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The Risks of Opening a Restaurant–Is It Worth It?

The restaurant industry is notoriously fickle and unforgiving. If you are an aspiring restaurant owner, it’s important that you fully understand exactly what you’re getting yourself into. The restaurant business is plagued by unique challenges including low profit margins, high turnover, and a broader industry that continues to face post-pandemic challenges including labor shortages, wildly fluctuating expenses, and global supply chain issues.

There’s even a pretty wild stat out there that claims 90% of restaurants actually fail in their first year of operation. Naturally, that’s a startling statistic, the kind that makes you wonder why anybody would ever go into the restaurant biz in the first place.

Well, here’s the good news—according to Forbes, that alarming stat is patently false. Indeed, if the odds of starting a successful restaurant were that low, why would anybody take the risk?

On the other hand, it is true that many new restaurant owners struggle to get their footing, and more than a few face failure in that first precarious year. While opening a restaurant is not necessarily riskier than opening any other kind of new business–a fact that we’ll address in a little more detail here below–there are unique challenges that you’ll face if you do wish to open your own restaurant. And if you aren’t aware of these challenges and prepared to face them, the risk of failure will be distinctly high.

If you already have a sound restaurant business plan and you’re looking for ways to finance your vision, you may want to consider a small business loan. Check out our tips on how to secure a loan with or without the help of the Small Business Administration.

Otherwise, read on for a closer look at the unique challenges you’ll face as an aspiring restaurant owner.

The Real Restaurant Risk Rate

Based on some of the research out there, the inherent risks of opening a restaurant are real but also quite frequently exaggerated. How exaggerated? Well, according to an article at Forbes, we’ve been blowing the risk of restaurant ownership way out of proportion. Not only is the number of first year failures nowhere near 90%, but it’s actually slightly lower than the failure rate for quite a few businesses that we typically don’t think of as quite so risky.

According to Forbes, research actually shows that “only 17% of restaurants close in the first year, not 90%. This is in fact a lower failure rate than other service providing businesses, where 19% fail in the first year. For comparison, they find that 21% of offices of real estate agents and brokers fail in the first year, and the number is 19% for both landscapers and automotive repair. The failure rate for full-service restaurants is the same as the failure rate for insurance agencies and brokerages.”

So why do restaurants have such a foreboding reputation? Forbes suggests that the public visibility of restaurant closures may account for this impression to some degree. Restaurants open to some degree of fanfare, or at least conspicuousness, in a given neighborhood. When these restaurants fail and quickly shutter, it does not go unnoticed. The same may not necessarily be true of a fly-by-night realtor or mortgage lender.

But there’s more to it than just public impressions. It also bears noting that smaller restaurant operations truly are at an elevated risk of failure. Forbes says that restaurants with 20 or fewer employers are more prone to failure–not just relative to other restaurants, but relative to other small service oriented businesses.

These factors are likely only magnified by the dramatization of restaurant culture in film and television. Just watch five minutes of shows like Bar Rescue, Top Chef or The Bear and you’ll understand exactly what we mean. There is a common public conception that kitchens are chaotic pressure cookers and that even highly frequented restaurants are often dangling by a financial thread. 

Naturally, this impression was only magnified by the events of the pandemic. Indeed, the pandemic represented a time of extreme hardship for restaurant owners in particular.

Broadly speaking, small businesses were among the hardest hit by work stoppages, staffing breakdowns, and a complete suspension of normal consumer spending habits. Restaurants lost their patrons, their revenue and, in many cases, their personnel. By summer of 2020, just three months into the pandemic, more than 15,000 U.S. restaurants boarded up their doors forever, according to an article published at Motley Fool.

While that unpredictable period represented a uniquely difficult time for restaurant owners–and for all small business owners–it also underscores the reality that many restaurants lack the financial resources to survive even a temporary disruption of business.

One of the reasons for this is that profit margins in restaurants are inherently slim. As the article from the Motley Fool notes, with the average profit margin coming in at about 6.2%, it is particularly challenging for restaurants to remain profitable.

And yet, in 2023, the restaurant industry turned more than $208 billion in revenue while employing more than four million Americans. In other words, somebody’s making money off of the restaurant business. And before you conclude that this revenue belongs to the likes of McDonald’s, Chick-fil-A and TGI Fridays, that number refers entirely to single location, full service restaurants.

Indeed, IBIS World reports that there is actually a growing desire–especially in the post-pandemic era–for local dining experiences, those provided by local purveyors. This represents a trend away from national chains and toward local fast-casual dining experiences.

