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Here’s How You can Avoid a Restaurant Bankruptcy!

Last updated: 23 Mar, 2021 By | 6 Minutes Read

Every business wishes to generate maximum profits, and the restaurant business is no different. However, in the case of restaurants, failure is seen on a large scale as compared to other businesses. If we talk about North America, its restaurant failure ratio is extremely high as compared to Europe due to various factors like undercapitalization, lack of managerial skills, revolving CEOs, poor decisions while hiring a restaurant accountant, litigation choices, over-aggressive cost-cutting, and more.

Interesting Stats and Examples

  • As per the Ohio State University, first-year restaurant failures account for 26%, second-year for 19%, and third-year for 14%.
  • iPic Entertainment, a movie cinema-restaurant chain, stated reclining seats’ popularity in cinema halls for its reason to consider federal debt protection despite the fact that it had a secured debt amount of $200 million.
  • The two family-dining chains’ operators Perkins and Marie Callender’s filed for bankruptcy for a second time, with their debt totaling to $115 million.
  • Granite City Food & Brewery had an opening sale bid of $7.5 million and $40 million debt. It cited retail traffic decline and delivery issues to be the major factors for its bankruptcy.
  • Another chain to hold third-party delivery accountable for credit protection is Houlihan’s. It got itself sold to Landry’s for an amount of $40 million that is below its debt amount of $47 million.
  • On the other hand, Landry’s owner Tilman Fertitta was a popular name when it came to buying 2019’s bankrupt chains. His similar acquisition was Restaurants Unlimited for an amount of $37 million that was below the company’s debt amount of $39 million.
  • In 2020, 5 restaurant businesses with 9 chains opted for debt protection, including Roadhouse, Old Chicago, and others.

Top 6 Reasons for Restaurant to Go Bankrupt

As per a recent study, restaurants failing due to financial incompetence accounted for 63%, poor managerial expertise for 16%, and poor skills or training for 10%.

Every restaurant chain is different and operates in a different way. However, if we look at some common reasons amongst bankrupt chains, the following reasons emerge to the top:

1. Management Skills

Irrespective of the business you are in, it is essential to have proper management skills to run a business successfully. If you are a great chef, it won’t guarantee you great success also since you need to have management skills for handling internal and external processes of a business like accounting, supplies, devising growth strategies, supervising human resources, etc. If you do well on an overall level, you will succeed, but if you fail at even one level, you may open doors for losses and bankruptcy.

Management Skills

2. High Competition

There exists stiff competition between restaurants, and in order to sustain in the market, it is essential to maintain and increase sales growth. This means a restaurant that has more capital to invest in its infrastructure, offers, discounts, marketing, and services is likely to beat other restaurants since it will attract more customers and drive more sales.

3. Multiple Bankruptcies

Restaurants that have witnessed multiple bankruptcies in the past are likely to become bankrupt again. This is especially true for buffet restaurants. For instance, Old Country Buffet, Ryan’s’, and HomeTown Buffet, faced bankruptcy thrice in the past, with Johnny Carino’s and Fox & Hound filing for bankruptcy twice. These businesses went bankrupt again and again because of their weaknesses and their inability to come over their previous bankruptcies.

4. Increased Minimum Wage

Due to an increase in the minimum wage amount, a lot of restaurants got higher on the expense side, which led them to an overall loss. For example, a Tex-Mex restaurant, Don Pablo’s that operates 16 restaurants cited an elevated minimum wage amount to be the prime reason for its bankruptcy.

5. Recession

Natural calamities and pandemics like COVID-19 are the biggest reasons for poor sales of restaurants. However, they happen once in a while, and when they do happen, restaurants with the best survival skills emerge at the top. For instance, under similar challenging situations, Popeyes Louisiana Kitchen was able to generate 40% more sales while Krystal ended up becoming bankrupt.

6. The Generation Factor

It is a fact that the younger generation eats out a lot as compared to middle and older age people. This means restaurants that are focused on family dining models are likely to suffer more as compared to restaurants that are focused on fast food models.

How to Prevent Restaurant Bankruptcy?

The following tips will help you keep bankruptcy at bay, along with guiding you to emerge as a winner during difficult times:

  • Evaluate Reasons for Your Poor Performance

If you want to never see bankruptcy again or even for the first time, it is imperative that you evaluate every reason for your poor performance. It can be in any management area like handling bookkeeping for restaurants, paying employees on time, understanding customer behaviors, etc. Once you figure out the reasons for your poor performance, all you have to do is devise a great strategy on your own or with the help of industry consultants to resolve the underlying issues.

  • Acquire the Right Skills and Knowledge

If you are in the restaurant business, it is essential that you acquire the right skills and practical knowledge of the restaurant industry through YouTube, free or in-person courses, a restaurant mentor, seminars, and more. The more you are educated and skilled, the more capability you will have in making your restaurant succeed during difficult times.

  • Make Informed Business Decisions

It is recommended to make business decisions after logical assessment and not just because of some gut feeling or hearsay. This assessment is based on considering different factors like public relations, laws, internal controls, taxation, accounting, maintenance, marketing, repairs, purchasing, food and beverage quality, service, decor, training techniques, including relationships with purveyors, government agencies, and bank managers.

  • Acquire Sufficient Funds

It is vital for restaurants to acquire sufficient funds since every restaurant demands regular maintenance, hiring, training, and compensating employees. If you’re starting out, make sure you keep aside 50% of your acquired funds to meet payroll and other expenses in the first few months when your restaurant will be looking to build customers and a name for it.

  • Communicate with Bank Managers

It is essential to regularly update your bank managers regarding the performance of your restaurant since it does two things: firstly, it helps nurture faith in your ability, and secondly, it makes him aware that you might need a contingency plan against bankruptcy. Although a manager is ready to help a restaurant owner during emergencies but generally charges a high interest, but sooner the bank manager learns about your position, sooner he can arrange a loan for you.

  • Conduct a Market Research

Before opening a restaurant or even when in a business, it is essential to conduct regular market researchers to assess the possibility of your restaurant’s success with respect to several factors like a particular location, taste of customers, rising competition, new marketing tactics, and more.

Market Research

  • Communicate with Your Staff

Your staff is your biggest asset, and you need to communicate with it on a consistent basis. Make your employees know how important they are for your business and how much you are willing to take care of their needs and future. This will help in boosting team morale and productivity, leading to streamlined operations and enhanced customer service, adding to your bottom line eventually.

     

    Conclusion

    The restaurant industry is surely competitive, and with customers becoming choosy about food tastes, it makes things even more complex. Restaurants need to avoid doing things that lead to financial failures and instead work on strategies that not only aid positive cash flow but help them become a favorite amongst their target audiences.

    However, devising strategies for growth, scalability, and sustainability requires time, and that is only possible when owners free themselves from unproductive tasks like accounting.

    Meet Cogneesol! A well-known outsourcing firm that has been providing error-free and highest-quality restaurant accounting services since 2008. Contact us now to start your free trial.

    Recommended Blog:

    5 Signs That You Need to Hire a Restaurant Accountant!

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