business plan (whether by themselves or in collaboration with a consultant);
• it is expected to express the founders’ vision and objectives when well-written;
• it assists in identifying the crucial factors that will decide the company’s success or failure;
• as an employee who is a part of the process, it helps you assess your alignment with the company’s vision, and helps you better identify where you fit in and potentially what your growth opportunities are.

Given Pedabo’s experience over almost 3 decades, it begs the question – Without a plan, do businesses really stand a chance of success? We daresay that no business actually starts off without some modicum of a plan. Yes, it may not be documented. Yes, it may be in response to a quick opportunity that was spotted and not some innate vision or long-standing passion, or just in response to a need for survival, but inherently, there is some ‘plan’ that guides an entrepreneur into believing that he or she can deliver on a certain idea. Similarly, developing a business plan is generally considered as part of a required stage in the startup process in the majority of recommendations for entrepreneurs. As such, they must be seen to be valuable or at least seen to significantly increase the chances of success if so many individuals and research studies advocate for it!

There has been a lot of debate in recent years about the true value of business plans, particularly if their existence could be directly correlated to the success of a company. Some schools of thought infer that planning in itself has no guaranteed positive impact given that some businesses are able to achieve great success despite not having formal business plans. What, however, are the daily contextual realities of such companies? In our experience, we find that such companies are those where the owners / founders are very actively involved in the daily operations, and in the very early stages, almost every primary activity revolves around them and their daily direction as they are effectively the organisation’s roadmap. How truly sustainable is this? For many owners/founders who fall in this category and are forward-thinking, we have found that they very quickly realise that this comes at a high cost to their sanity and a high risk to the continuity of their businesses, and thus begin to seek out ways to structure – devolve their powers to team heads they can trust – develop systems & processes – document – to ensure their businesses can operate successfully without them. It is important to note also, that according to research, the question is not actually about “developing a plan” or “not developing a plan”, but rather “what kind of plan do you undertake and how much effort are you required to put into it to succeed?”

Planning can speed up a Company’s Growth by up to 30 percent According to a research by the University of Oregon, businesses that plan, grow 30% quicker than those that do not. This study indicated that while many firms can succeed in the short term without a plan, those with a plan grew quicker, and overall, were more successful than those without one.

Another study from the same source indicated that fast-growing companies — those with sales growth of over 92 percent from one year to the next — typically had business plans, which further supports the link between planning and rapid growth. In fact, 71 percent of rapidly expanding businesses have working plans. They develop targets for sales, make budgets, and monitor these plans actively. These businesses frequently use terms like strategic plans, growth plans, and operational plans instead of constantly referring to their plans as “business plans”, and this is because they are agile and constantly evolving with the business environment and competitors’ performance. Whatever their long or short-term plans are called, they are all working together towards the organisation’s focus on planning for its future.

Planning enhanced business success was the conclusion, according to a study by Brinckmann, J., Grichnik, D., & Kapsa, D. (2010) that compiled research on the expansion of 11,046 businesses. Interestingly, this same study discovered that planning helped established businesses much more than it helped startups. The reason for this is probably that established companies are better familiar with their clients’ demands than are startups. Planning for an established business entails fewer guesses or presumptions that must be supported, therefore the strategies they create are better informed given the availability of working data. In Nigeria, 61% of Nigerian startups fail in the first 9 years (BusinessDay, 2020). Similarly, in the US, it is noted that about 543,000 new firms open each month, yet only seven out of ten survive in the first two years, while only five out of ten survive after five years. Surprisingly, 70% of companies that last for five years are said to do so because they have a comprehensive business plan (Nazar, 2013).

Sometimes it seems that only large organisations benefit from having a written (formal) business strategy in place. Obviously, because of the resources required, there are few small enterprises that have formal documented business plans, and even fewer that have some informal owner / founder-managed plans. According to 2015 Barclays data, 23% of small enterprises in the UK do not have a business plan. In the UK, formal (written) business plans are present in around half (47%) of small enterprises, while informal (spoken) plans are present in the remaining 30%. (Talk Business, 2016).

Further, it is said that more than 30% of small enterprises fail within the first three years of operation if they do not have a business strategy (Francis J. Greene & Hopp, 2017). Thus, the success rates for business plans appear to be evident.

In the First Five years, 50% of new Businesses Fail It is said that 50% of newly founded companies fail within five years; why is this? According to several schools of thought, it frequently occurs as a result of businesses ignoring the direction of a set business plan or the nonexistence of a plan to begin with. To emphasize, 25% of enterprises without a business plan fail within the first two years of operations. 10% of businesses fail within the first five years of operations, whereas only 6% fail within the first ten (SBT, 2017). In other words, the longer you stay in business, the more likely you are to learn from the marketplace and establish a set of working patterns (a plan) that could drive your success. If you had however devoted some time and resources to a study of those patterns prior to commencement, chances are that you could have saved your enterprise some deeply struggling years. Similar to major companies, small companies need to have a clear business plan – strategy and roadmap – if they want to succeed (Koulopoulos, 2016).

Summarily, to specifically address the question, what are the odds that a business will succeed without a business plan? A business can succeed without a business plan and there are indeed examples of such large companies– albeit outliers – that are able to succeed, especially, at the onset. However, it is more likely that organisations without a set business plan will make a lot of thoughtless errors and that their rate of growth would be greatly impeded, in comparison.

A strong business plan goes beyond market analysis coupled with vague revenue projections for an investor pitch. Like a professional sports team has a playbook, a strong business plan has one too; action plans about what to do when the business is at the final and critical moment or moments of a tense, important, or desperate situation; including a feature roadmap, a target market strategy, and secondary markets to explore when the primary markets are saturated; action plans in case the intended target market’s response is different from that which was anticipated; techniques for strengthening the team as the business expands, etc. These are invaluable learnings from the process of development of a business’ strategy and associated plans. Most businesses that just move with the flow do not end up getting very far, though they may not join the classification of failed enterprises. They, however, eventually realise that they are wasting their time in an endless cycle of repetitive mistakes.

