Small business failure is one of the severe economic problems that are observed in the contemporary economies both in developed and developing ones, and its causes have been target of many research projects conducted in different contexts. In Somaliland, a high percentage of firms are recently established, and they belong to those operated by families (Ministry of Planning and National Development, 2017). Moreover, Somaliland business sector in general is tackling a variety of challenges such as access to finance, access to land, expensive electricity, transportation problems and tax rates (Ministry of Planning and National Development, 2017). Similarly, World Bank (2016) stated some challenges like customs and trade regulations, unavailability of water, inadequate of educated workforce and unregistered practices, but the report claimed that these obstacles were not as severe as other hindrances mentioned by Somaliland national development plan II. Farah and Ainebyona (2019) identified that tax is a noteworthy factor which is obstacle to small business performance in Somaliland. Likewise, Noor and Ampornstira (2019) pointed that lack of security, lack of public services, and competition are factors hindering small business performance in Somalia. According to Ali et al. (2013), in Somalia, small businesses fail due to inaccessibility to loan. As stated by Ahmed (2020), inadequate management skills and government policies are main obstructions for small and medium-sized enterprises in Somalia. Similar difficulties are also facing small businesses in Burao city, since the business environment of the country is homogeneous.

In Burao, small businesses leave the market constantly as reported by Burao chamber of commerce in 2019. All small businesses, regardless of sectors and industries cease operations persistently, but most observed failing small businesses are restaurants, teashops snake bars, clothes shops, boutiques, pharmacies and small retailor shops. The problems that are facing these businesses include incapableness to pay costs which forces owners to pay part of the costs. Entrepreneurs or owners of these businesses try to tackle the difficulties, but the last viable option is always dissolution. Moreover, no one can accurately explain real factors that contribute to this severe business failure.

If this terrible problem is not solved, it could create awful effect on the economy in general and particularly on the local investors, consumers, labor force and government. The potential consequences of the small business failure may include development of imperfect markets, inflation, unemployment, lower consumer purchasing power and reduction in both local and central government’s tax revenue. Therefore, it is necessary to study this difficulty in order to avoid all these potential problems.

Keats and Bracker (1988) developed a model of small business performance. Their model shows that performance of small business is determined by two factors which are entrepreneurial characteristics of the owner and contextual or task environment factors. Entrepreneurial characteristics of owners are something related to the concept of the entrepreneur. Dollinger (as cited in Keats and Bracker, 1988,p. 54) stated that environmental factors includes customers and clients, vendors and suppliers, potential employees, bankers, lawyers and accountants (external consultants), trade and business associations, regulatory and union officials, stockholders and creditors, competitors and unspecified others. Thus, the model of Keats and Bracke claims that small business performance is influenced by these two categories of factors (entrepreneurial characteristics of owners and task environment factors). The current study is guided by this model in that it studied internal and external sources of small business failure.

Internationally, there are different definitions of the concept of small business, and most of these definitions concentrate on size aspect of the businesses to clearly delimit the concept of small business or to distinguish small business from medium and large business. Most of the available definitions are based on company’s acts of the western countries. In UK, a small business is a business that has maximum revenue of £5.6 million, a maximum total balance sheet of £2.8 million and maximum of 50 employees, while in European Union countries, small business is any business organization that has a maximum of 50 employees (Lee-Ross and Lashley, 2010). On the other hand, in Australia small business means the one that has a number of employees between 5 and 20, but in USA, a given business to be small business it should have a maximum of 100 employees (Lee-Ross and Lashley, 2010). For the purpose of this research, small business is any business organization that has maximum employees of 20 and maximum yearly revenue of $200,000.

The term business failure has also been defined in different ways by different researchers; for example, Mcgrath (1999) defined business failure as closure of business activity that has failed to meet its goals. Business failure is defined “as firms earning a rate of return on investment which is less than the company's opportunity cost” (Ibrahim and Ellis, 2015, p.18.). These definitions are different in terms of scope and aspects of failure that they are considering; however, for the purpose of this study, McGrath’s definition is suitable. Therefore, throughout the study, business failure means closure of business activity that has failed to meet its goals.

The specific objectives of this study were to identify internal factors that cause small business failure of Burao businesses and to discover external factors that contribute to small business failure of Burao businesses. To achieve these objectives, the study used survey research design in which questionnaire data were collected from 200 owners of failed small businesses.

A large number of research articles were written about factors affecting small business failure, but most of these studies are outdated; therefore, the current study cited only those which were conducted in the last five years. The relevant literature concentrated on both external and internal causes of small business failure, and this is congruent with the objectives of this study as they also targeted both external and internal causes. Apart from other factors, poor managerial skills of the owners is a major source of business failure (Robleh, 2017; Al-Ghamri, 2016; Twesige et al., 2020; Alshami et al., 2020; Lussier, 2016; Malecka and Luczka, 2018).This is evidence for how owner’s managerial skills are indispensable factor of small business success. Managerial skills are part of the entrepreneurial skills, and there are some other researchers who claimed that poor entrepreneurial skills of the owners/managers of the small business are causes of small business failure; for example, Radzi et al. (2017) and Bushe (2019) indicated that entrepreneur incapacity of the owner/manager of the small businesses is a source of failure. On the other hand, Aisyah et al. (2017) claimed that entrepreneurial skills have no effect on small business performance. Okpalaojiego (2021) discovered that immoral government policies, economic marginalization, ethnic or religious imbalances, bad economic conditions and lack of security are major sources of small business failure in Nigeria. In contrast, some other researchers stated that small business failure is caused by competition facing them in both their local markets and foreign markets (Rahman et al., 2018). Differently, Truong (2019) claimed that performance of small businesses is determined by staff skills, suitability of the product to the market demand, location and availability of financial resources.