The report from IBIS World notes that “The growing domestic economy led to consistent but modest increases in consumer spending on full-service restaurants. The fine-dining segment performed particularly well over the past five years due to solid growth in the income levels of affluent consumers. Nevertheless, industry operators were forced to curtail dine-in operations when the coronavirus struck, thus reducing demand for fine-dining restaurants as services at these establishments involve a high degree of in-person experience. Simultaneously, restaurants at the lower end of the market struggled as consumers traded down to the innovative products served by a growing number of new high-quality fast-casual chains.”

This tells us a few things. First, there is still plenty of money to be made as the proprietor of a single location full service restaurant. However, it also tells us that the pandemic has absolutely altered the landscape of the restaurant industry, and perhaps permanently in many ways. This means that the true survivors will be those that understand and adapt to the shifting realities.

With that said, there are still some fundamental rules to restaurant development that were true before the pandemic and remain true today. Often, when a restaurant closes prematurely, it’s easy to retrace the steps that led directly to this failure.

5 Reasons Restaurants Fail

When you open a restaurant, there are plenty of things you can’t predict. Certainly few predicted the events of 2020. But to be blunt, some failures are utterly predictable. And that’s because there are a several key reasons why many restaurants fail.

1. Bad Location

There are few things that will doom a new restaurant faster than a poor location. Getting a great deal on a cool space with an elegant dining room won’t mean much if you’re in a neighborhood with zero foot traffic, or you’re surrounded by well-established competition, or your restaurant concept simply doesn’t fit the vibe of the neighborhood.

In other words, there is a lot to consider when it comes to your restaurant’s location.

Binwise notes that “You will need ample, accessible parking, your restaurant needs to be easy to find, and your location needs to serve an active population. If your restaurant doesn’t meet the needs of your target market, you’ll find it difficult to increase restaurant sales and stay open.”

This means that you have to do some very real market research before settling on a restaurant location. Is this a community that can support another food service establishment? Is your restaurant concept compatible with the culture of this community? Does the income level in this community match your expected food costs and, consequently, the pricing for menu items?

Your business plan should include a comprehensive evaluation of your restaurant’s intended location and how this location will ultimately contribute to the success of your restaurant. In short, do not attempt to start a restaurant business without understanding the implications of your chosen location. This is a recipe for failure.

2. Poor Sense of Restaurant Concept

It’s impossible to overstate how important your restaurant concept is to your success both in the short- and long-term. A restaurant without a concept is a restaurant without an identity. And if you don’t know your restaurant’s identity, you can’t expect diners to identify with your restaurant.

But what is a restaurant concept? In essence, it’s the big picture. It’s everything that comes together to define your restaurant. As an article at Menu Cover Depot explains, “A restaurant concept is not a menu and a set of recipes. Rather, it encompasses a location, a marketing plan, a service scheme, design, atmosphere, price point, a defined position in relationship to the competition, and almost as important as the food itself, a long-term strategy.”

The article goes on to explain that there are two basic options when it comes to defining your restaurant concept. Identify a concept that somebody else is doing, and do it better. Or come up with your own concept and become a completely unique entity in the field. There are risks and advantages that come with either approach, but the real point is that your success hinges on how well you both understand and can pitch your restaurant concept.

Make sure the space you envision, the menu you hope to implement, the clientele you plan to serve, and the vibe you plan to create are compatible and attainable. And understand what kind of experience you intend to foster for your guests, whether you picture a fine dining restaurant, a fast casual experience, a gastropub, or even just a food truck. Far too many restaurants are doomed by an absence of identity before they even open their doors.

3. Bad Customer Ratings

According to a study published in the Journal of Economics Letters about restaurant closure patterns during the pandemic, there were greater factors at play than simple misfortune. To be sure, all restaurants faced extremely difficult conditions during the pandemic including closures for health and safety reasons, staffing challenges, and patrons who were slow to return to indoor dining.

Still, the study finds that star-ratings remained an important determinant of who survived and who did not. According to the study’s findings, “higher rating scores and review counts are robustly associated with lower restaurant exit probabilities. A 1-star increase in the restaurant’s rating is associated with a roughly 1.2% lower chance of restaurant closure. Additional 100 reviews at the beginning of the observation period are associated with a lower probability of restaurant exit.”

