Business Failure and Change in Australia

A Staff Research Paper, Business Failure and Change: An Australian Perspective, presents the most recent available evidence of business exits and failures. Some of the key findings are contrary to common perceptions.

It is widely thought that most new businesses will die in the first few years of their operation. The paper reveals that, in fact, most survive for a considerable time. For example, around two-thirds of businesses are still operating after five years. Moreover, the majority of businesses that cease operations are not'failures'- they are solvent businesses closing for reasons unrelated to their financial position (such as when the owner retires or seeks a different lifestyle).

Business failure is a comparatively rare phenomenon. Only around 2 per cent of businesses cease operations each year because the owners, while solvent, are unable to secure a sufficient return. And less than 0.5 per cent of businesses cease operations each year due to insolvency - down significantly from the rate applying in the early 1990s.

Common misperceptions about the level of business failure and the chances of survival may lead some entrepreneurs to overestimate the risk of failure, reducing their willingness to commence new businesses.

Governments have an important role in defining arrangements for the orderly closure or reorganisation of insolvent businesses. The research paper examines institutional arrangements and policy mechanisms for dealing with insolvent businesses.

The loss of employee entitlements in the event of business failure has been the subject of much debate in recent years. Governments around the world use a variety of mechanisms to protect employee entitlements in these situations (a government-funded national employee protection fund was introduced in Australia in early-2000). The paper outlines criteria for evaluating these mechanisms and assesses the various alternatives.