According to an Ohio State University study published in 2005 about failed restaurants, 60 percent close or change ownership in the first year of business, with 80 percent closing within the first five years. There are many reasons restaurants fail, from health related closures to consistently bad reviews.
Location. Location. Location. A bad location is one of the biggest—if not the biggest—reason a restaurant fails. Poor visibility, no parking, and no foot traffic is a combination that makes it nearly impossible to turn a profit. Picking the right location can even make up for some of the other deficits in this list, but should not be used a crutch or excuse for bad service or negligence.
"Hands Off" Restaurant Owners
Being a restaurant owner means working at the restaurant. Hanging out night after night and getting famous in the process is just one of many restaurant myths that abound when discussing ownership. Good owners are the first in and the last out because they have the most to lose, but also the most to gain. Unless the property is strictly an investment or the owner lives out of town, the person with money on the line should be there every day, finding new ways to extend profit margins and build the business.
Poor Management Team
You hire someone who you think will be a great general manager, kitchen manager, or bar manager since the person has 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, or steal money—or all three. Unfortunately, the pressures and hours of the industry can crumble even the strong links, so check in regularly with management to ensure they are working at their highest potential.
Tax Complications or Evasion
State and federal taxes come with hefty penalties, fees, and other assorted fines when paid late, but when a restaurant falls on hard times, it is often difficult to make payments on time. Some owners will avoid paying taxes entirely and hope they get away unscathed. It might work once, but tax negligence almost always ends in heavy fines, business closures, or even jail time.
Bad Customer Service
Poor service is an obvious reason for any restaurant closing. A reputation for bad service spreads like wildfire and can seem at times irreparable. Customer service is integral to staying open, as even the best three-Michelin-starred restaurant would shutter with bad service. Getting customer feedback in the beginning stages ensures that you work out the kinks before it becomes too late.
Lack of Attention to Accounting Practices
Since they work on such tight margins, restaurants have to keep a close eye on their cash flow. Making sure you have enough cash to cover big expenses, like food orders and payroll, can often make the difference between recovery and closure. Double-checking your books is a good idea, and getting a CPA to do the polishing will make sure everything is in its correct place. If your accounts run into the red, start looking for ways to save money.
Too Many Staff Members
If anyone is standing still, the business is overstaffed. When several servers, three or four cooks, and a bartender are standing around, the restaurant is probably hemorrhaging cash in payroll costs. Another common problem with a high payroll is paying any single employees more than they are worth. Chef-driven restaurants are notorious for underpaying cooks and overpaying the executive chef, despite the fact that almost everyone is replaceable.
Little or No Advertising
As more and more chain restaurants open across the country, advertising and marketing are both key in establishing a new restaurant's reputation. Most people think that you need to pay substantial amounts to bring customers, but with social media and word-of-mouth marketing, you can spread news to a targeted demographic for little or no money.
Miscalculated Food Cost Percentages
Knowing how to properly price your restaurant menu is the first step toward making a profit. Do you know how to cost out menus on a per-plate basis? Most owners do not. Adding caviar to a menu item as a supplement can be a good idea to capitalize on a low-cost dish. Replacing parmaggiano with grana padano will cut your risotto bill in thirds. Many tricks can help keep food costs down with taste remaining the same. The golden rule of 30 percent food cost will help you keep menu items in line.
Lack of Capital Before Opening
Depending on the type of restaurant you plan to open, you may need hundreds of thousands of dollars or more to cover payroll and vendors until you turn a profit. Remember that the loan has to last you until opening day. Don’t go crazy buying new equipment and furniture for a restaurant before serving a single customer. 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.