Guide to Risky Restaurant Investments

Guide to Risky Restaurant Investments

The Restaurant Investment Dilemma: A Recipe for Disaster or a Hidden Gem?

Imagine receiving a large inheritance and being presented with the opportunity to invest in a restaurant. It sounds exciting, doesn’t it? However, before you empty your pockets and hand over your hard-earned money, it’s essential to consider the potential risks and pitfalls associated with such an investment. In this article, we’ll explore the advice given by Eric Barth, a seasoned consultant in the hospitality industry, and delve into the common mistakes that often lead to restaurant failures.

One concerned reader, Harry, reached out to Mr. Beaver, seeking advice on whether he should invest his recently inherited fortune into a restaurant venture proposed by his uncle, Ben. Despite Ben’s track record of two failed restaurant ventures, he assured Harry of guaranteed success and a 30% return on investment within a year. Unconvinced, Harry’s wife, Cindy, threatened to divorce him if he agreed to invest. Mr. Beaver, in stark disagreement with Harry, jokingly recommended that Cindy should consider sending him for a mental health evaluation.

Being in Business for 40 Years Provides Some Perspective

To shed light on the situation, Mr. Beaver sought insights from Eric Barth, a consultant with over 40 years of experience in the hospitality industry, who has successfully opened over 100 restaurants, casinos, and food halls. Barth emphasized the importance of understanding the mistakes that commonly lead to restaurant failures. By analyzing these mistakes, potential investors can gain invaluable knowledge and make more informed decisions.

Mistake 1: Failing to Understand the Market and Not Doing a Market Study

According to Barth, failing to comprehend the market and neglecting to conduct a thorough market study is a recipe for disaster. It’s essential to understand the existing offerings and prices in the area. Can the proposed restaurant be competitive? If not, trouble is on the horizon. As an investor, the first question should always be: “Please show me your concept statement and your local market study.” Without a market study, it’s wise to walk away from the deal.

Mistake 2: Writing a Menu that Guests Don’t Understand

Restaurants should aim to offer an enjoyable food experience, not a challenging educational endeavor. Barth suggests that around 80% of the menu should consist of recognizable dishes for the guests. If the menu is overly complicated, listing numerous ingredients that patrons need to Google to understand, failure is imminent. A restaurant’s success relies on returning customers, and a confusing menu will discourage their loyalty.

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Mistake 3: Not Testing Dishes with Potential Guests, Friends, and Family

Just because a restaurant owner enjoys a particular dish does not guarantee customers will have the same sentiment. Barth stresses the importance of seeking feedback from friends, family, and potential guests. By inviting others to try the dishes and honestly share their opinions, restaurant owners can refine their offerings to better cater to their target audience.

Mistake 4: Not Creating a Great Work Environment

A positive internal service culture, where staff members genuinely care about helping each other, is essential for developing a positive external service culture that customers can feel. Inexperienced restaurant owners often fail to recognize the significance of this aspect. Barth points out that around 60% of restaurants close within three years, partly due to owners who view employees as subordinates. In reality, the owners work for the staff, and their well-being directly impacts the customers’ experience. Attention to detail is paramount, from comfortable chairs to appropriate condiments and even the quality of napkins. Each choice contributes to the overall dining experience. For instance, serving messy or greasy foods with low-quality napkins can lead to customer dissatisfaction and negative reviews.

Mistake 5: Failing to Learn and Grow

Successful entrepreneurs continually learn from their experiences, analyzing what sells and what doesn’t. They make adjustments and stay open to experimentation. Items that don’t perform well can always be replaced, and this provides an opportunity to create unique signature dishes. By actively seeking knowledge and adapting to the market, restaurant owners can keep their establishment relevant and maintain community interest.

Bonus Tip: For a Guaranteed Migraine, Do Business with Family!

Barth humorously advises against doing business with friends and family, particularly when it comes to investing large sums of money. He emphasizes the potential strain it can place on relationships and the emotional toll it can take. The restaurant industry is notorious for being demanding and all-consuming, often jeopardizing both health and personal connections. When investing, it’s crucial to consult with professionals experienced in the hospitality industry, such as attorneys and CPAs. They can provide a comprehensive evaluation of the investment opportunity, ensuring financial security isn’t compromised for the sake of pleasing a friend or family member.

To avoid the real-life tragedy that often unfolds when a restaurant fails, leading to the loss of livelihoods, homes, and financial security, potential investors must exercise caution and seek expert advice. By bolstering their decisions with professional evaluations and thorough analysis, they can minimize risks and maximize the chances of a successful investment.

Remember, the allure of investing in a restaurant may be tempting, but it’s vital to approach these opportunities with a careful eye and consult professionals who can help navigate the complicated landscape of the hospitality industry.

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