Why Do Nine Out of Ten Restaurants Fail During their First Year?
Restaurants still experience about a 60% failure rate during their first three years of operation, and a 25% failure rate during their first year of operation. This “oldie but baddie” incorrect statistic was used in television commercials for American Express. H.G. Parsa, a professor in Hospitality Management at Ohio State University, heard one of the commercials that said that many restaurants fail and set out to discover the truth.
Lenders have bought into the mysterious extreme restaurant failure myth, however. According to Mr. Parsa, banks often ask restaurants to pay very high interest rates on loans they do obtain, or they are asked to put up extreme amounts of collateral, such as their own homes and other property.
I know from working with restaurant business planning that a lot of funders believe franchises are “safer bets” than independent restaurants. However this isn’t 100% true. Mr. Parsa found that franchise restaurants had about a 43% 3-year success rate – just 3 points higher than the “average” restaurant.
Many franchise opportunities advertise 90% success rates or even higher. It stands to reason that this isn’t necessarily guaranteed, and the reality is, an independent restaurant will have just as much chance of success as a franchise. With some franchises, the independent operator will have more of a chance! Be sure to analyze franchise opportunities carefully if you’re considering buying a franchise.
Guess what success factor, and reason for closing (sometimes a planned exit, such as a planned, profitable sale or a retirement) is the most frequently overlooked aspect of running a successful restaurant business?
That’s right. Anyone who’s worked in the restaurant industry knows that the long hours required to run a successful business take their toll on family relationships. It’s especially hard for restaurant owners with young children, or family members who fall ill. Because so many restaurants are family-owned businesses, any problems within the family will impact the business, and will also make it difficult or impossible for an owner to continue who has to try to divide their time between the restaurant and life at home.
“Conventional wisdom” and business sometimes aren’t the best fit, and the myth about 90% of restaurants failing during their first year is a great example of that.
If you enjoyed this article and are planning to start or expand a restaurant business, contact us at Pacific Human Capital to see how we can help. Remember, if you’ve already started a business plan or have written one using one of the online business tools, we can go over that for you and let you know what you need to do to improve and get funded for only $149.95 – you’ll receive a professional review, report and “how to” steps you can use right away.