As a Restaurant Broker dealing with dozens of franchise resale opportunities every single day, I am often asked why restaurants fail. Here are the candid and all too real answers about why restaurants fail. They can be summed up in three ways.
Reason Number One - "If you build it, they will come" is not a business model, it's a movie.
Restaurants fail because grown men and women believe that "if you build it, they will come." That single line from the movie Field of Dreams is the number one reason we see those operating great franchise brands failing in the market. The operator believes it's enough to open the door, put up the sign and sit back and wait for the business to happen.
They refuse to acknowledge that the business world has expanded far beyond the four walls of the store and now requires the active pursuit of customers. They do not want to take a hard look at their catering line and decide they have to invest to develop this all important way to add top line sales and ultimately, bottom line profit. They don’t want to acknowledge that people would rather stay home than dine out and fail to sign up for delivery services. Lastly, they believe that investment in the brand name of the franchise is enough.
Restaurants fail because owners believe that a franchise brand is their lifeline and a guaranteed path to success. It is not. The brand is the starting point for developing the business. It's up to the business owner to grasp that fact and grow the business.
Reason Number Two: Restaurant Ownership Is a Hands-On Business
The second reason why restaurants fail is that owners in countless other fields see the business model as one they can operate on an absentee basis. In most cases, this is just not a viable option. Many restaurant buyers contact me and insist they can operate while pulling down a full time job or from many miles away or even from out of state.
A restaurant buyer last month made an offer on a business in Florida while he and his wife lived in Missouri. He did not reveal, until very late in negotiations with the seller, that he intended to stay in Missouri for two more years. He seemed incredulous that the franchise brand would not approve him to operate a brand from hundreds of miles away. His plan was to give the current manager a minority stake in the business and let him keep running it.
Is a minority stake for managers a good idea? Absolutely. This can lock in front line people to contribute their best and stay in place. It is not, however, a guarantee that manager will not leave, not like the new owner, fall in love with someone moving out of state or continue to run the business well, knowing the owner is thousands of miles away.
Most franchise brands require an ownership stake in the operations of the business. They want to see a family member with equity in the business at the helm if you're not running it. Otherwise, if you want to operate as an absentee owner, get ready to add your business to the list of restaurants that fail.
Reason Number Three: Failure to Grasp the Basics -- It's the Numbers
The third reason restaurants fail, in this restaurant broker's opinion, is an underlying failure to understand the three key financial variables required to manage for success: food cost, labor cost and occupancy cost. These three items drive the lion's share of the monthly profit and loss statement. Food costs and labor costs have to be closely managed on a day to day basis (refer back to Reason Number Two in why restaurants fail). Now you see why absentee ownership is a bad idea.
Food costs mean managing the portion size to exactly what is laid out in the brand requirements. It also means control over ordering. Your inventory ages and when it ages, it results in waste. Control over food costs mean managing what goes out the front door and what ends up in the dumpster at the back door. This and labor cost, are the single most important variables to control
In today’s high tech world, failure to exercise control over labor is just inexcusable. It is very easy to see in advance the number of meals that have to be prepared. Any POS system is going to tell you what you did for a Tuesday at lunch last year, last week, last month and yesterday. Absent any unforeseen event like weather, tourist influx or natural disaster, any owner should be able to plan the schedule and labor correctly to maximize results and minimize costs. For that reason, failure to grasp this basic and control it within acceptable financial reasons contributes, along with food costs into why restaurants fail.
The last large variable in costs are the occupancy costs and this is the rent number. Once that number is determined, it’s very difficult to change. Getting the cost right up front and not inflating sales estimates are the only way to keep from getting into an occupancy cost over 10% which starts highly impacting profitability. There is generally no way to renegotiate a lease mid-stream. Landlords have you locked in with personal guarantee. You will have to sell yourself out of this problem by getting the top line sales results up.
Overall, there are many reasons why restaurants fail. In this restaurant broker’s experience, however, the three above are the main reasons we see otherwise successful opportunities take a turn for the worse.
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