How to Avoid a Restaurant Bankruptcy

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A lot of restaurants are struggling financially right now, especially during the COVID-19 outbreak, while most restaurants across the world are closed for dine-in business. Many restaurant owners have had to fire many of their employees, since they are limiting their services to takeout and delivery, and many are limiting their schedule to particular hours or days of the week.

And even during non-COVID-19 times, restaurant failure rates tend to be higher in North America than in Europe. In fact, a whopping 60 percent of all new restaurants don’t make it past the three-year mark.

Many restaurant bankruptcies occur during catastrophes like COVID-19 or natural disasters, but most bankruptcies occur due to a lack of management skills. This can include anything from poor training to a lack of supervision to a lack of attention to human resources, marketing, finance or internal controls.

Many chefs open restaurants, thinking that if they have the proper experience and talent as a chef, they will automatically excel as a restaurant owner. But in order to truly succeed as a restaurant owner and avoid restaurant bankruptcy, you need to have the right training as an entrepreneur, marketing, public relations and a great personality. 

You also need to have a more general knowledge, be able to master a large number of skills and have a keen attention to detail. According to recent studies, a whopping 63 percent of businesses fail due to financial incompetence, while 16 percent fail due to a lack of managerial expertise and 10 percent fail due to a lack of the right skills or training.

How to prevent restaurant bankruptcy

You can prevent restaurant bankruptcy if you are truly honest with yourself, recognize your faults and admit any issues that you have in the early phases of opening your restaurant. Here are some of the best tips and tricks for preventing restaurant bankruptcy:

  • Pinpoint the reason for your poor performance. The first step to preventing bankruptcy is admitting that your restaurant is not doing well and pinpointing the exact reason or reasons for your restaurant’s poor performance. After you have pinpointed exactly why your restaurant is not performing well, you can hire a consultant or multiple consultants to help you solve any issues that you are having.
  • Make sure that you are well informed. One of the best ways to successfully run a restaurant business is to ensure that you are receiving the right education and consulting on how to solve any issues that you come across. Acquire the best practical knowledge, education and training through formal in-person courses, free online courses, YouTube and more. You can also read up on the industry and marketplace through trade literature and specialized courses or seminars. But keep in mind that reading about the industry will not necessarily help your business succeed. Success typically comes through diligence, hard work, passion and personality.
  • Conduct a feasibility study. Before actually opening your restaurant, make sure to conduct a feasibility study to figure out whether you can viably open a restaurant in the location you’re considering. Once you’ve conducted your study and determined that the restaurant is financially viable, you can create a business plan, arrange financing and plan your marketing strategies.
  • Make informed decisions. It is super important to make informed managerial decisions based on timely and accurate information, rather than making decisions based on hearsay or gut feelings, which can be an expensive mistake. Analyze all of the information you have about the industry, marketplace, relevant factors and more before making a decision. In order to really be successful, you need to know enough about internal controls, accounting, marketing, maintenance, repairs, public relations, taxation, purchasing, laws, training techniques, food and beverage quality, service, decor and relationships with bank managers, government agencies and purveyors in order to make informed decisions.
  • Communicate with your bank managers. It is super important that you communicate with your bank managers how your restaurant operation is performing and if bankruptcy is looming, so that you can create a contingency plan. Most restaurants begin their operation with a lot of debt, and because bankers are risk averse, they typically charge fairly high interest rates. However, they are very quick to call in loans to help entrepreneurs.
  • Acquire enough capital. Restaurant owners need to make sure they have enough cash coming in after opening, since they need to find, hire, train and compensate employees in order to help their business succeed. Therefore, it is crucial that you acquire sufficient capital. Make sure to put up at least 50 percent of your capital. You need to have enough cash to meet payroll for the first several months, at least four to six months.
  • Communicate to your staff. As important as it is to communicate to your bank managers, it is also super important that you communicate to your staff as much as possible, both verbally and in writing, throughout all stages of your restaurant. You need to lead by example, but you also need to be very clear in your communication and let them know how the business is performing and what is expected of them as employees. Communicating the needs of the business to your employees will help them feel more a part of the team, boosting employee morale, productivity and the overall bottom line of the business.

Successful businesses require adequate financing, excellent planning, motivated employees, passion and dedication and information about the marketplace and industry at large. Hopefully, you have enough information now to help your business avoid bankruptcy.

Article Name
How to Avoid a Restaurant Bankruptcy
Here are some of the best tips and tricks for preventing restaurant bankruptcy
Chad Van Horn
Van Horn Law Group
Van Horn Law Group
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Published by
Chad Van Horn

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