My wife Mega and I opened our restaurant, Heartland, in October of 2002.  Having just celebrated our seven year anniversary of operation, I got to thinking about other restaurants and their successes and sometimes failures and what leads to the idea that our industry has a failure rate that far exceeds other small business ventures.

In 2003, just after we opened, New York City Chef Rocco DiSpirito appeared in an American Express commercial where he boasted about the two restaurants he was currently running and how he was planning on a third at a time when nine out ten new restaurants fail within their first year of business.  Thanks for the publicity, Rocco, but due in part to that commercial and to your often times unintentionally comical reality series, The Restaurant, not only do many people think we restaurateurs are bunch of crybabies but they also think our industry suffers from a 90% failure rate.  As a member of our club, DiSpirito should know better than to perpetuate this myth, but the fact remains that most people believe in its veracity.

H.G. Parsa, an associate professor at Ohio State University with thirteen years experience in our industry, wasn't buying it.  In fact, he asked American Express to produce some data supporting that contention.  In a written statement, a spokesperson for American Express let him know that they didn't have any such data and that, as far as they could tell, none existed.  Consequently, Parsa conducted his own study which tracked 2500 restaurants in Columbus Ohio.  Through it, he found that one in four restaurants fail or change hands during their first year of operation and three in five do so by the end of year three.  While that 60% "failure rate" might seem high, it is no higher for our industry than it is for any other small business according to statistics supplied by the Small Business Administration and the Bureau of Labor Statistics.

Not to be outdone, Restaurant Start Up&Growth magazine commissioned its own study of the Dallas market and came up with very similar numbers, that is, a 23% turnover rate in the first year.  In other words, according to them a burgeoning restaurateur has a 77% chance of being successful.  That's not bad, statistically speaking.

So what does all this mean?  Well, guess what?  I'll tell you.

In practical financial terms, it means that many lenders who have latched onto this myth of a 90% failure rate won't lend to restaurants at all.  Those that will lend to prospective restaurant owners typically ask for sky high interest rates or seek significant collateral, such as a person's house, or both to secure a loan.  Since one of the primary reasons a small business fails is lack of sufficient capital and readily available cash flow, this is a myth that virtually sustains itself.

So how did we get here?  Well guess what?  I'll tell you.

In many ways, owning and operating a restaurant, especially a relatively high profile one, thrusts people in the glare of public light.  Do you really think I would have been asked to write this blog if my name wasn't constantly being bandied about in the media?  That's not very likely.  In similar fashion, those "closed until further notice" and "currently under new management" signs that appear in restaurant windows contribute to the illusion that we are a bunch of clueless fly-by-night operators who can't manage our ways out of a to go bag.  While there might be a few of us for whom that is an accurate assessment, for the most part, that just isn't true.

Even so, we remain less the victims of misconception than we do of our own propensity for creating bad publicity.  Let's face it, most stereotypes, no matter how egregious, have at least a flimsy basis in some reality.  Unfortunately, in our business we see it every day.  We all know of the restaurant owner who creates a much ballyhooed concept only to go belly up in a relatively short period of time and, in so doing, leaves countless individuals holding the empty money bag.  An operation like this is a miniature Ponzi scheme.  The restaurant accepts delivery of supplies from purveyors, is supported by the labor of its staff, leases a building space and so forth.  The ownership is continuously borrowing from Peter to pay Paul.  The wager is that enough juggling of the books can be done so that creditors, while overextended, will never call in their notes.  The hope is that as long as customers keep coming in the door then there will always be just enough cash to keep the dogs at bay.  In the meantime, the debt keeps increasing and the liabilities keep mounting while all the while the owner is buying a big house on the lake where he docks his cabin cruiser and garages his Mercedes sedan which he uses to shuttle his kids to and from private school. All that is needed for the whole thing to blow up is an unexpected downturn in customer counts or a major unanticipated expense.  Once that happens, without any cash reserves it's only a matter of time before the restaurant goes belly up.

