Eating Failure’s Lunch

Do half of all new restaurants fail in their first year?

Photo: Dick Terry. Source: Morguefile

Starting a new business is hard. There are regulations, suppliers, labor issues, insurance, bookkeeping, and countless other issues. It seems like there are a million ways to go wrong, and just one lonely road to success. You need a plan, you need drive, and most of all you need customers – customers that your competitors also want.

Because of all these issues, it’s commonly claimed that most start-ups fail in their first year or two. This assertion even made it into a 2003 “Do you know me?” American Express commercial. The high first-year failure rate is often repeated by franchisors, who may cite it as a way to encourage would-be entrepreneurs to use their services – and to pay their franchising fees.

But it turns out, the high first-year failure rate is an urban legend – a self-serving story that gets repeated so often that it is assumed to be factual. A couple of researchers looked at 20 years’ worth of Bureau of Labor Statistics data for almost 2 million independent businesses, including 81,000 restaurants in eight different states. They found that 83% of restaurants survive their first year, and the median survival time is 4.5 years. That’s actually higher than the average for non-restaurant service businesses.

Source: Luo and Stark study

The hospitality industry has been expanding, and the number of restaurants has been growing almost 2% per year for the past several decades. It would be almost mathematically impossible for the industry to grow steadily and also have such a high initial failure rate.

But since restaurants open and close all the time, it may seem like the turnover is higher than it really is. And making it in the food business isn’t easy, no matter what the numbers may show. One of the most important elements of any startup is maintaining a healthy work-life balance. Many failed restauranteurs have attributed some of their failure to personal issues, such as divorce, ill-health, and not wanting to miss seeing their children grow up.

Starting a small business is risky. Many things can go wrong. But if you have a great idea, a good product, and a committed team, the dream be worth the effort. As high-school dropout Walt Disney once said, “If you can dream it, you can do it.”

Douglas R. Tengdin, CFA

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