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The reason why so many good restaurants fail

Failed restaurant
[Unfortunately, many restaurants end up like this/Getty Images]

Sometimes the first sign for customers that a restaurant is in trouble is when they see papered-over windows or discover an eviction notice for unpaid rent taped to the restaurant’s locked door. How does a restaurant go from seemingly thriving one day to being shuttered the next?

The restaurant industry generates $75 billion in annual sales and employs more than 1.2 million people at more than 91,300 restaurants, cafes and bars across Canada, accounting for almost four per cent of the country’s economic activity, according to industry association Restaurants Canada. But eating and drinking places have among the highest bankruptcy rates of all retail businesses. In a 2005 study, “Why Restaurants Fail,” Dr. H. G. Parsa found that in the U.S the annual failure rate is almost 30 per cent, and double that by the third year. Small independents in dense urban markets, where real estate and labour costs are highest, have the hardest time succeeding.

“Some places are open three months and then, bingo!” says lawyer Joe Solomon. “They’ve put all their money into the fridges, stoves, chairs, decorating—then they open and have no money to buy food.” Solomon has advised dozens of restaurateurs over the years, including his daughter Alida Solomon, the award-winning chef/owner who opened Toronto’s acclaimed Tutti Matti in 2002 and is still going strong. “To build a restaurant with a liquor license used to be $5,000 a chair,” he says, “—now it’s $10,000 a chair. Then you need $40,000 to $50,000 in the bank to stay open while you build your clientele. People have too many choices,” he adds. “Every week there’s three new places good enough that I want to try them—there’s lots of fresh competition.”

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“You can never assume business is just going to come to you,” says Andy Smith, a restaurant manager with years of experience in the market. “Creativity is key—staying with the trends, keeping up with social media and all the different internet review outlets, having a five- to ten- year plan and knowing what’s going to happen in the area.” Neighbourhoods change, styles change, tastes change.

But even popularity won’t save some operations—in fact, it can increase the likelihood of failing by putting more stress on what Parsa calls an owner’s “entrepreneurial incompetence”—his or her lack of planning, inadequate financial management, poor hiring practices, failure to maintain standards, an inability to balance family and work life or delegate responsibilities. The places that have consistent business should eventually be able to succeed if they’re able to control the costs of labour, sales, and purchases, says Smith. “But if even one of these falls out of line it can begin to spiral, and it can take a long time to bounce back to profitability.” In many cases owners just burn out.

“As soon as I see the owner working in the kitchen I know he’s got a problem,” says Solomon. “There are other signs. Prix fixe specials. They stop paying HST, then the retail sales tax and then their suppliers”—probably in that order, he explains, since HST is usually collected quarterly. “A lot of guys ride on a cushion of that money between periods and then have to catch up when it becomes due,” he says. Late payments, bounced paycheques or being paid in cash all indicate to staff that owners are in trouble, says Smith.

“With commercial leases, you can be locked out if you’re in arrears for 15 days,” says Solomon, but most landlords want to recoup rent from current tenants if they can. “There’s always a period of negotiations, notices, letters, partial or half-payments,” he says. “If they know the guy is strong in the summer they might let them build up some arrears and then collect when the patio is open, or something like that.”

“More often than not the landlord locks the guy out after he’s already left,” he continues. “A lot of guys know when they’re going—they do a midnight run, take all the equipment and they’re gone. Or they just hand the keys to the landlord, who then formally locks them out by posting it.” The landlord might have a restaurant auction and sell what’s been left or sell individual items online for whatever they can, says Smith, and employees who are owed money can go to the Labour Board or hire a lawyer, “but the owners are usually in so much debt that they won’t get their money for a long time,” he says. “For a couple hundred dollars, everyone I’ve known usually just walks away.”

“They’re sad stories, all of them,” says Solomon. It’s relatively easy for anyone to open a restaurant—succeeding in running one is much more difficult. “A lot of them are from the business and they all have a dream to be an owner,” he says, “but it’s a heartless, cold, industry. Sometimes they’re not cut out for it—and there is always someone standing in line who wants to try their hand.”