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Prospective entrepreneurs are concerned about the chance of success for their proposed business. A success versus failure prediction model can help the prospective entrepreneur more accurately assess the probability of the proposed business is success. Success versus failure prediction research also benefits existing entrepreneurs, those who assist, train, and advise them, those who provide capital for their ventures, suppliers, and public policy makers (Altman 1983; Ballantin, Cleveland, and Koeller 1992; Cameron, Kim, and Whetten 1987 D'Aveni 1989; Dugan and Zavgren 1989 Koh and Killough 1990; Pech and Alistair 1993; Storey, Keasey, Watson, and Wynarczyk 1987).
While there has been much prior work in this area, much is left to do. As Gaskill, Van Auken, and Manning (1993) state: "There are many studies to better understand business success versus failure. However, there are many questions still to be resolved that warrant additional exploration...previous studies do not provide a comprehensive or unified explanation for small firm failure...comparisons are needed between successful and failed small business owners." Prior empirical studies of failure have concentrated almost exclusively on financial ratio data, though studies of failure usually cite managerial variables as being critical (Scherr 1989). The usefulness of ratio-based business failure prediction models has been questioned (Alves 1978; Corman and Lussier 1991; Gilbert, Menon, and Schwartz 1990; Shelton 1986; Stockton 1989; Sommers and Koc 1987). For example, El-Zayaty (1986) found ratio models to be poor predictors of bankruptcy: in his research of 132 businesses predicted to fail, only 5 were discontinued over a five-year period. Storey et al. (1987) indicated that qualitative data can provide at least as good predictions as traditional financial ratios.
This study is not based on financial ratios, but on the quantitative and qualitative managerial factors that may contribute to success or failure. To date, the author has found only a few major nonratio empirical studies: Cooper et al. (1990, 1991); Reynolds (1987); and Reynolds and Miller (1989). While these studies are pathbreaking, more research is needed. For example, the Reynolds and Miller model cannot predict failure of a business before it starts because the age of the business and the first year sales are factors in the model to predict failure.
The Cooper et al. study provides a point of departure for this research. The...