Have you ever noticed a new restaurant opening and the next thing you know the restaurant is closed? Every year, a countless number of brave entrepreneurs open restaurants with the idea in mind of being successful. Some individuals have restaurant experience, but a great majority of new restaurant owners don’t have experience. Working with some restaurant owners I sometimes wonder did they do their research before opening the restaurant?
The truth about the restaurant industry is that a new restaurant is more likely to fail within the first three years of opening the doors than succeed. According to a study performed by H.G. Parsa, Professor of Hospitality Management at Ohio State University, her study indicated that an average of 57% of new start-up restaurant businesses fails within the first three years after opening.
Professor Parsa found that the highest failure rate for new restaurants occurred during the first year when about 26% of the restaurants failed. Approximately 19% of new restaurants failed in the second year, and approximately 14% of new restaurants failed in the third year. Among franchised chains, the failure rate was 57% over the three years; and among independent restaurants, the failure rate was 61% over the three years.
Would you be surprised to know 80% of restaurants fail within 5 years of operating the doors? What is behind the high number of restaurant closings. Let me help you understand, find our reasons listed below.
EATS Broker 5 reasons:
- It’s ALL About the Money– The most common reason Restaurant Owners tell me they need to sell a restaurant is due to a lack of start-up capital. Opening a new restaurant comes with tons of setbacks, unexpected challenges, and the money disappears quick. Most restaurants take a loss in the 1st year due to the build-out cost and funds required to operate a business. The high failure rate is a big reason landlord require a personal guaranty on leases, to ensure they can collect a rent payment in case the restaurant closes before the lease expires.
- EATS Broker Tip: To be honest with yourself and think if I don’t make positive cash flow in the 1st year can my concept survive?
- Poor inventory and staff management-The highest percentage of restaurant sales will be used for paying the labor cost, buying and ordering food. Food cost should range from 28%-35% depending on the concept, salary and wages should come in at 20%-23%. Watching these numbers closely can be all the difference between showing positive numbers or taking a loss.
- EATS Restaurant Brokers Tip: Know the numbers for your restaurant, you should never be in the dark regarding your food cost % and labor %.
- Pick the right restaurant concept- I tell my clients the restaurant business is a lifestyle. Picking the wrong concept for someone’s family lifestyle, beliefs, or capability of operating is a quick way for failure. I would think about are you passionate about the cuisine? How easily can you train employees to operate? Do you relay on highly skilled employees?
EATS Broker Tip: The high failure rate of new restaurants can be attributed in part to a lack of understanding of the restaurant’s market. Do your research before you open a new restaurant?
After 7.5 years of working with one of the nation’s largest restaurant brokerage firms, and now opening a Restaurant Brokerage Firm, I have seen a lot of restaurants close the doors. Regardless of all the planning, the restaurant can fail, but you are increasing your chances for success if you think about the three points covered in this article.
For more information on the restaurant market and other available consulting services or restaurant valuations, contact Restaurant Business Broker Dominique Maddox at 404-993-4448 or by email at [email protected]. Visit our website at www.EATSbroker.com
