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Texas Restaurant Law

Biggest Legal Causes Of Restaurant Failures

Posted in Acquisitions, Commentary, Franchises, Franchising, Liability, Litigation, Negotiation, Real Estate, Recent Law Trends

Just this week, two of my favorite restaurants in Dallas closed operations. This led me to consider the biggest issues I have seen that factored into a troubled restaurant. A few of these may not be a surprise, but you may be shocked at others. Consider this list of top legal reasons why restaurants fail:

Inadequate Initial Capital

Seasoned restaurant owners would expect to see this. By most accounts, the single biggest reason that restaurants historically fail is the lack of enough money to get the restaurant off the ground. Restaurant owners are entrepreneurs and often risk takers. Those are needed components to starting a restaurant. However, that does not excuse poor planning on the front end or the need to realistically understand that it may be 6 to 18 months before a restaurant breaks even or makes a profit.

Poor Advice From Bad Advisers

Second on our list of restaurant failure factors is taking advice from bad advisers. Bad tax advice, bad accounting advice, bad legal advice and many more can lead restaurant owners down very bad paths. Before taking anyone’s advice, ensure that they have good experience in the restaurant industry. Just because an accountant does your personal taxes or a lawyer handled your divorce, does not mean that they know anything about restaurants.

Similarly, avoid being penny-wise and pound foolish. A cheap adviser does not always provide real value. That said, it is likewise true that you do not always need the gold standard of advisers. Solid advice comes from solid people regardless of price.

Not Seeking Or Taking Advice From Good Advisers

Dovetailing from point three above, it can be business suicide to avoid asking for help when you need it. Being a great restaurant owner does not make you a good surgeon. The same is true for lawyers, accountants, real estate brokers, and all of the other great business advisers that restaurant owners need in their business. Just because you can file your own taxes or write a contract, does not mean those are good ideas.

Poor Location

Not every restaurant needs a great location, but that is the exception, not the rule. Most restaurants need to be in a place that is convenient and with good visibility. Think hard before you cut corners on the location of the restaurant just because the price is good.

Inattention To Details

Most businesses need great innovators and great analysts. Right brain and left brain. The artist and the number cruncher. Restaurants are no different. However, details apply to both personality types, and all restaurant owners must pay attention to these little things.

For instance, the food could be great, but it might not be profitable per item. The restaurant might be popular, but you might lose customers because of the wait. The decor could be fantastic, but it may not fit the food.

All of these little details add up, and it has cost many a restaurant owner their business for not paying attention.

Lack Of Restaurant Experience

Our final point here is the surprising fact that many people try to open restaurants with little or no experience. As noted above, you need to take risks sometimes, but those risks need to be calculated. Restaurants are a tough business, and it will greatly increase your chances of success by knowing something about them before starting.

Have you experienced issues like these? Have you gone down some bad paths and learned something? We want to hear about them, so please post your thoughts!

About the author: Matthew Sanderson is a restaurant lawyer in Texas. “Good service with a smile” is his motto. Click here to find out more about Matthew Sanderson’s legal practice and how he can help you today. Follow him on Twitter @dealattorney.