Cash Flow Solutions

10 Reasons Restaurants Fail (and Solutions to Avoid Each One)

Welcome, Hartford readers, to the American Express Business Blueprint™ blog! We’re here to help you and your small business achieve your goals and see success. Check out our blog for additional tips, tools and resources. From marketing to cybersecurity to hiring and more, American Express Business Blueprint™ is here for your small business. If you’re interested in learning more about what it takes for qualifying for an American Express® Business Line of Credit loan, check out our qualifying page. Enjoy!

Although there is disagreement about the rate at which restaurants fail — with some research indicating a rate of 17 percent in the first year and others as high as 90 percent — the real takeaway should be that preparation and contingency planning are central to every restaurant’s success.

Restaurants don’t usually fail for just one reason. It’s a combination of issues that build upon one another, stymieing any forward trajectory and growth. But when you are proactive and preemptively address the common reasons why restaurants can’t get off the ground, then you substantially increase your odds of success. Here are 10 common reasons why restaurants fail, along with solutions to avoid each one.

  1. Location

There’s no denying that location is important. If you choose an area that is not easily accessible, not visible from the road, or that has insufficient parking, you’re going to be facing an uphill battle just to get people in the door.

Solution: Complete market research and a thorough competitive analysis so that you know exactly who your target market is and where to find them. Then, partner with a local commercial real estate agent who can offer guidance on the ideal areas to launch your concept.

  1. Lack of leadership

As the owner-operator, you simply can’t do it all on your own. That’s why you need a reliable team of like-minded and capable managers and leaders who understand your vision and have your back.

Solution: Leadership starts with you, so make sure you are setting a proper example. From there, you need to align your leadership team as soon as possible. If you have internal candidates who show promise or possess several of the desirable yet hard to teach soft skills, work on mentoring them and further developing their talents. You can also seek external managerial candidates who are experienced in restaurant operations.

  1. Poor customer experience

You can’t impress a customer just once. Your success relies on providing a remarkable customer experience each and every time. If food quality is hit or miss or the staff isn’t consistently bringing their A-game, you not only can lose customers, but the resulting word-of-mouth causes further damage.

Solution: While perfection isn’t necessary, encourage your team to focus on making progress and continuously improving on all aspects of the customer’s experience — from the food to the restaurant’s cleanliness to their own attitudes. And when a mistake is made, make sure they know to always apologize and ask how to make the situation better.

  1. No mission, vision or purpose

Without a mission, vision or purpose guiding your way, you can quickly end up being a boat lost at sea. Oftentimes, this leads to restaurateurs trying to be everything to everyone, because they haven’t drilled down to their core values and motivations yet.

Solution: Develop mission, vision, and purpose statements that are customized to your overall goals. These statements should closely tie into your intended culture as well. Here is a great step-by-step process to create your own.

  1. Overspending

No matter if you’re just starting out or been in business for years, it’s tempting to think that making certain upgrades can catapult you to the top. And while some investments may be wise, maintaining the attitude of bigger or more is always better can lead to overspending. 

Solution: Make a realistic budget based on your access to capital and the debt load you are comfortable carrying. To determine this number, consider meeting with a financial advisor who specializes in restaurant or small business planning and also collecting insights from other restaurateurs. Listen, learn, make a budget and stick with it.

  1. Lack of HR systems

Your people are your greatest asset, so you need to have plans in place to take care of them. That’s why having internal HR systems that span the entire lifecycle of an employee — from recruiting and onboarding to performance management and leadership development — is so important. These systems will keep you and your managerial team organized and on track while also ensuring the fair treatment of all employees and avoiding troublesome legal snafus.

Solution: It’s never too late to develop these systems, but it can be an overwhelming task if you’re starting from scratch. If you don’t have in-house HR support, consider working with an HR consultant or firm who can get you up-to-date, compliant with current laws and likely save you money and prevent legal troubles too.

  1. Insufficient cash reserves

Like any other business venture, the investment amount required to launch a restaurant varies. Even though there are some great examples of bootstrapping a concept for very little, you’ll more than likely need to have significant cash reserves. Otherwise, you run the risk of depleting your budget early on and being left with little to no funds to keep operations going long-term.

Solution: Ask your financial planner to help you determine an appropriate level of cash reserves. These critical funds are instrumental in smoothing over slow sales periods, investing in equipment or purchasing additional inventory or hiring staff in preparation for a busy season or projected growth. If you are falling short on cash, seek out an affordable lending option like American Express® Business Line of Credit that offers flexible terms and quick access to working capital.

  1. No unique selling proposition

You need to know, without a doubt, what sets you apart from the dozens of other restaurants in your market. Without a unique selling proposition, or USP, it’s going to be difficult to gain traction and pull in a sizable customer base.

Solution: If you’re really struggling to find your USP, make a list of the qualities and characteristics linked to your restaurant’s concept and employees. From there, you can narrow the list down to find your one or two distinguishing factors. Just make sure that in addition to being unique, your USP satisfies an unmet consumer need or want and is sustainable over the long haul.

  1. Lack of industry experience

We probably all know someone who has a dream of opening their own restaurant. Unfortunately, if you don’t have experience in the field or a team of trusted consultants to lean on in combination with an absolute love for the industry, that dream can devolve into a nightmare.

Solution: Talk to other restaurateurs and read everything you can in order to establish at least a baseline level of knowledge. Surround yourself with others who have a proven track record in food service and can offer insights into operations, finances, HR and beyond.

  1. Minimal support and resources

It’s tempting to want to do everything on your own in an effort to save money and preserve your funds, particularly when you’re just starting out and sales may be slow. But if you don’t have the background, as mentioned earlier, or the internal support or resources to handle the many aspects required to operate a successful restaurant — like accounting, marketing, HR, purchasing, etc. — you could be doing more harm than good and spending more than you need to boot.

Solution: Factor in the costs of outsourcing some or all of these tasks to professional companies when planning your funding needs and budget, so that you can build a dedicated support team. Another option is to delegate certain areas to your managerial staff, but only if they have related experience.

Carrie Luxem is a human resources professional specializing in the restaurant industry. In 2010, she founded Restaurant HR Group where she partners with dozens of restaurateurs to take care of their greatest assets — their people. With a career that has spanned nearly 20 years, Carrie is frequently sought out for her modern, yet simple and effective advice and has been featured in Entrepreneur, Restaurant News, and Independent Restauranteur. Connect with her on social media or learn more at 

Want to dig deeper?