Small business owners are some of the most passionate and hardworking people out there. They pour their heart and soul into their establishments. Yet, two out of three small businesses fail in the first two years of operation.

In California, the numbers are even more astonishing. Three out of four small businesses will go under in the first two years. This makes California the state with the highest failure rate. In fact, CEO magazine ranked California last in its annual “Best States/Worst States for Business” listing.

So, what is going wrong? In order for you to protect your small business to the best of your ability, it’s important to know where others are falling short. Here are some of the top reasons that small businesses fail:

  • Bad team: For a business to succeed, it needs effective leadership, strong management and dependable employees. The founders should show respect and appreciation for the team they hire. In return, these employees may be happier at work and show loyalty to your business – which could result in less turnover.
  • Competition: No matter what your business is, you’ll likely have some competition in your area. Therefore, you need to deliver a service or product that is a step above your competition. In order to do this, you should pay attention to what works well for your competitors and focus on continuous improvement.
  • Poor marketing: It’s helpful to learn about your consumers by using focus groups, surveys or phone calls, and then developing marketing strategies based off this information. And don’t underestimate the value of word-of-mouth marketing. Customers love telling others about a great experience – and this is free advertising for you.
  • Lack of proper business systems: Regardless of your business’s size, it needs to have policies and procedures in place. You should consider management systems to manage your employees, equipment and facilities. Without systems and automation, mistakes could be more common.

It’s always hard to see a small business fail – especially when the owner put a lot of money and hard work into it. But if you recognize the common reasons for failure, you may be able to protect your business from the same fate.