Chapter 5 — Exercises

Thirty-four problems, graduated from recall through applied judgment. Items marked with a dagger (†) have worked solutions in the Answers to Selected Exercises appendix — try them before you look.

Do the arithmetic by hand or in a spreadsheet. A capital stack you have built yourself is a different object from one you have read about, and the difference shows up the first time somebody asks you a question across a desk.

A. Recall and definitions (1–7)

1. Define capital stack in one sentence. Then list Bellwether's four layers, their amounts, and their order of repayment priority.

2. In an SBA 7(a) loan, who lends the money, who underwrites it, who services it, and what exactly does the Small Business Administration do?

3. † Distinguish the SBA guaranty from a personal guarantee. Who does each one protect, and from whom?

4. Define collateral. Give three specific reasons a restaurant is harder to collateralize than almost any other small business.

5. Distinguish a term loan from a line of credit. Give one use for which each is the correct instrument and one for which it is the wrong one. Why is a line of credit usually unavailable to a restaurant that has not opened?

6. What is a tenant-improvement allowance, when is it typically paid, and what condition must usually be satisfied first?

7. Write the DSCR formula. State in plain English what a ratio of 1.00 means, and why a lender would not be satisfied by it.

B. The stack, sources, and uses (8–14)

8. † Build a sources-and-uses statement for a \$410,000 project.

Sources: an owner injection of 20% of project cost, a \$50,000 landlord TI allowance, a \$45,000 equipment lease, and an SBA 7(a) loan for the balance. Compute the loan amount and show that the statement foots.

9. Express each source in problem 8 as a percentage of total project cost, to one decimal, and confirm the percentages sum to 100.0%.

10. † For the project in problem 8, build the source-to-use matrix: which source pays for which use. Apply the principle from §5.1 — outside money funds what it could repossess. State which uses end up funded entirely by the owner, and why.

11. For Bellwether: what percentage of the \$620,000 project is contractual debt (the SBA note plus the equipment lease)? What is the ratio of that debt to the owner injection?

12. † A lender offers you \$200,000 two ways: at 9% over seven years, a payment of \$3,218 a month**; or at 10.5% over ten years, a payment of **\$2,699 a month. For each: compute annual debt service, cents of annual payment per dollar borrowed, total of payments, and total interest. Then say which you would take for a restaurant build-out and defend it in three sentences.

13. A landlord offers a \$120,000 TI allowance on 3,500 square feet under a ten-year lease. Price the allowance undiscounted, per square foot per year. Then price it as a loan at an assumed 8% over 120 months (the payment is about \$1,456 a month) and express that per square foot per year.

14. † A landlord offers you a choice: four months of free rent, or \$30,000 more in TI allowance. Annual all-in occupancy is \$110,000. Compute the face value of each. Then argue — in two paragraphs — which is actually worth more to a first-time operator, and name the one lease provision that could reverse your answer.

C. Debt service coverage (15–21)

15. † A restaurant projects operating profit before debt service of \$148,000. Its debt service is an SBA note at \$41,000 a year, an equipment lease at \$12,500 a year, and a family loan at \$9,600 a year. Compute DSCR and characterize it against the bands in Figure 5.5.

16. The same restaurant has a poor first winter and operating profit comes in at \$70,000. Recompute DSCR. What conversation does that number produce, and with whom?

17. † A plan shows operating profit of \$210,000** against debt service of **\$96,000 — a DSCR of 2.19 — and both owner-operators are drawing no salary. A reasonable market salary for their two roles is \$135,000 combined. Recompute the ratio with the owners paid. Write two sentences on what this exercise demonstrates about reading anybody's projections, including your own.

18. Recompute Bellwether's DSCR if the SBA note carried a rate of 12.5% rather than 10.5%. (At 12.5% the annual note service is about \$58,843.) By how much does coverage fall?

19. † Use the simplified model from §5.4: Bellwether keeps 34.0¢ of every sales dollar after the costs that move with volume, against \$265,980 of costs that do not move. Find the revenue at which DSCR reaches 1.35, and express it as a percentage of the plan's \$1,550,000. Then state, in one sentence, why the true break point is at a higher revenue than your answer.

20. Name three limits of DSCR from §5.4 and construct a specific, concrete scenario illustrating each — a restaurant whose annual coverage looks fine and whose reality does not.

21. A restaurant reports a DSCR of 1.6, holds no cash reserve, and has a rent escalation landing in month 14. Write the three questions you would ask before agreeing the business is healthy.

D. Equipment, leases, and vendor money (22–26)

22. † A lessor quotes a lease rate factor of 0.0243 on \$85,000 of equipment over 48 months. Compute the monthly payment, the total of payments, and the total finance cost. Then express the annual payment as cents per dollar financed and compare it with Bellwether's SBA note at 16.2¢.

23. Take the lease in problem 22. The lessor offers a second version at \$1,780 a month over 60 months with a fair-market-value buyout. Compute the total of payments for each and write three sentences on why the cheaper monthly payment may be the more expensive deal.

24. † A brewer offers a draft system worth \$9,000 installed, free, in exchange for buying kegs at \$22 above your alternative supplier's price. You will sell 6 kegs a week on a five-year agreement. Compute what the "free" system costs across the term. Then name two circumstances under which you would take the deal anyway.

25. List five clauses you would check in an equipment lease before signing, and say in one line what each one protects you from.

26. Sort the following into "an equipment lessor will finance this" and "an equipment lessor will not": reach-in refrigerator · hood ductwork · POS terminals · grease interceptor · ice machine · site-built wood-fired hearth · walk-in compressor · dining chairs · make-up air unit. State the single principle that decides every case.

E. Friends, family, and investors (27–30)

27. † A family member offers \$60,000 as a loan at 7% over six years; the payment is about \$1,023 a month. Compute annual debt service, total repaid, and total interest. Then compute what that loan does to a plan already carrying \$69,500 of debt service against \$261,020 of operating profit.

28. The same \$60,000, taken instead as 25% equity. What post-money value does that imply? If the restaurant matures into \$120,000 a year of distributable cash, what is the investor's annual return on their \$60,000, and in what year does the equity deal become more expensive than the loan in problem 27?

29. A close friend with no restaurant experience wants to put in their entire savings. Write out — in actual sentences, as you would say them — what you tell them. Then write what you do if they insist.

30. † Price a comp policy. Four investors, three visits a month each, an average tab of \$95, fully comped, at Bellwether's 27.8% blended cost of goods. Compute the annual retail value, the annual product cost, and the number of covers consumed. Then propose a written policy and justify it in two sentences.

F. Writing, judgment, and the Business Plan (31–34)

31. Write "the ask" for your own concept — or for Bellwether — in one paragraph of no more than 90 words. It must contain the amount, the structure, the term, the security, and the injection. Read it out loud; if you stumble, it is not finished.

32. † Write a 250-word memo to a family member who has offered you money, explaining the difference between lending it to you and buying a piece of the business. Include one specific number for each path. Do not persuade them toward either one; the memo's job is to make them able to choose.

33. Business Plan extension. Reconstruct Bellwether's full source-to-use matrix from Figure 5.2 without looking, then check it foots in both directions. List every line funded entirely by owner money and write one sentence explaining why each one falls there.

34. † Business Plan extension. Bellwether's \$45,000 working-capital reserve is about 1.8 weeks of operating cost on plan. Compute the reserve that would fund six weeks. State how much additional capital that requires, then work through each of the four sources in the stack in turn: could it supply the difference, and what would it demand in exchange? Conclude with the change you would actually make to the plan, and what it costs.