Chapter 8 — Exercises

Thirty-six 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.

Every scenario here is a constructed teaching example. Entity law, licensing, permitting, insurance, dram shop doctrine, and accessibility enforcement vary by state, county, and city, and they change. Nothing in this set is legal advice; a real decision requires a real attorney, a real accountant, and a real insurance broker who work in your jurisdiction.

A. Recall and definitions (1–9)

1. Define certificate of occupancy and food service establishment permit. Name the authority that issues each, and state one thing that can be true of a restaurant holding the first but not the second.

2. † Explain the difference between an LLC and an S-corp election. Which one describes liability, which one describes tax, and why does the confusion matter?

3. Name the four things §8.1 says an entity does not protect against. For each, name the specific document or behavior that creates the exposure.

4. What is a quota license? Explain in two sentences why the same restaurant concept faces a completely different capital problem in a quota jurisdiction than in an open-issuance one.

5. † Define dram shop liability and describe the two distinct exposures it creates. Which of the two does insurance respond to, and what happens to the other?

6. Your general liability policy is in force. Why will it not respond to a claim arising from alcohol you served, and what is the name of the coverage that will?

7. What does business interruption insurance actually require before it responds? Use that requirement to explain why most pandemic-era claims failed.

8. † Distinguish the three ADA obligations — new construction, alterations, and existing facilities. Which one applies to a \$310,000 second-generation conversion, and which one never ends?

9. What is an auto-renewal clause, what is the "notice window," and why do two calendar entries protect you better than one?

B. The permit stack, costed (10–14)

10. † A 90-seat restaurant is building its licensing budget against a \$48,000 pre-opening line. Entity formation and attorney \$2,900 · business license \$275 · health permit \$1,350 · certificate of occupancy fee \$300 · fire operational permits \$525 · sign permit \$400 · liquor application and first-year fee \$6,200 · licensing consultant \$4,000 · alcohol server certification for 30 staff at \$28 each · food-handler cards for 34 staff at \$18 each plus two certified-manager courses at \$175 each. Compute the total and express it as a percentage of the pre-opening budget. Then state what is left for training payroll and opening inventory.

11. Same restaurant, recurring costs: annual report \$75 · registered agent \$165 · business license \$400 · health permit \$1,350 · fire \$310 · sidewalk café \$1,100 · liquor annual fee \$2,600 · music licensing \$1,850 · server recertification \$220 · food-handler turnover replacements \$475. Compute the annual total, then express it as a percentage of a \$46,500 general-and-administrative line and of \$1,600,000 of sales.

12. Which of the following costs belong in the construction budget rather than the licensing budget, and why does it matter which line carries them? (a) building permit fees, (b) health-department plan review, (c) the certificate of occupancy inspection fee, (d) the liquor application fee, (e) the architect's fee, (f) the sidewalk café permit.

13. † A restaurant's certificate of occupancy issues on March 3. Rent commences thirty days later under the Chapter 6 formulation, and the three months of abatement have already been consumed during a construction overrun. The liquor license issues on May 28. All-in rent is \$7,933 a month. How much rent is paid on a building that cannot legally serve alcohol? Show the day count.

14. Build the compliance calendar for the items in problems 10 and 11: list each permission, its issuing authority, its renewal interval, and how many days before expiration the reminder should fire. Explain your rule for choosing 30 days versus 90.

C. The liquor license (15–21)

15. † A restaurant forecasts \$1,850,000 of first-year sales at a 26% beverage mix and a 21% pour cost. Compute annual beverage revenue, beverage cost, annual beverage contribution, and weekly beverage contribution. Then compute the cost of opening ten weeks before the license issues.

16. Using your answer to problem 15: the restaurant's forecast operating profit is \$296,000. What happens to that figure if the license is never granted at all and beverage revenue is zero? State the result in dollars and in one plain sentence.

17. † A quota-market license is offered at \$88,000, with broker commission, licensing attorney, escrow, and transfer fees totalling \$11,500. The buyer would fund it as additional principal on a ten-year note whose payment factor is \$0.0134935 of monthly payment per dollar borrowed. Compute the total acquisition cost, the added monthly payment, and the added annual debt service.

18. For the same purchase: name four things you must verify about that specific license before signing a purchase agreement, and state the one structural term that determines whether you lose the money if the transfer is denied.

