The Restaurant-Failure Myth

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Rocco DiSpirito’s restaurant, Rocco's on 22nd Street, shut down just over a year after its well-publicized opening Getty

Because changes in franchise ownership usually remain behind the scenes, Parsa says it's still easy to make franchises look like a much safer bet than they are Getty

How well an owner juggles the demands of the business with family life is actually one of the most critical factors contributing to a restaurant's success -- more important, even, than "location, location, location." Getty

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Franchise Safety Is Overrated

And it doesn't end there. Research shows that a lot of the conventional wisdom about failure in the restaurant industry is similarly faulty.

One widely held belief is that franchise restaurants are much safer bets than independent restaurants. But Parsa found that the three-year success rate for franchised restaurants is actually only a few percentage points higher than it is for independents—about 43%. That's a far cry from the 90% or higher success rates trumpeted by many franchisors.

So far a cry, in fact, that the International Franchise Assn. decided it had to step in to clear things up. In 2005, the IFA issued a letter urging its members to remove from their Web sites or printed materials "any information claiming that the success rate of franchised establishments is much greater than that of independent small businesses," calling the information "potentially misleading."

The IFA specifically called out franchisors for using old Commerce Dept. data that has been shown to be invalid. But because changes in franchise ownership usually remain behind the scenes, Parsa says it's still easy to make franchises look like a much safer bet than they are. "In the Yellow Pages, a Taco Bell is still a Taco Bell," Parsa says—even if it's had five different owners in a year and isn't turning a profit (see BusinessWeek.com, 1/29/07, "Franchise Owners Go to Court"). On the other hand, Parsa's failure-rate statistics are somewhat misleading too, because they count any turnover as a failure, including restaurants that close or change hands while still profitable.

Juggling Family Ties

Given the immense time commitment that goes into owning a restaurant, it makes sense that some owners want out, even if they're making money. And in fact, the number of profitable "failures" is not insignificant. A 2003 report from an economist in the SBA's Office of Advocacy analyzed unpublished data from the U.S. Census and found that one-third of closed businesses were financially successful at closure.

"It appears that many owners may have executed a planned exit strategy, closed a business without excess debt, sold a viable business, or retired from the workforce," the report noted, adding that business-failure statistics might therefore present "much more daunting odds for business success than is actually the case."

Whether failure rates overstate or understate the odds, no one disputes the conventional wisdom that making it in the restaurant industry is no cakewalk. What entrepreneurs might find surprising is just how much a restaurant's success hinges on an owner's ability to keep the pressures of work from affecting life at home.

Parsa says how well an owner juggles the demands of the business with family life is actually one of the most critical factors contributing to a restaurant's success—more important, even, than "location, location, location."

Overcoming Geography

His conclusions were based on in-depth interviews with 20 successful and 20 failed restaurateurs. He determined that "beyond muddled concepts, failure seemed to stem in large part from an inability or unwillingness to give the business sufficient attention, whether due to lack of time, passion or knowledge."

Most of the failed restaurant owners themselves attributed their failure at least partly to competing family demands, including divorce, ill health, and retirement. Some owners voluntarily closed when the family sacrifices became too much, like one owner who said she didn't want to miss seeing her children grow up.

Location, while an important factor, appears to be more of a "moderating variable" than a causal one, Parsa says, ruling that "a poor location can be overcome by a great product and operation, but a good location cannot overcome bad product or operation."

DiSpirito—whose restaurant Rocco's on 22nd Street shut down just over a year after its well-publicized opening—might well have a few moderating variables of his own for the list.

Miller is a New York-based staff writer covering startups and small business. Miller is a graduate of Brown University.