CONCLUSION Creating a business strategy is an essential step in ensuring the long-term success of any enterprise. The advantages of having a business plan far outweigh the inconvenience or the resources expended, as there is definitely no disadvantage in taking a deeper look into the business area you intend to venture. Business planning helps businesses not only succeed but also have a better chance of surviving any industry disruptions, evolution, or unforeseen occurrences. It has a way of setting an enterprise up for effective continuity.

The good news is it is not all gloom and doom, even if perchance you realise that you did not get off to a great start or the last year has been you potentially playing ‘catch up’, or you are able to identify your enterprise in one of the less exciting growth stages discussed above, it is very possible to retrace your steps, put in the time, effort and resources required, and set your enterprise up for a new beginning, and what better time to look into those possibilities than at the beginning of a new year.

To get you started, below are some key activities to keep in mind when creating a business plan for your startup or a growth plan for your existing business:

• set goals – financial goals, brand goals, client goals, and staffing goals (to mention a few). Be clear and explicit about what you want your organisation to attain;
• you can decide to forego the 80-page business plan and instead have a business model canvas or 3 sacred strategy slides; concentrate on basic preparation that outlines your objectives and compiles information on your market and your clients’ needs that will facilitate your meeting those objectives;
• understand your strengths so you can optimise and leverage them and identify your weaknesses so you can properly align with the market opportunities that perhaps do not require those skills whilst you grow;
• know every aspect of your industry/market, so you can adequately identify opportunities and avoid threats where able. You cannot properly position your enterprise to penetrate a market you do not understand;
• start early with your planning – plan for the year, for each quarter, to achieve your annual goals, and know what targets you must reach each month, each week. Break down your goals;
• as you gain more knowledge about your operations, frequently modify your plan;
• more essentially, revisit your strategy, develop and update it as you gain knowledge about your market and clientele;
• develop a roadmap, but do not just file it or store it in a drawer. Monitor your performance to see if you are making progress toward your objectives. Your plan will assist you in identifying what is effective and what is not, and these adjustments can continue as you grow your firm.

The management consulting team at Pedabo is equipped to assist you with your corporate strategy review and/or development to get you started on the right path for 2023.

Any enquiries? Send an email to [email protected]

The Business Plan Quiz: Test!

Business is not as easy as it seems when you just imagine it. The test in front of you is "The Business Plan Quiz." This quiz will see your understanding of the concept of the business plan. This will also provide extra information to you that will help you in the future. Get ready to take this fun and informative quiz that is here. Best of luck with this!

Which section is completed last?

Finance detail

Marketing budget

About your business

Executive summary

Rate this question:

According to research, without a business plan, firms are more likely to close down.

You should describe your products and services and discuss the market that you are ..., if you wish to interest investors, you need to emphasize the company's profit ......... ., the preparation of a business plan is optional for some small businesses., why complete a business plan.

To get finance

To impress your mum

To set out clear goals for your start-up.

To make sure you know what you are doing.

The business goals and competitive advantages can be described by...

Mission statement

Core values

None of these

......... the strong and weak points of any firms in competition with yours and look for marketplace opportunities.

Investigate

SMART means:

Success, Measurable, Achievable, Realistic, Timed

Specific, Measurable, Achievable, Realistic, Timed

Smart, made-up, actual, real, true

You should examine customer... and the benefits of your products and services.

Quiz Review Timeline +

Our quizzes are rigorously reviewed, monitored and continuously updated by our expert board to maintain accuracy, relevance, and timeliness.

• Current Version
• Mar 22, 2023 Quiz Edited by ProProfs Editorial Team
• Oct 01, 2012 Quiz Created by MrsGabell

Related Topics

• Agriculture

Featured Quizzes

Popular Topics

• Advertising Quizzes
• Brand Quizzes
• Business Accounting Quizzes
• Business Analyst Quizzes
• Business Development Quizzes
• Business Environment Quizzes
• Business Etiquette Quizzes
• Business Finance Quizzes
• Business Math Quizzes
• Business Organization Quizzes
• Business Process Quizzes
• Business Study Quizzes
• Business Technology Quizzes
• CEO Quizzes
• Collaboration Quizzes
• Company Quizzes
• Construction Quizzes
• Consumer Quizzes
• CSR Quizzes
• Customer Quizzes
• Customer Service Quizzes
• Development Quizzes
• Ecommerce Quizzes
• Employment Quizzes
• Entrepreneurship Quizzes
• Finance Quizzes
• Hospitality Quizzes
• Human Resources Quizzes
• Industry Quizzes
• International Business Quizzes
• Introduction To Business Quizzes
• Investment Quizzes
• Logistics Quizzes
• Management Quizzes
• Manufacturing Quizzes
• Marketing Quizzes
• Material Quizzes
• Media Quizzes
• Office Quizzes
• Organization Quizzes
• Principles Of Business Quizzes
• Printing Quizzes
• Product Quizzes
• Publishing Quizzes
• Real Estate Quizzes
• Retail Quizzes
• Sales Quizzes
• SAP Business One Quizzes
• Small Business Quizzes
• Source Quizzes
• Supply Quizzes
• Survey Quizzes
• Telecommunication Quizzes
• Trade Quizzes
• Training Quizzes
• Transportation Quizzes
• Warehouse Quizzes
• Welding Quizzes

Related Quizzes

Wait! Here's an interesting quiz for you.