It’s a question just about every entrepreneur, CEO, economist and stock investor has asked at some point: How long does the typical business last?
A new study from scientists at the Santa Fe Institute in New Mexico might provide some insight. Researchers found that among publicly traded companies the average life span, taking into account acquisitions, mergers and bankruptcy, is about 10 years.
And, surprisingly, companies have the same mortality rate regardless of how established they are or what they do.
The study, published in the journal Royal Science Interface, was led by then-undergraduate fellow Madeleine Daepp under the guidance of post-doctoral fellow Marcus Hamilton, Professor Luis Bettencourt and Distinguished Professor Geoffrey West.
Daepp is now a graduate student at the University of British Columbia and did a large share of the research.
While theories abound as to why companies come and go, prior to the study there was remarkably little quantitative work on what economists call company mortality, Hamilton said.
The theories and evidence that did exist were often contradictory, with some researchers believing younger companies are more likely to die quickly than older ones and other experts thinking just the opposite.
In conducting the study, the institute’s researchers aimed to find out if there was any standard behavior for companies or if it was simply random.
To gather information, Daepp went through Standard and Poor’s Compustat, a massive database of information on about 30,000 companies traded publicly in U.S. markets between 1950 to 2009.
In general, the younger small companies grew quickly and had steep sales increases in their early years, while the older companies saw sales level off as they reached maturity.
Using a statistical technique called survival analysis, Daepp and the team discovered a company’s risk of dying in the next year, for example, had nothing do with how long it had been in business or what it does.
The life span is about the same, whether a business sells bananas or airplanes.
While the exact age varies from firm to firm, researchers estimated that the typical company lasts about a decade before it’s bought out, merges or gets liquidated.
The study doesn’t address the reasons behind the findings, but the researchers have their ideas. Much like plants and animals have their own internal dynamics and must compete for scarce resources, so do businesses trying survive.
