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.
