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An Expert's Opinion of the Top 3 Reasons Restaurants Fail

Tuesday, July 01, 2014  
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People have many ideas about why restaurants fail, so when I saw the following list a few years ago in passing of the “15 Main Reasons Why Restaurants Fail,” I was naturally intrigued.  The writer says that they are (in no particular order):  1. heavy competition, 2. little to no experience, 3. bad location, 4. limited inventory options, 5. equipment costs, 6. inadequate funding, 7. credit card fees, 8. personal expenses, 9. premature growth, 10. shoddy customer service, 11. unnecessary expenses, 12. poor collection efforts, 13. low sales, 14. mismanagement of inventory, and 15. employee theft.

Full disclosure: I have never owned or operated a restaurant.  Rather, I am an attorney whose sole clients are restaurant and bar owners.  Through my years of dealing with countless restaurateurs, I’ve heard many reasons (some might call them excuses) as to why restaurants actually fail.  What I have noticed is that the same reasons to echo time and time again and can be boiled down into three simple failures. 
1.  Lack of Concept.  In a place like New York City where thousands of restaurants compete for business, even great chefs can get lost in the chaos.  A successful restaurant needs a clear concept and that is by no means limited to a great menu.  Restaurateurs who are unable to define their concept beyond the food they prepare seem to drift from idea to idea in an ever expanding attempt to appeal to a greater audience.  They fear being too unique or niche and therefore often wind up being too general, too generic and incapable of standing out from their competitors.
2.  Lack of Support.  Never underestimate the importance of having a supportive network of family and friends. Emotional support has kept many of my clients going and pushed them to achieve greater success. However, if friends and family are too involved in your business (or your life), this can be problematic for a restaurant owner.  Because people in the restaurant industry tend to work nights and weekends, it can be difficult to keep a work/life balance. Those same friends and family members who are showing you support may become upset that you are not around to reciprocate. Some may feel pressure to spend more time with family and friends to the detriment of their business.  The clients of mine who most often succeed tend to be single or divorced.  Now I’m not suggesting that families are bad for business (quite the opposite) but balancing family and work seems more difficult for restaurant owners given the time requirements they want (and need) to dedicate to both.  Finding the perfect balance is difficult, but achieving this balance is a key element of success in all workplaces; the restaurant industry is no exception.
3.  Insufficient Capital.  I would subdivide this into three categories:
(a)  Opening Under Funded.  Each deal is different but most new restaurants (at-least in NYC) have a slew of costs during its initial stages including the payment of key money, 3-4 months’ security, first month’s rent, legal and accounting fees, as well as the fees associated with architects, designers, contractors, expeditors and other professionals.  And, this is often just the tip of the iceberg.  I find that nearly one-third of my clients come to me with woefully inadequate funding and rarely does this breed success.
(b)  Sufficient Capital but Serious Mismanagement.   Having enough money to operate a restaurant means nothing if mismanagement causes your funds to deplete quicker than expected.  Even if you create a great concept and have what you feel to be sufficient funds, mismanaging these funds, or failing to consider certain costs, will cause your cash to deplete quicker than expected. Things to look out for when creating your budget include:

- Making sure you do not overspend on unnecessary equipment, advertising, or excess food/beverages
- Hiring a bookkeeper or accountant to keep track of your taxes and potential savings
- Staying mindful of how many employees are working per shift and their number of hours
- Costly lease agreements that increase each year beyond what you can afford
- Expanding too fast
(c) Sufficient Capital but Extensive Fines and Unnecessary Legal Costs.  While some legal costs are necessary, others can be avoided.  Avoiding liquor license violations, health code violations, employee discrimination and unemployment claims, patron lawsuits, and partnership disputes, not only reduces the legal fees you will pay, but also the costly fines associated with most violations.  Careful planning and good management from day one will help you ensure that your capital remains sufficient.

This article was submitted as part of our Industry Insider program. Learn more >>

By James D. DiPasquale, Esq., Restaurant & Nightclub Attorney at DiPasquale Law Group, PLLC

The DiPasquale Law Group advises and represents restaurants, bars, lounges and nightclubs in a broad range of business related services, covering all matters related to the New York restaurant and nightclub industry. Our firm's expert restaurant law attorneys possess the knowledge and experience  necessary to effectively counsel our clients in all facets of New York City restaurant law. We handle cases involving the variety of laws and regulations relevant to those in the industry, constantly staying ahead of the curve on the legalities associated with restaurant and nightclub ownership and operation.

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