This is to suggest that restaurants which excelled in customer satisfaction across multiple fronts were more likely to weather the hardships of the pandemic than those with a few middling Yelp! reviews and even a slight reputation for mediocrity. Of course, that doesn’t mean that only fine dining establishments survived the pandemic. Casual dining establishments with a sterling reputation among critics and customers were just as likely to survive this sustained period of hardship.

The real takeaway is that it’s important to understand your customer base, and to deliver on their expectations. Your customers will reward your attention to detail with positive reviews and loyalty during these  times of hardship. By contrast, businesses which fail at meeting these expectations will be punished with indifference, and ultimately, failure.

Restaurants that suffer from poor quality control in the kitchen, high front of house turnover, and inconsistent customer experiences are significantly more vulnerable to failure than those with excellent chefs, knowledgeable servers, and a highly curated approach to the dining experience.

4. A Shortfall of Initial Investment

Opening a restaurant costs money…a lot of money. Your startup costs will include, but are not limited to, getting a business license, purchasing a liquor license, buying or renting restaurant equipment and kitchen equipment, hiring a head chef, building (and printing) a restaurant menu, achieving compliance with current food safety regulations and local health department standards, purchasing foods and ingredients, preparing for your soft opening, preparing for your grand opening, and much more.

Small business loans play an important part in financing the initial operating costs for many startup restaurants. But it is particularly common for this initial restaurant funding to fall short of your total startup costs. The article from Motley Fool warns that many inexperienced restaurant owners underestimate the inevitability of unpredictable expenses.

As the article notes, “Restaurateurs require an emergency fund. Unless you buy all equipment brand-new and under warranty, something is guaranteed to break. From walk-in coolers to ice machines, equipment failure always comes when you can least afford it. Without enough money for repairs, it’s easy to fall behind.”

Falling behind in the early stages could stand in the way of your restaurant’s success and survival.

5. Poor Long Term Financial Management

This is far too often the cause of closure for many restaurants, even those that might be succeeding on other fronts. Indeed, a restaurant that receives five-star ratings, has a full dining room every night, and enjoys stellar reviews from noteworthy food critics may appear on the surface to be a runaway success.

But that success can’t outrun financial mismanagement. Too many aspiring restaurant owners take for granted the sheer complexity of the business and the challenges that come with achieving profitability and survival. 

As the article from Motley Fool points out, “Many businesses start with a pile of cash and still fail. That’s because managing restaurant finances is complicated. Each aspect, from menu pricing to staffing levels, impacts your bottom line. And these numbers fluctuate widely in a new business since you may not get into the swing of staffing until you have some experience behind you.”

Many small restaurants are owned and operated by their own executive chefs. While this is a common business model in the restaurant industry, it comes with plenty of risk. A brilliant chef may not necessarily be a competent business manager. Blurring the lines between the roles can lead to financial failure, even in a restaurant that appears, to the casual observer, to be thriving.

5 Ways to Improve Your Restaurant’s Chances of Survival

Though we’ve identified some of the greatest risk factors facing new restaurants, we should reiterate the point that most restaurants actually do survive their first year. But whether you are among them will depend on a number of factors, only some of which you can control. Below are a few things you can control. If you control them effectively, you could significantly increase the chances of your restaurant’s success.

1. Conduct Comprehensive Market Research

Don’t just assume that your restaurant concept is something that the market wants. Be sure of it, and create a marketing plan that gives that concept a real chance to succeed. The only way to do this, however, is to do your full and due diligence in conducting market research. Let the research help shape your concept, rather than allowing your concept to drive your decisions.

The result should be a concept with a proven pathway to success. Accordingly, the article from Menu Cover Depot advises that “A strong concept starts with thorough and unbiased research on the size of the market and the general economic condition of the neighborhood. Next comes a thorough analysis of the competition: direct and indirect, their price points, their strengths and weaknesses (the latter of which may present a competitive advantage for you). I emphasize thorough research because many operators frequently make two mistakes: their understanding of the competition is limited and their market analysis is shallow.”

The takeaway here is that your research should be comprehensive and meaningful. If this is not something you are prepared to do on your own, it may be advisable to hire a marketing consultant at this early stage. While this will add to your outlay of capital, it may also significantly improve your chances of success.

2. Know Your Clientele

Understand precisely who it is that you expect to walk through the doors of your restaurant. Who is your target market? Before you can shape a restaurant to serve your diners, you need to know exactly who these diners are.

