Why do Businesses Fail? Part III


Published: January 6, 2020

Today’s blog is part III of a 10 part series of “Why Do Businesses Fail?” Parsa, Nijite, Self, Njite, and King (2005) did a research paper on “Why Restaurants Fail.” What they found the data focused on business failure through bankruptcies was supplied to them by Dun and Bradstreet. Their period was from 1996-1999 and showed a contrast to frequently reported statistic was higher than what was actual. Although a majority of businesses indeed fail within the first 5-years of their startup, the longer they stayed around the lessor, the chances of them going out of business.

They went on to prove that some 26.16% of independent restaurants fail within the first year of launching. Thus, and franchise chains within five years were 57.2%, and independents within that same period failed were 61.4%. The objective of this series is to find reasons why so many businesses fail within five years. Just imagine if this failure rate were to turnaround the type of economic boost that would be subjective to our economic economy — moreover, more jobs in the various communities where the businesses located, more taxes for the local and federal agencies, and communities would have more civic and personal pride.

Types of Restaurant Failures

Restaurant failures can be, studied from three different prospectives (1) economic (2) marketing, and (3) managerial. Of the three, the financial perspective is the most studied and reported on by researchers. The main area of interest and reporting is bankruptcies is the cause of the majority of failure, which is an economic perspective when in reality, this is not the main reason for failure, which is managerial. Out of all industries, restaurants are the number one industry that is, proven that will go out of business the quickest. Nevertheless, the most significant failure rate is in ownership change is not bankruptcy (Parsa, Nijite, Self, Njite, and King (2005).

Organizational Life Cycle

Another risk area from the study is that of newness. The liability of newness increases due to entrepreneurs don’t have the resources for sustainability at the beginning. However, as each year goes by, the entrepreneurial survival rate increases until year-4,5,6, the failure curve has dissipated, and now survival and not failure are more typical. Research has supported this survival rate of newness as entrepreneurs learn other skill-sets, and after 7-years, the propensity of failure drops dramatically.

Another area of interest is that of size. The larger the organization, the lengthier time that is correlated between size and survival. Thus, the larger firms will remain in business longer over that of their smaller counterparts due to size.

Internal Factors

Hence, managerial capabilities are at the forefront of why restaurants fail. Lack of experience, concentrating on putting out fires, managing from the seat of their pants with no sound plan. Poor management in accounting or other financial matters is a hindrance to not only the day-to-day operation but long-range planning too. Slopping record keeping.

Moreover, anyone who can cook it appears feels they can operate a restaurant business with no business skill-sets. For a restaurant to be a success, the restauranteur needs more than culinary skills to survive, needs to have business acumen. It knows how to order food, and how to store it when the shifts are over is the knowledge that must be, used, if not then waist will creep into the business and food is thrown away

Sacrifice

Restauranteers put in 60-80 hours per week in the operation of their companies, and this is a family sacrifice that, over time, some can no longer see the benefit. Balancing work and family is at the core of the business operation, watching the children grow up, being available for family outings. Without this commitment and learning, the balance of work and business failure is forever looming over the business. The family must buy into the fact that long hours are part of the terrain of any entrepreneurship understanding the sacrifice today for tomorrow’s goals.

High energy is a must for one operating their own business, and without it, the passion, the drive, and staying away from burnout or breakdowns is essential in the longevity of the company and its stakeholders. Thus, since restaurants are the number one business to close down, what can we bring from this study to alleviate this constant failure rate along with other industries? Passion is what one does, the love of doing and bring one’s family into subjection on what the goal is for the family, economically, and the building of wealth in America.

Follow us next week for part IV of “Why do Businesses Fail”? We inspire your comments and thank you for reading. See you next week.

References

Parsa, H.G., Nijite, J. T., Self, Njite, D., and King, T. (2005). “Why Restaurants Fail.” Cornell Hotel and Restaurant Administration Quarterly, Aug 2005; 46-3; ABI/INFORM Collection pg 304.