Have you ever noticed a new restaurant opening and the next thing you know the restaurant is closed? Every year, a countless number of brave entrepreneurs open restaurants with the idea in mind of being successful. Some individuals have restaurant experience, but a great majority of new restaurant owners don’t have experience. Working with some restaurant owners I sometimes wonder did they do their research before opening the restaurant?
The truth about the restaurant industry is that a new restaurant is more likely to fail within the first three years of opening the doors than succeed. According to a study performed by H.G. Parsa, Professor of Hospitality Management at Ohio State University, her study indicated that an average of 57% of new start-up restaurant businesses fails within the first three years after opening.
Professor Parsa found that the highest failure rate for new restaurants occurred during the first year when about 26% of the restaurants failed. Approximately 19% of new restaurants failed in the second year, and approximately 14% of new restaurants failed in the third year. Among franchised chains, the failure rate was 57% over the three years; and among independent restaurants, the failure rate was 61% over the three years.
Would you be surprised to know 80% of restaurants fail within 5 years of operating the doors? What is behind the high number of restaurant closings. Let me help you understand, find our reasons listed below.
EATS Restaurants Brokers 5 reasons:
- It’s ALL About the Money– The most common reason Restaurant Owners tell me they need to sell a restaurant is due to a lack of start-up capital. Opening a new restaurant comes with tons of setbacks, unexpected challenges, and the money disappears quick. Most restaurants take a loss in the 1st year due to the build-out cost and funds required to operate a business. The high failure rate is a big reason landlord require a personal guaranty on leases, to ensure they can collect a rent payment in case the restaurant closes before the lease expires.
- EATS Restaurant Brokers Tip: To be honest with yourself and think if I don’t make positive cash flow in the 1st year can my concept survive?
- Poor inventory and staff management-The highest percentage of restaurant sales will be used for paying the labor cost, buying and ordering food. Food cost should range from 28%-35% depending on the concept, salary and wages should come in at 20%-23%. Watching these numbers closely can be all the difference between showing positive numbers or taking a loss.
- EATS Restaurant Brokers Tip: Know the numbers for your restaurant, you should never be in the dark regarding your food cost % and labor %.
- Pick the right restaurant concept- I tell my clients the restaurant business is a lifestyle. Picking the wrong concept for someone’s family lifestyle, beliefs, or capability of operating is a quick way for failure. I would think about are you passionate about the cuisine? How easily can you train employees to operate? Do you relay on highly skilled employees?
EATS Restaurant Brokers Tip: The high failure rate of new restaurants can be attributed in part to a lack of understanding of the restaurant’s market. Do your research before you open a new restaurant?
After 7.5 years of working with one of the nation’s largest restaurant brokerage firms, and now opening a Restaurant Brokerage Firm, I have seen a lot of restaurants close the doors. Regardless of all the planning, the restaurant can fail, but you are increasing your chances for success if you think about the three points covered in this article.
For more information on the restaurant market and other available consulting services or restaurant valuations, contact Dominique Maddox at 404-993-4448 or by email at email@example.com. Visit our website at www.EATSbrokers.com
When you think of a Fast-Casual Restaurant what is the first thought that comes to your mind? Why are Fast-Casual Restaurants Growing?
Most people have an idea but don’t know how a Fast-Casual Restaurant is defined. Ask a person to name a Fast-Casual Restaurant and they may have trouble or be confused.
The Wikipedia definition is- A fast-casual restaurant, found primarily in the United States, does not offer full table service, but advertises higher quality food than fast-food restaurants, with fewer frozen or processed ingredients. It is an intermediate concept between fast food and casual dining and usually priced accordingly.
The concept originated in the United States in the early 1990s but did not become mainstream until the end of the 2000s and the beginning of the 2010s. Fast Casual Restaurants have built their popularity by offering healthful food prepared with better ingredients than those at fast-food chains.