This goes hand in hand with shaping your restaurant concept. And it requires you to truly winnow down the type of diner you envision in your establishment. Of course, this approach is not in lieu of being inclusive or welcoming. But the restaurant business is a densely packed space where proprietors are tasked with meeting the expectations of a select strand or cross-section of a much larger population.

Everything about your restaurant–from its menu items and its price points to its ambience and style of services–should be informed by the expectations of your unique target audience. This will require you to ask and answer a number of critical questions right at the outset. 

The article from Forbes notes that “Knowing why and for whom your restaurant exists is crucial to success. Your marketing plan should offer compelling reasons why that guest base should frequent your establishment regularly. Is the concept created for health-conscious people? Is it aimed at Millennials or Baby Boomers? Is it a full menu or dessert brand or a convenient, fast food, value-based concept?”

Not only should you work to address these questions, says Forbes, but you should build a marketing plan based on the answers you arrive at. The Forbes article suggests that “your social media, print ads, and community outreach should focus on one single audience with one single message. Once you’ve built a loyal base of customers and repeat business, then you should consider expanding your base by marketing to others in the area with a proposition that appeals to them.”

3. Create a Real and Realistic Business Plan

As we noted earlier in the article, it is quite common for a talented executive chef to open a restaurant without any prior experience managing a business. It is also quite common for this situation to quickly turn south.

Experience is a key ingredient to success in the operation of any small business. Restaurants are no different. That’s why the most important starting point for any aspiring restaurateur is an actionable and credible business plan.

A restaurant supply and management blog called Webstaurant Store notes that “Starting a restaurant, like any new business, requires a solid business plan. This is the step that may become a stumbling block for those unfamiliar with business plans and how they are written. Restaurant business plans are divided into sections that describe all the aspects of your new business, from your restaurant concept to your financials.”

If you’re planning to open a restaurant but you don’t have experience or an aptitude for writing, developing, or providing the accounting for a business plan, this is probably a great time to consider hiring an experienced business manager. You need somebody with the knowledge and background to create a compelling business plan from executive summary to financial projections.

Indeed, if you are seeking a business line of credit to help finance your startup costs and first year operating costs, your restaurant’s business plan will be an important piece of the puzzle. Lenders will be more willing to support your enterprise when they can see that you have a fully formed and viable restaurant idea, that you’ve developed a comprehensive marketing plan, and that you’ve outlined a clear path to profitability.

4. Hire the Best People

This is easier said than done. The restaurant business is noted for its high turnover. But those restaurants that succeed do so by creating consistency in both the kitchen and the front of house. This is critical to the dining experience. Your guests can tell the difference between a new server and somebody who truly knows the menu. Your online reviews will reflect on a kitchen that produces inconsistent results. These are the kinds of experiences that can result in less than stellar views.

Alternatively, restaurants that court (and effectively compensate) excellent chefs, servers, bartenders, and hosts are likely to be rewarded for their investment. As Forbes advises, “It’s not enough to hire people with restaurant experience; they should also understand and be excited about the mission of the restaurant. If not, they will go through the motions with an inauthentic approach and often fail at exceeding guest expectations. Examine your corporate core values and hire people that match it. Next, supply your staff with comprehensive, ongoing training and the proper tools so they can carry out the day to day tasks flawlessly. Hire for qualities, train for skills.”

In other words, hire employees that bring both experience and enthusiasm to the role, and create a structure where these employees can grow and thrive. The best restaurants–those that bring in repeat diners and garner uniformly excellent reviews–succeed on the strength of knowledgeable, talented, and attentive personnel.

5. Clear All of the Bureaucratic Hurdles

If you’re new to business development, get ready to fill out a whole lot of forms. You’re about to need a ton of permits, licenses, and more. The restaurant licenses you require will depend on the nature of your establishment. If you plan to serve alcohol, you will need a liquor license. If you don’t plan to serve alcohol, you will still require a food service license as well as any number of health department permits.

Failing to acquire all necessary permits and licenses could result in fines and costs down the road that could negatively impact your ability to operate and earn a profit. Make sure you get all of this red tape sorted out in a timely fashion.

Webstaurant notes that , “To start a new restaurant, you’ll need to obtain several federal, state, and local permits and licenses. It’s helpful to enlist legal counsel when filing for restaurant permits and licenses to make sure you don’t miss a step.”

Once again, this is a service that will add to the outlay of capital for your investment. But the benefits of getting your paperwork, permits, and licenses properly in order is well worth it.


For a few more helpful tips that apply to both the restaurant business and beyond, check out our step by step guide for how to start your own small business.