My Restaurant is Failing. What Should I Do?

Nothing lasts forever. Unfortunately, this adage has never been truer than in the case of a restaurant. Nationally, up to 60 percent of restaurants fail within three years of opening, and some 80 percent close within five years. Even restaurants that are successful for more than five years close sooner or later. If your restaurant is failing, then there are steps you can take that may help you avoid closure or minimize your financial loss when you must go out of business.

Why Do Restaurants Fail?

The reasons for restaurant failure are as varied as types of cuisine. However, one of the leading factors is location. Many restaurateurs don’t know how much there is to consider when choosing a location.
“Most owners know that their restaurant must be located where people can see it,” says Paul W. Vernon, an Executive Vice President in the Retail Division of Henry S. Miller Brokerage, LLC. “What they may not realize is the importance of accessibility and parking. Visibility means little if patrons cannot easily get to your restaurant or if parking is a nuisance once they do arrive.”

In addition, the demographics surrounding a location must match the restaurant’s target customers. For example, a restaurant geared toward family dining is not likely to succeed in an urban area where mostly young professionals without children live.

Usually, the road to restaurant failure is paved with more than just one mistake. Other reasons include:

• Not having a clear concept to guide menu choices, design, marketing and long-term strategy
• Hiring a restaurant manager or chef who is not up to the job
• Partnership conflict
• Road construction
• Inefficient systems and procedures, which covers staffing, payroll, cash flow, food procurement, pricing and everything else that goes on behind the scene to keep a restaurant running
• Poor customer service and experience
• Food costs
• Economic downturn
• Personal reasons such as the drain on family time that owning a restaurant often demands

What Should You Do If Your Restaurant is Failing?

If one or more of these reasons have brought your restaurant to the brink of failure, then there are steps you can take to keep from going under.

“The first step is often the hardest, “says Mr. Vernon, who has been helping restaurateurs get into and out of business for more than 30 years. “You must be honest with yourself. Is your restaurant going to make it? Don’t wait until it’s too late. Make an honest assessment of sales vs. expenses. If the numbers indicate that your restaurant business is failing, then you need to be proactive.”

To determine your best course action, ask yourself the following questions:

• Do you have a lease or mortgage and how much time is left?
• Did you sign a personal guaranty?
• How are other restaurants around you doing? This will help you know whether or not you are in an area that is good overall.
• Is someone likely to buy or sublease your restaurant space?
• Do you own your restaurant equipment or is there a bank loan attached?

Armed with the answers to these questions, a qualified real estate agent can help you plot your course to recovery or accept the inevitable and look for a way to land on your feet.

How Can a Real Estate Agent Help When Your Restaurant Business is Failing?

If you are leasing your restaurant space, then it is important to talk to your landlord before you’re unable to pay rent. Perhaps there is a legitimate reason for a downturn in business such as road construction, difficulty obtaining a liquor license or a partner’s exit.

“Most of the time, it is in a landlord’s best interest to work with you at least for a while,” Vernon notes. “An experienced real estate broker can help you restructure your lease for short-term relief that may give you enough time to fix these concerns. Alternatively, if you’re renting more space than you can afford, an agent can help during negotiations with your landlord to reduce the size of your restaurant, which can lower monthly expenses.”

While working with your landlord, you should also look for additional capital to keep the restaurant afloat. Think of how you can grow business through advertising, social media marketing, catering and delivery services or creating another use for your space during slow times.

As you consider all the options for growing your restaurant, you should also hire a knowledgeable real estate agent to begin marketing your space to potential prospects. This process takes time, so you cannot afford to wait until the last minute. Once the landlord changes the locks on your doors, you are no longer in control of your own destiny.

Finally, if you and your agent have exhausted all the options for staying open, then it’s time to negotiate the best deal possible. Although this is never fun, it does not have to be messy. And while it is most likely going to hurt financially, the outcome does not have to devastate you or your financial statement. A qualified agent who understands the ins and out of both the restaurant and real estate business can turn a potential disaster into nothing more than a temporary setback.

 

The information contained in this article is general in nature and should not be construed as financial, tax or legal advice.  As with any financial or legal matter, consult your tax advisor and legal counsel.