So what happens then?  Well, guess what?  I'll tell you.

Taxes go unpaid.  Employees are left with bouncing paychecks.  Landlords are left to scramble to make mortgage and property tax payments on properties that house tenants whom they have no other choice but to evict and then sue to recover back rent.  Suppliers, who are essentially unsecured lenders, must somehow attempt to survive the loss in revenue from unpaid invoices.  Banks are left with loans in default.  People suffer.

This is not to say that every restaurant or small business that does go under is due to unscrupulous behavior or mismanagement.  Sometimes the best conceived and most well run businesses fall victim to circumstance and must shutter the doors.  In those cases, well intentioned ownership will do their best to make good on outstanding liabilities.  Sometimes they are successful in doing so and sometimes not, but their intentions were never to rip people off or to operate dishonest businesses.

Other times, that is not the case.  I know of one high profile chef and restaurateur who fabricated his resume perhaps to con people into investing in his businesses.  How do I know this person was lying?  Well, he recited that very resume to me over fifteen years ago when he offered me a job, and it took about fifteen minutes of due diligence on my part to discover his con.  Nonetheless, he went on to open a series of restaurants, none of which were successful, and, according to reports, left most of his financial obligations unsatisfied.  Apparently, those obligations included employee wages.  One of my current staff, who previously worked for him, told me that she sat in his office for six hours demanding payment for back wages and gratuities before he finally caved in and had his accountant cut her a check for $1,300.  A chef who was recently a guest in our kitchen and who was also formerly employed by him told me that he is still owed $900 from over three years ago.  He was not so diligent in trying to recover his money and so has never been paid.  Granted, most of that is hearsay, but there are lawsuits that have emerged that lend credence to these claims. You have to believe where there's smoke there must be at least a little fire. Still, this individual remains active in our industry and is currently operating restaurants that bear his name.

How does this happen?  Well, guess what?  I'm not sure I can tell you.

It is not terribly unusual for someone to close down a restaurant and leave a trail of bad debts behind.  Still, a landlord will somehow agree to lease a space to such a person for the purpose of opening another restaurant.  Some finagling might occur whereby the ownership of the new restaurant is placed in the name of a relative or partner, but the identity of the person in charge of the day to day operation of that restaurant is no secret.

Usually, the media are complicit in helping to foster such returns to business as usual because the person in question usually has a high enough profile that it makes for interesting news.  That's understandable.  What isn't understandable is the way in which some of these charlatans are lauded by the media as if they deserve their benevolence and admiration for a job well done.  It is not surprising to see many of these establishments in "best of the industry" features.  My peers and I in the business often shake our collective heads at this and speculate among ourselves as to how long it will be before we see a repeat performance.

The harsh reality of this is that as long as someone is willing to give the unscrupulous operator money, lease him a space, agree to his employ and sell him product, then the whole sad affair will continue to repeat itself over and over again.  How many people do you think would invest with Bernie Madoff or Tom Petters if they were released from prison tomorrow and opened their own investment firms?  It sounds silly, but I'm guessing that there might be quite a few.  And if those people lost everything, wouldn't we all look at them and shake our heads in utter disbelief.  Would they be worthy of our sympathies?  I think not, and, in much the same way, anyone who would continue to support the unscrupulous people who are active in our industry almost deserves what he or she gets in return.

In summary, what we have is both a bane and a blessing.  On the one hand, media coverage of our industry helps fuel our businesses and helps drive customers to our establishments.  Without it, many of us would not be as successful as we are.  I cannot tell you how appreciative I am of the press we get.  By the same token, the public microscope under which we operate our businesses contributes in large part to the misconception that we belong to an industry rife with incompetence.  That misconception contributes in turn to making our road to success a much bumpier ride than need be.

We do operate in an industry that is very difficult and requires long hours and substantial personal sacrifices in order to successful.  But are we really any different from any other small business?  The statistical research says otherwise.  Now if only we can get the banks to agree.







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