Sour Bites
6 Sure Ways to Ensure that Your New Restaurant Will Fail
You’ve saved some money to open a new restaurant.
Maybe it’s always been your dream to open a restaurant or maybe it’s your new plan. Maybe you’re going to do it on your own or maybe you have some friends as partners.
After all, you know all about restaurants. You’ve been going to them all your life. You love good food and drink. You get along great with people in the industry and know plenty of owners of great restaurants. You’re a natural.
What Could Go Wrong?
Okay, time for a reality check. Do you know how many restaurants fail? I’ve heard it said that 90% fail in the first year or 60% in the first three years. The better studies indicate that the real number is about 25% of restaurants fail in the first year. But, that still means 1 in 4 fail in the first year. More college students make it through their freshman year than restaurants do. Why do so many fail?
1. The easiest way to ensure your restaurant’s failure is to pick a bad location. Isn’t there one spot in your neighborhood where the restaurant is always changing? It’s usually not because the food’s bad, the ambiance is dull, or the type of cuisine is wrong(although those things may play a part), but because it’s just a bad location. Bad locations are like swimming with a fifty pound weight around your neck. It may work for a little while but it won’t be long until you drown.
Sure, you can probably name a bunch of restaurants in dirty back alleys that are turning away diners. But don’t count on your restaurant becoming one of those and overcoming a bad location. If you make the wrong choice on the location, there may be virtually nothing you can do to prevent eventual failure. Great food, spectacular marketing, fabulous service, plenty of capital, and the hardest work ethic possible are no match for poor visibility, no parking, no foot traffic or just a location that just doesn’t work.
Solution: Take your time and watch the area. Scout, analyze, observe, and ask people in the area what they think of the idea. Does anyone walk by? Bike by? Drive by? Can they take public transportation? Unless the restaurant is going to have some incredible draw, don’t be the test case for a new location. You can never do enough location scouting.
2. The second way to ensure the restaurant’s failure is to just wing it. You may make the best red sauce anyone has ever tasted or the most delectable tiramisu, but that doesn’t mean you can make a restaurant succeed. Great food is a start but that’s all it is. Opening a restaurant requires extensive financial and operational planning in addition to a concept and vision. And most important is a solid business plan. When the money gets tight, you will learn that banks hate to lend to restaurants. Think about it from the bank’s point of view. All a bank has for collateral is tables, chairs, pots, and pans.
Solution: Plan ahead. Before you buy or invest, you need to have a thorough plan for all aspects of the business, including food supply, distribution, bookkeeping, and supplies. Plan for everything. Be cautiously optimistic in your projections for your success may be gradual.
3. You can ensure failure by never learning the restaurant industry. You cannot open a restaurant just to be a new hangout or a home base for you and your friends to eat and drink for free. Sorry, it just doesn’t work that way. You can’t merely hire a manager and put the restaurant on cruise control. You need to know every aspect of the business and operations, from bus boy to bookkeeper. Better yet, work each job!
Absentee ownership will send your restaurant on a losing spiral. You have to be the face of the restaurant, the floor manager, the bar manager, the kitchen manager, the CFO, and the bus boy. Initially, you will have to be the first one there and the last one to leave. Before you can hire others for all the functions of the restaurant, you have to learn them yourself. No one else will ever have the same desire for the ultimate success of the restaurant as you have.
Solution: Dedicate yourself to the restaurant and work hard.
4. Another sure path to failure is to take on too much. Even though you have to learn every role at your restaurant, you can’t do everything yourself. Tax issues, licensing issues, insurance issues, and operational issues can all cause you gigantic problems if you don’t know how to handle them. Failure to pay trust fund taxes, i.e. state and federal withholding and unemployment taxes and the employer’s share of FICA taxes, will not only cause the business to be assessed with severe penalties, fees and fines but may also make you personally liable for the failure to these taxes. Consider forming a limited liability company or corporation for your restaurant so you don’t find yourself personally liable for other debts and injuries at the restaurant (it won’t protect you from taxes).
Solution: Good advice is available from many people who have helped other restaurants succeed including accountants, attorneys like the Restaurant Group at Looney & Grossman LLP, business consultants, and government agencies. A good owner identifies his strengths and weaknesses and gets professional help where and when needed.
5. A swift demise will come to your restaurant when if you run out of money. We all feel like we never have enough money, and truer words are never said at a new restaurant. Too many owners plan and fund the build-out expecting that once they open the restaurant they will have plenty of money for operations and expenses. In reality, it may take up to 12-18 months for your restaurant to have positive cash flow. Opening a restaurant without enough cash can send your restaurant on a short track to disaster.
Without sufficient cash after opening, you will need to free up money from the operations and that will likely cause you to cut corners. Cutting corners will cause food quality and customer service to decline. You will lose customers. You won’t have funds for marketing so you won’t bring in new customers. You will then need to cut more corners. The downward spiral will be nearly impossible to stop.
Solution: Have enough money in the bank to cover fixed costs, including rent, utilities and salaries at your opening. Then, watch your spending, and limit free drinks, especially during the first year.
6. You can kill your restaurant for these obvious but often neglected reasons: your food isn’t consistently good; your restaurant isn’t always clean; and your service isn’t the best around. Without these things, you won’t get repeat customers. Without repeat customers, even the most popular restaurants slowly slide into oblivion. Your goal is to make your restaurant a recurring destination. Good food in a clean and friendly environment.
Solution: Observe and listen to your customers. For every complaint you hear, there are three more that go unsaid. You need to be around, pay attention to everything, and keep the highest standards.
I love going to good restaurants too. I can’t wait for you to make yours a success. I won’t even ask for a free drink at the end of your first year.