According to 10Best.com, the top 10 Best Fast Casual Restaurants are as follows:
QDOBA Mexican Eats
Dickey’s Barbecue Pit
Chipotle Mexican Grill
Moe’s Southwest Grill
Au Bon Pain
A restaurant like Chipotle and Panera proved that Fast Casual restaurants could have success in the suburbs. Nowadays a growing number of Fast-Casual restaurants entering into a new market will open in the Suburbs before moving to the bigger cities.
In 2009, there were about 17,300 fast-casuals in the United States with sales of $19 billion, according to the market research firm Technomic. By 2018, the last year for which statistics are available, fast casuals had more than doubled their locations (34,800) and sales ($47.5 billion). Based on an article written by Tim Carmen
EATS Restaurant Brokers provides it’s 4 reasons why Fast-Casual Restaurants are growing so fast.
- The counter-service concept requires far fewer specialized employees than your full-service restaurants require. The Owner can save on salaries for Executive Chefs, Sous Chefs, and employees
- The improvements in technology and data to track buyer’s buying habits have given the owners and franchises tons of information on buyer’s buying habits.
- A better selection of healthful options on menus. The customization of meals, proteins, vegetables, vegan selections, sauces, wraps, etc.
- Dress Code requirement-On the weekends I’m dressed in sweats and a sweatshirt. I want somewhere where I don’t have to dress up to enjoy great food. (#4 is my personal opinion)
Thank you for reading my blog. Next time you enter a Fast-Casual restaurant you will know and can say “Hey this is a Fast-Casual Restaurant”
For more information on the restaurant market and other available consulting services or restaurant valuations, contact Dominique Maddox at 404-993-4448 or by email at firstname.lastname@example.org. Visit our website at www.EATSbrokers.comRead More
EATS Restaurant Brokers are involved with multiple Professional Organizations that are created to educate Business Brokers. I recently attended a Georgia Association of Business Brokers Spring Conference. The topic that got my interest was the Difficulties Seller’s Encounter when trying to sell a business or restaurant.
80% of Business Owners don’t know the value of their business-Source M&A Today
80% of Business Owners don’t have an exit strategy.
When it’s time to sell Restaurant Owners encounter the following 5 problems if they don’t have Professional Help:
- Valuing the restaurant– The restaurant industry is a specialized industry that some books and records can be creative. EATS Restaurant Brokers are trained using the following methods:
- A liquidation asset-based approach determines the net cash that would be received if all assets were sold, goodwill, location, and lease terms.
- Earning Value Approaches-based on the owner’s past performance of restaurant financials. This method includes tax returns to find out the Seller’s true owner benefit for ownership.
- Percentage of gross sales- This method is not recommended.
2 Keeping Sale Confidential– Buyers request various financial records and information about a restaurant when it’s listed. This information is confidential and should be protected by a Buyer Confidentiality Agreement. Just hand-shakes no longer work, it’s best to put terms on paper.
3 Marketing- Marketing a restaurant for sale can feel like a full-time job. Buyer activity should be monitored to track success. Listings should be written to interest buyers to inquire for more information. Reports showing restaurant financials, equipment list, lease terms, store operations information, should be prepared to give to interest buyers.
4- Structuring the deal and negotiating- In Restaurant Brokerage the saying goes, “ It’s easy to get a buyer, it’s hard to get the deal closed”. This is a very important step because it sets expectations for the Restaurant Seller and Restaurant Buyer. Most deals will fail if the deal is not structured correctly on the front end. During this step, it’s highly recommended to get professional assistance with someone that has experience negotiating Restaurant Sales.
- Financing- This goes back to Question 1, I think this is the most important question Restaurant Owner should think about when selling a restaurant- “How will someone pay for my restaurant, will they pay with Cash, Bank Financing, or Seller Financing”. Once you have your answer it’s time to start preparing the docs required. Bank financing will require the most information and checks and balances. Clean books and records are required.