10 Reasons Restaurants Fail

Why Some Restaurants Fail in the First Three Years

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Even before the recession started, restaurants have come and gone, all over the country. According to a study about failed restaurants by Ohio State University, 60 percent close or change ownership in the first year of business, 80 percent fail within five years. The big question is why? Why do so many restaurants fail so quickly? Few other businesses tout such disheartening statistics. Most restaurants don’t fail because of just one problem.

It usually a combination of problems that finally reach a head and the business can’t be saved. Here are ten common reasons that many restaurants fail within their first three years.

A Bad Location

I’ve said it over and over again. And I will continue to say until I am blue in the face. Location. Location. Location. A bad location is one of the biggest (if not the biggest) reason a restaurant fails. Poor visibility, no parking, no foot traffic, or maybe being cursed are just a few of the problems associated with a bad restaurant location.

Restaurant Owners Who Don’t Work

Being a restaurant owner means, in most cases, working at the restaurant. Many people open a restaurant thinking they will pay a manager (see number 3, for this potential mistake) to run the front of the house and pay a chef to run the back of the house, while they sit at the bar with their friends and collect a paycheck. Wrong.

One of many restaurant myths that I like to debunk. If you want to own a restaurant, but not work in it, then don’t expect to get paid. Restaurants can’t support dead weight very long.

Hiring Poor Management

You hire someone who you think will be a great general manager, or kitchen manager, or bar manager, since they have experience and excellent references.

Then a few months down the road not only don’t they manage the restaurant, they alienate staff, drink away the profits and/or steal money. Hiring a manager is fine — in some cases it is a necessity — but don’t ever trust anyone completely with your money or your business reputation. Remember that no one is going to care about your business the way you do.

Not Paying Taxes

Both state and federal taxes come with hefty penalties, fees and other assorted fines when paid late. It can also cause the state or other local government to shut down a restaurant completely if taxes aren’t paid.

Bad Customer Service

This is an obvious reason for any restaurant closing. But I still think it is worth repeating. Customer service, along with good food, is integral to staying open. Therefore, don’t shy away from getting customer feedback, whether in the form of comment cards or just asking patrons how their meal is. I’ve often heard that for every customer complaint you get, three more are left unsaid. If that is true, then there are a lot of unhappy dining patrons out there who don’t bother to say anything. And they don’t bother to return to a restaurant when they think they have bad service, either.

Not Watching Your Cash Flow 

Cash is king, no matter what credit card companies would like you to believe. It is vital that restaurants (well, any business for that matter), keep a close eye on their cash flow. Make sure you have enough cash to cover big expenses, like food orders and payroll, every week, along with all the other bills that come with a restaurant. If your checking account starts running into the red, it is time to look for ways to save money at your restaurant.

Keeping Payroll too High 

I cringe when I go to a local restaurant (one I used to own, actually) and see the number of staff working on a Sunday evening. The owners (who don’t work there often- and are never in the front of the house) have several servers, three or four cooks in the kitchen, and a bartender- all sitting around. They could easily cut a third of the staff and still give good customer service. Another common problem with a high payroll is paying any one employee more than they are worth. Everyone has their price, and I’ve seen countless unsuspecting restaurant owners pay chefs or general managers way too much money, because they think they have to. Salaries depend largely on where you are located. In quiet ole Western Maine, even someone of Emeril Lagasse’s caliber won’t make more than $50,000 or $60,000 (and that is very generous) as a head chef. Yet, I know of restaurant owners (with way too much money to burn) who have paid chefs and GM’s well over that amount.

Not Advertising

As more and more chain restaurants open across the country, advertising and marketing are both key in establishing a new restaurants reputation.

Not Understanding Food Cost

Knowing how to properly price your restaurant menu is the first step toward making a profit. Most people know that seafood is more expensive than chicken and beef is more expensive than pork, but beyond that, what do you charge for pasta dishes?

Salads? Desserts? The golden rule of 30% food cost will help you keep menu items in line.

Spending too Much Money Before Opening Day 

Depending on the type of restaurant you plan to open, you may need anywhere between $50,000 to $100,000 or more. Remember that the loan has to last you until opening day. Don’t go crazy buying new equipment and furniture. Buy what you need and consider the benefits of used equipment. Avoid putting anyone on payroll until as close to opening day as possible. Be frugal with your opening loan; don’t treat it like you just won the lottery.