why restaurants fail

The hospitality industry is booming, and everyone has an idea for a cool bar or nightclub, a restaurant, or other hospitality-affiliated business. After all, it’s Florida! Snowbirds, tourists, business travelers, and locals should keep everything topped off and running all year round. Sure, things can get a little slow in the summer, but the rest of the year should make up for it. The thing is that any business can fail in the first year, and it’s a hard truth – many of them do.

Hard Numbers

Investopedia says that 30 percent of new businesses fail in the first two years, 50 percent close after five years, and 66 percent end their run after ten. Only 25 percent will make it to fifteen years or beyond that. Of course, these are not hard-and-fast numbers. The economic health of the country has a lot to do with staying in business, as does the economic environment of the surrounding community. The last recession hit South Florida hard, and while we have recovered, the recovery is fragile despite low unemployment. Unfortunately, the economy is less set-it-and-forget-it and more like running a nursery school with 30 fractious toddlers – just as you get one soothed down another is having a meltdown.

Why Failures?

Failures in the first year can be laid to some basic errors before the business even opened. These reasons are as valid for why restaurants fail as for any other business.

1. Putting the idea first. So, you’re in love with the idea of opening a restaurant. You have a location you’re sure will be a hit. Have you investigated the local area to see how many restaurants are operating in the area? Is it saturated with the same type of establishment that you want to open and operate? And if the location is already fitted as a restaurant or bar, what happened to the previous tenant? One reason why restaurants fail is that great ideas seldom visit only one person – five other people could be ahead of you.

2. Starting with no business plan. A business plan is an essential part of opening a business, and while some businesses can succeed without it, it’s like trying to drive while blindfolded. You might have some idea of where you’re going, but it’s harder to know if you’re going to get there. A business plan is a roadmap that helps to determine if there’s a need for the business, gives a timeline and milestones, and strategies for success. One of the best ways to get a business plan is to contact a service like SCORE – the Service Corps of Retired Executives – help with business plans, mentoring, and workshops that help you grow and to grow your business.

3. Not enough financing. The greatest idea in the world won’t take off when there’s not enough money to cover basic expenses. You can look for loans or investors, but you need some start-up money to… well… start things up. Restaurants are equipment and materials-intensive operations, and that can eat a lot of capital. The failure to look at start-up costs is one reason why restaurants fail.

4. No marketing plan. Another reason why restaurants fail is that there’s no marketing plan. Marketing is not just ads, not just a Facebook page with photos of your location and food, but a comprehensive approach that includes social media, digital advertising, local advertising, and even billboards, and publication ads.

5. Complacency can kill your business. You might think that you have the winning formula, and everything after year two is easy street. Instead, you need to be looking at trends, the competition, seeing how you can innovate and change with your customer base to keep them coming back. Don’t think that you need to change what works? Two words – Blockbuster and Netflix.

6. Too much, too soon. Can a business be a victim of its own success? Yes, expanding too rapidly complicates supply chains, and requires just as much work as starting from scratch. The finances have to be there to make another location independent and not a drain on the original location. A business plan – yes, again – helps to start the new and viable business without draining the original dry.

7. This is a hard one. You might have a friend or a family member who is a terrific person, and you’d love to include them on your march to success, but they may not be the best person for the position you imagine them in. You want to have the best person for the position you’re entrusting them with, no matter who they are. It’s also possible to be incompetent yourself – not knowing what you’re doing, not having a plan, not being prepared for emergencies, and not understanding the complex underpinnings of a successful business.

8. Not enough insurance. Insurance is about being prepared for the unexpected, whether it’s a hurricane (though this is Florida – you should expect those) or a slip-and-fall accident in the kitchen. The list of insurance that a bar, restaurant, or other hospitality service needs is extensive, but when the unexpected happens you need that coverage to be there.

What Kind of Insurance Do I Need?

Your business should carry the following types of insurance.

  1. General liability.
  2. Commercial property insurance against hazards like fire, theft, and other named perils.
  3. Worker’s compensation.
  4. Product liability is there in case your food makes someone ill.
  5. Liquor liability covers injuries or property damage caused by someone you served.
  6. Business interruption insurance will cover interruptions to your business from fire, theft, hurricane, sewer backup, and other issues.
  7. Replacement cost insurance covers rebuilding, replacement, and refurbishment costs.
  8. Fire liability insurance is not the same as fire insurance. If the fire originates in your business and spreads to other buildings, you could be held liable for the damages.
  9. Equipment breakdown insurance for all the big equipment like a walk-in refrigerator filled with food that can spoil.
  10. Flood insurance and wind insurance are coverages that have to be purchased separately – this is Florida, you need both.
  11. Sewer backup insurance. Beware of this and have a backflow valve installed!
  12. Food spoilage insurance because the aforementioned walk-in was loaded with your stock-in-trade.
  13. Sign insurance covers the signs for your business on or near your building in terms of damage to them or from them.
  14. Data loss insurance covers you in case of a data breach that exposes your customer’s information.

Talk to your independent insurance agent at E&L insurance about getting the insurance you need at the price you can afford, and have a lot less to worry about as you get ready to open your doors.