While appearing in a TV commercial for American Express in 2003, Chef Rocco DiSpirito said that 90% of restaurants fail within the first year. It turns out not to be true, but for some reason the number still keeps floating around.[1] While the failure rate for restaurants is not nearly this high, it is still intimidating. According to the National Restaurant Association, the real number is closer to 30% for the first year. Another 30% fail within the next two years.

As a new restaurant owner, what can you do to avoid becoming yet another statistic?

Restaurants fail because of a combination of “macro” and “micro” factors. Macro factors are conditions or events not under the restaurant owner’s control, such as the economy, hurricanes, etc. Since you can’t control these, you need the right types and levels of insurance coverage. On the other hand, micro factors are things the owner can control that affect the growth of the business, so these are what we’ll cover here.

Common problems leading to failed restaurants

Insufficient Capital

Perhaps the single biggest factor, in early restaurant failures, is insufficient capital. Many inexperienced restaurant owners incorrectly assume things will go according to plan. Part of the business planning process should involve Murphy’s Law – what can go wrong will. Make sure you minimize the chances of bad things happening, and that you have enough capital to survive Murphy “when he asks for a table.” Stuff happens, whether you can control it or not. Rodent infestations, employee theft, vandals, food spoilage, cockroaches, staff not showing up, lawsuits from over-served patrons or under-cooked food, etc. You need to plan for all of these. Make sure you have enough capital to handle any “accident” when and if it occurs. In practice this means ensuring you have ample cash reserves, a credit line, and adequate insurance.

Poor Location

Choose wisely, the location of your restaurant is important. Don’t just do a quick walk through of the neighborhood and leave it at that. Research, research, research! Look at crime levels, schools, income levels, wealth, housing values, ethnicities, mass transportation, etc. Are there enough people in this neighborhood, or nearby, to comfortably support your new restaurant? Can the neighborhood afford your pricing? Can a competitor easily set up right across the street? Is there enough parking close by? Does your site have good visibility from the street?

Lack of Commitment

Many new restaurant owners plan to manage their restaurant themselves. If you fit this profile, make sure the restaurant is a high priority in your life. If you are young, and plan to start a family in a few years, will you be able to devote the necessary time and energy to the business? If you are older, will you be able to maintain your passion, energy, and interest for years to come? If you lose interest, or take your eye off the ball for too long, the odds are good that you will become one of next year’s failure statistics.

Lack of Prior Experience

While most of us are good at something, running a restaurant means you have to be good at a lot of things. It is a tough place to learn on the job. Make sure you get some experience as top manager or assistant manager at another restaurant before you take the plunge managing your own. Don’t assume that your experience as a waiter or bartender is enough. Those positions require skills, but not the same ones as a manager/owner.

Out of Control Costs

Unless you have access to unlimited capital, you will need to make some tough decisions before you open. Do you really need that extra 700 square foot room in the back? How about that top-of-the-line cookware you’ve always wanted? Do you really need to hire a full-time assistant manager and a CFO when a part-time assistant manager and a good accountant would suffice? If this is your first restaurant, start small. It is a lot less risky to open an 1,800 square foot restaurant with 14 tables and a staff of 10 than a 4,500 square foot restaurant with 60 tables and a staff of 40. If the first few years go well, you can always expand later.

Of the 30,000 new restaurants that open every year in the United States, about 18,000 of them will fail within the first three years. While careful research and planning cannot guarantee you success, they will certainly tilt the odds a little higher in your favor. And in the end, that is about all you can hope for in the real world.

[1] The Restaurant Failure Myth, Kerry Miller, Business Week, April 16, 2007