There are other researchers who divided sources of small business failure into external and internal causes; for instance, Atsan (2016) identified that there are internal sources of small business failure such as bad relationship between partners, poor financial skills and lack of necessary information and monitoring. Atsan also argued that there are some external causes of small business bankruptcy which includes undesirable economic conditions and unfavorable changes in government policy. Although all of them did not declare directly, the findings of the above cited studies stated that small businesses can fail as a result of both internal and external causes, and that is why the current study is trying to identify external and internal factors that bring small business bankruptcy in the Burao context. However, a noteworthy gap that exists in the literature is that there is no sufficient number of researches that focus on the causes of small business failure in Somaliland. Thus, this study enriches the literature in that it identified sources of small business failure in Somaliland context where considerable studies of this kind had not been conducted before.

This research used survey research design to achieve its objectives, and its target population was all previous owners of the small businesses that had been discontinued in the last three years which used to operate in Burao city. This study employed cluster sampling method; moreover, since there was no reliable governmental records of businesses that had been terminated, 400 businesses which had failed in the last three years were registered by the research team in seven different villages and areas (October, Plaza-Ukubo, Hodankaylo, Sha,abka, Keny-Sailada, Mohamed-Ali and the city center) of Burao city. Then, 200 businesses were selected randomly to study.

Data collection method was questionnaire, and statistical data analysis such as frequency distribution tables, percentages and Relative Importance Index (RII) were used to analyze and interpret data. The RII is an average value of an item which is scaled to have a value between 0 and 1. A five-point Likert scale ranging from 1 (strongly disagree) to 5 (strongly agree) was used, and then they were changed into relative importance indices (RII) by using the following formula: RII =  , where W is a weight given to each factor by the research participants (ranging from 1 to 5), A is the highest weight (5 in this case), and N is the total number of respondents. The RII value has a range of values from 0 to 1 .The higher the value of RII, more important was the role of the factor in the small business failure. Furthermore, reliability of the data was assessed by using Cronbach’s Alpha. Moreover, factor analysis was conducted to evaluate validity of the questionnaire.

Apart from the characteristics of the failed businesses and their owners, the studies have two categories of research variables. Category one consists of group of internal variables which could contribute to the small business failure. Category two contains set of external variables which also may cause small business failure. These two dimensions of small business failure are in harmony with the Keats and Bracker model which they developed in 1988, so the study is guided by this model. Their model claims that performance of small business is determined by two group of factors which are entrepreneurial characteristics of the owner and contextual or task environment. Entrepreneurial characteristics of owners is relevant with the entrepreneurial skills of the owner which influence the business performance while the environmental factors are influential elements within the business surroundings such as customers and clients, suppliers, potential employees and bankers.

To identify characteristics of the failed businesses and their owners, normal close ended questions which were related to age, gender, education level, previous business experience, business type, business age and form of business organization were written in the questionnaire.

To ascertain the internal factors, the following items were used: Lack of a specific target market; poor business site location; Failure to generate a long-term business plan; personal problems (health, marital, etc.); Ineffective advertising or promotional strategy; inadequate knowledge of pricing strategy; inflexible decision making; premature business growth or overextension; inadequate financial accounting record keeping; Lack of managerial experience, skills, and training; Lack of a formal college education and etc. To respond, participants showed to what extent these factors contributed to their business failure by choosing answer from this scale of five options: Strongly disagree, Disagree, Neutral, and Agree and strongly agree. These items were used by Gaskill et al. (1993) in their research of small business failure.

In order to determine the external factors that may cause business discontinuity, the research used items like high taxes; high interest rates; high operating expenses (wages, rent, etc.); government regulations; poor economic conditions; difficulties in receiving merchandise; lack of financial support from banks and financial institutions and competition from discount stores. Owners of failed businesses indicated to what extent these external factors had caused the failure of their businesses, and again the above mentioned five points scale were used in answering these questions. Similarly, these items were used by Gaskill et al. (1993).

