Chef Rocco DiSpirito commented that 9 out of 10 restaurants will fail in their first year of existence. Chef Rocco can’t really be blamed for throwing that restaurant failure number around. After all, conventional wisdom is that restaurants fail at a significantly higher rate than almost any other small business. But is restaurant failure really so much higher, or is that just an urban legend?
Interestingly, an associate professor in the Hospitality Management program at Ohio State University named H. G.Parsa decided to put those numbers to the test. He found that not only is the restaurant failure rate was wrong, it wasn’t even close to the truth.
He tracked 2,500 restaurants over a 3 year period, and found that the restaurant failure rate in the first year was only 25%. Over a 3 year period that rate rises to 60%. While that rate is high, it is consistent with the failure rate of small businesses in general, and certainly never comes close to the 90% that most people like to cite.
The unfortunate part is, even though other studies have supported Professor Parsa’s findings, the high restaurant failure myth persists. Worst of all, banks use that figure when determining the loans available to new restaurant owners. Because of the high perceived risk, restaurant owners are either denied the amount of loans they desire, or they finance less because of being charged higher interest rates.
It all leads to a nasty Catch-22; One of the leading causes of failure for small businesses is being under-financed. Because banks are hesitant to lend to new restaurant owners, or lend at higher interest rates, many new restaurants are opened with less financing than they really need to survive. This leads to restaurant failure, and helps to keep the myth alive.
What this means for you is, if you are thinking about opening a restaurant, don’t let the misinformation about high failure rates scare you away. It is risky, but so is opening any small business. You can succeed if you follow sound business principles. Read my article on Top 5 Reasons Restaurants Fail for more information about what it takes to make your restaurant a success.
