According to recent studies done by University of Denver, 59 percent of hospitality facilities fail in the period of three years. Another study by Ohio State University reported 60 percent of restaurants close or change ownership in the first year of business and 80 percent fail within five years. Most restaurants don’t fail because of just one problem.
I have been a restaurant consultant for more than 25 years and I have seen many tears as restaurants close. Lack of preparation for the restaurant business can lead to massive financial burdens, a very stressful life, and ultimately, bankruptcy and loss of home and assets.
There are patterns common to novice, and even some experienced, restaurant owners.
Here are the top five reasons I’ve seen why restaurants fail:
1. No Business Plan
You signed the lease, but you don’t have an estimate for first month’s expenditures.
Many people make this mistake. But a business plan steers you in the right direction from the very beginning. It is a road map to where you want to go. Studies show that businesses have a 30 percent better chance to be successful if they have a business plan. This couldn’t be truer than in the restaurant industry.
Restaurants have an extremely high failure rate because owners don’t realize how expensive it is to start and maintain a restaurant. Operating without a business plan is like setting a timer for failure. Simply put, create one if you don’t have one.
2. Lack of Capital
You have enough money to purchase the restaurant, but you did not give more thought to pre-opening expenses and working capital after you open.
Don’t underestimate operation costs. First-time owners make the classic mistake of allocating more money to construction and/or remodeling while ignoring the expenses that begin piling up after the “We’re Open” sign goes up. A good rule is to budget six months of capital. (This is where a business plan guides you through the bumpy start.)
3. Dirty Restrooms
I have found over the years that clean restaurants do not go out of business. In the restaurant industry, it’s standard to judge effective management based on the hygiene of a clean toilet. Clean restrooms reflect the type of management that pays attention to detail.
Proper sanitization is central to a restaurant’s brand, not only in the kitchen, but also in the restrooms. Cleanliness lets customers know management follows health laws and is adamant about keeping the kitchen and restrooms sanitized. This kind of subtle messaging builds trust with clients.
4. Location! Location! Location!
Didn’t anybody look at the parking? It has poor accessibility. And the signage… can anyone see it? Maybe three weeks after opening your restaurant you find out it’s in a high-crime area. I can go on and on about why a location doesn’t work. But it’s up to you, the owner, to research the area, the traffic, the foot traffic, and the accessibility. You must do your research to make sure your investment is in a sound location.
5. Lack of Management Skill
There’s no way around good management or lack thereof. Whether it’s managing a Girl Scout troop or a restaurant, management is the glue that holds any operation together. Management has to be effective. Failure to recognize the importance of an organizational chart, to create a management structure, to follow recipes, to construct a menu, to control food costs and to control the staff are some ways management can be ineffective. Poor management is the first domino to fall among reasons why restaurants fail.
Where to Go for Help
You’re already started in the right direction when you know you need help. One of the easiest steps is to hire a restaurant consultant. As a consultant myself, I guide restaurateurs from the early stages of the dream to running a financially sound operation. If you are not experienced with running a restaurant, getting advice from an experienced restaurant consultant will save you time and money—and maybe your restaurant.
Look at business groups that provide support and information like SCORE (www.score.org). SCORE is a non-profit organization run by the Small Business Administration. SCORE provides entrepreneurs with mentors who are experienced with various business industries. Here’s the best part: it’s free!
Join a community like Restaurant Owners (www.restaurantowners.com). It provides tools and information to help you run your restaurant effectively and guides you to making a profit. This one does come with a monthly cost.
If you’re overwhelmed with the process, contact me. I coach clients who are new to the business as well as those who are struggling, barely making it. Learn how to manage your restaurant with a cost-effective system that leads to less stress and more profit.
As Alan Lekein said, “Failure to plan is planning to fail.” Proper preparation involves research paired with a thought-out business plan that will help you avoid the costly pitfalls common to restaurant owners.
Kenny Arone is a restaurant consultant and partner in Cost Genie Menu Costing Software.