Internal causes of small business failure

The current study revealed that the five most significant internal factors that caused the small business failure in Burao were: lack of consultation with experienced and professional business people; ineffective advertising or promotional strategy; poor business site location; lack of knowledge of current business situation; lack of specific target market. The findings of this study are different from what majority of the other researchers found regarding to the internal causes of small business failure; for example many researchers mentioned that lack of managerial skills is the major internal source of small business failure (Robleh, 2017; Al-Ghamri, 2016; Twesige et al., 2020; Alshami et al., 2020; lussier, 2016; Malecka and Lucezka, 2018). However, the current study is partially in agreement with the result of Truong (2019) who mentioned that inappropriate business location is one of the factors that cause small business failure. The aforementioned findings of this study are also partially congruent with the argument of Atsan (2016) who pointed out that small businesses fail if the owners/managers lack the necessary information that is needed to run the business effectively. However, when it comes to internal causes of small business failure, the findings of this study are not in harmony with most of the arguments of the cited research articles. The majority of the cited studies were conducted in some other contexts, so this contextual difference may cause findings to be also dissimilar.

External causes of small business failure

The current study disclosed that the most significant three external causes of small business failure were: poor economic conditions; high operating expenses like rents and wage; competition. Poor economic condition means lack of sufficient demand and existence of large credit sales which their payments were not always successful. According to respondents, the competitions that they faced were two forms: competition among similar small businesses and competition between weak small businesses (retailers) and wholesalers who sell commodities to the small businesses. As stated by the respondents, wholesalers also retail commodities with a price which is lower than that of retailers. This study is in line with Okpalaojiego (2021) who considered poor economic conditions as external factors of small business failure. Rahman et al., 2018) identified that competition is a cause of small business bankruptcy. This is in harmony with the findings of the current study. The result of the current study is also in line with Gaskill et al. (1993) as they mentioned that inability to overcome competition in the market is one of the external causes of small business failure.

This study investigated causes of small business failure in Burao, Somaliland where small business failure has been a severe problem in the last years. The study aimed at identifying external and internal sources of small business discontinuity, for there are some theories which categorized factors that cause small business failure into internal and external. Small businesses are very important economic units in every economy regarding to their role in the employment and economic growth. Therefore, studying their problems is an indispensable thing. The current study found that there are some internal causes of small businesses failure such as lack of consultation with experienced and professional business people, ineffective advertising or promotional strategy, poor business site location, lack of knowledge of current business situation and lack of specific target market. This research indicated that these are five most influential factors when it comes to internal factors that bring small business bankruptcy. On the other hand, this research identified that poor Economic conditions, high operating expenses like rents and wages and competition are key external factors that cause small business failure. In my point of view, these findings are objective and logical, and sustainable solutions could be made if all concerned parties consider the argument of this study carefully. Furthermore, personally I met several small business owners claiming that they had been challenged by bad Economic conditions and severe competition. Thus, the claim of the current research could be applicable in Somaliland context and other neighboring regions which have similar social and business features. However, this study was a survey research which did not carried out a deep inferential data analysis, and this may be considered as the key limitation of this study. Therefore, this study implies that the other sophisticated research designs are needed to deeply comprehend the sources of small business failure, so I recommend that other researchers who are interested in this area of research conduct correlational research in Somaliland. However, the findings of this research are useful; besides, the findings imply that Somaliland’s ministry of business, other relevant public institutions and business owners should consider these recommendations that were made in this study to reduce small business failure.

1. Poor economic conditions are prevalent problems throughout the country. Somaliland central government should make efforts by using fiscal and monetary policies to create job opportunities so that purchasing power of consumers can be increased. The Somaliland government must also use the aforementioned policies to mitigate inflation which is also another challenge for both small businesses and consumers.

2. Private and public consulting firms should be established to provide skilled advisory services to small businesses.

3. Small business managers/owners must consult experienced and professional business people and consulting firms in order to tackle problems facing their businesses successfully.

4. Small businesses have to advertise their businesses by using cost effective simple methods like attractive brand names; brochures, good-looking billboards, magazine ads and social media.

5. At the beginning, businesses must be located in a site which is convenient for the potential customers. Costs of rents, access to suppliers and locations of competitors must also be taken into account when deciding business site locations.

6. The major operating costs like salaries and rents must be kept in a reasonable level through bargaining and negotiations. Job enlargement must also be exercised as a cost minimization method.

7. Owners of the small businesses must always be aware of the dynamic market conditions regarding to demand, supply, prices and government interventions. The information could be found by contacting suppliers, trade unions, chamber of commerce, competitors and the relevant government institutions.

8. To outdo the competitors, owners of small businesses must come up with effective strategy. In this regard, Michael Porter stated two strategies: cost leadership and differentiation. That means either minimize costs to be able to sell at lower price, or sell unique commodities or services which your competitors do not have. Moreover, to improve their competitive advantage, small business owners should consider the followings factors: quality, price, location, selection (choices available) and speed. On the other hand, concerned government institutions should examine and punish wholesalers who also retail their commodities at a cheap price with which weak retailers cannot sell.

9. Target market must also be clear. Your products or services may not be needed by everyone in the market; thus, small business owners should target specific segment of the market based on geographic, demographic, psychographic or behavioral differences of the potential customers.

This research was funded by University of Burao and Togdher Chamber of Commerce.

The author has not declared any conflict of interest.

The author would like to appreciate the University of Burao and Togdheer Chamber of Commerce for providing financial resource that was needed to conduct this research as well as the Social sciences students of University of Burao for collecting the data used in this research.