It is a fairly commonly known fact that the majority of restaurants that open will fail within three years or sooner. However, some restaurants hype up their openings and then fail disastrously, which can be a lot more publicly humiliating. Restaurant failure is common among all types of restaurants, whether they are fast food joints, fine dining establishments, or everything in between. 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.
Many people have the intention opening a restaurant and thinking they will hire a manager to run the front of the house and hire a chef to run the back of the house. You feel everything will be taken care of and being there is not important. Wrong, if you want to own a restaurant, but do not work in it, well then don’t expect to get paid!! Restaurants can’t support that extra cost very long. Besides weak management occurs when you hire someone who you think will be a great 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. Who’s to blame? You! Don’t ever trust anyone completely with your restaurant, money, and staff. It’s your business reputation and you need to take care of your own business.
I’ve said it over and over again that a bad location is one of the biggest problem and reason a restaurant fails. It has poor visibility, no parking, no foot traffic, just a few of the problems associated with a bad location. Trust that’s not a good thing!
While I have your attention, lack of capital and negative perception of value is a huge problem when opening a restaurant. Depending on the type of restaurant you want to open you will need at least $50K – $100K to start. I’ve talked with many restaurant owners who have fallen into this trap. Learn to be frugal with open credit and stop taking money you cannot pay back. Use your money as a savings and spent only in case of necessity. The restaurant that runs out of working capital before it can start running to make a profit is doomed to failure. So with that said, please by all means have enough cash in reserve for the first year to make sure that you have enough capital for all the uncertainties you‘re going to face in the initial period of operation. This is very important because in the first year you cannot predict the course of your financial operations.
One important issue concerning money is 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.
This is something that gets me upset, “The bad partnership relation”. I’ve experience it, seen it with other associates and friends. If you share ownership of the restaurant with a partner (s) especially if you are with your business partner in close friendship, kinship or had a romantic link. You will share financial risks which can be very stressful. Unfortunately, many restaurants fail because of the inability of partners to resolve their disputes. Business partners must collaborate to resolve such issues. They need to objectively review the facts and analyze the situation. You should determine your common ground and value of the relationship for the sake of the business. You must clearly recognize each party’s contributions to the restaurant business. Functional roles should be clarify and distinct from equity ownership. It is increasingly important to separate these two concepts as the business grows. The best solution is to formalize roles and duties or simply draw up a contract.
The restaurant business is tough, everyone in it knows it. Everyone looking to get in it ignores it. The cold fact of the matter is that opening up a restaurant may be one of the worst investments you could make with your money. That’s a horrible, sobering statement coming from someone like me, but it’s the truth. Ugh! Why the hell would anyone want to get into this business with a failure rate like that? Risk and reward my friend, risk and reward.
Take a look at the external issues that contributed to the failure and tackle those you can control, you can’t control the economy; you can control the people you hire. Don’t blame other people – failure is an event, never a person, recognizes that failure is going to happen – if it doesn’t, it probably means you are not setting high enough standards or not taking enough risks.