19. † Write the eight verification questions from §8.3 as an actual email to a state licensing authority about a specific address. Business language, numbered, answerable in writing, under 350 words. Assume you have not yet signed a letter of intent.

20. Chapter 6 obtained a 45-day due-diligence period with a permit-and-license contingency. Explain precisely which liquor-licensing risks that contingency covers and which it cannot, and propose two lease provisions that would close part of the gap. For each, state what a landlord would say and what you would offer in exchange.

21. A jurisdiction conditions a restaurant liquor license on food being at least 55% of gross receipts. The plan is 72% food / 28% beverage. (a) State the margin of safety. (b) The bar program outperforms and beverage reaches 41% of sales in year two. Is there a problem, and what would you have had to build in year one to even know? (c) Which chapter's system produces the evidence?

D. Dram shop and responsible service (22–26)

22. List the five components of a responsible-service program from §8.4. For each, name the artifact that proves it happened — the physical or digital thing an attorney could put in front of somebody a year later.

23. † A licensing authority suspends a license for 21 days after an over-service violation. Using Bellwether's weekly beverage contribution of \$6,510, compute the direct cost of the suspension. Compare it to the \$4,900 annual liquor liability premium from Figure 8.5 and state the ratio. Then name two costs the arithmetic does not capture.

24. Write the policy. Draft a one-page responsible-service and refusal policy for a restaurant with a twelve-seat bar. It must cover: the ID standard and how IDs are examined; who may refuse service; the rule about managers overriding a refusal; what is offered instead of the drink; how a guest gets home; what gets logged and by whom; and the certification requirement. Write it as something a twenty-two-year-old bartender would actually read on their second day.

25. † Diagnose the shift. It is 10:40 on a Friday. The bar is three deep. A party of five orders; four IDs are checked and the fifth is waved through because the line is long. Ninety minutes later a member of that party is involved in a crash. Working only from §8.4, list every point in the evening at which a system — not a heroic individual — would have changed the outcome, and say which one you would install first if you could only install one.

26. Judgment. Your beverage director proposes a Thursday promotion: \$5 cocktails from 9 p.m. to close, marketed as "the late shift." Evaluate it on three axes — the revenue case, the compliance case, and the dram shop case — and give a recommendation with a condition attached.

E. Insurance and exposure (27–32)

27. † Total this schedule and place each line on the correct part of the P&L. CGL \$7,100 · liquor liability \$5,400 · property \$6,300 · business interruption \$3,500 · equipment breakdown \$750 · spoilage \$450 · EPLI \$3,100 · umbrella \$3,600 · hired and non-owned auto \$800 · cyber \$1,200 · workers' compensation at \$3.15 per \$100 of \$468,000 of gross wages. Then express the "other operating" subtotal as a percentage of a \$245,000 other-operating line, and the grand total as a percentage of \$1,750,000 of sales.

28. Using problem 27: which single line would you increase first if you had \$2,000 more to spend, and which would you cut first if you had \$2,000 less? Defend both answers by naming the loss each one answers.

29. † The coinsurance penalty. A restaurant insures tenant improvements, equipment, and contents for \$600,000. Their actual replacement value is \$850,000. The policy carries an 80% coinsurance clause and a \$10,000 deductible. A kitchen fire produces a \$140,000 loss. Compute the required limit, the amount the carrier pays, the amount after the deductible, and the shortfall. Then name the ordinary, blameless event that created the gap.

30. Workers' comp and prime cost. A restaurant does \$1,400,000 in sales with COGS of \$392,000 and all-in labor of \$462,000. Compute prime cost in dollars and percent. Now the experience modifier rises at renewal and the workers' compensation premium goes from \$13,400 to \$19,900. Recompute labor and prime cost. How many basis points did an insurance renewal move the number this book says predicts survival?

31. † Read this certificate. A vendor emails you the following. Identify the four problems.

CERTIFICATE OF INSURANCE — hood cleaning contractor        [constructed teaching example]
  NAMED INSURED      Regional Hood Services
  GENERAL LIABILITY  $1,000,000 each occurrence / $2,000,000 aggregate
  AUTO               $1,000,000 combined single limit
  WORKERS' COMP      "coverage in place"
  UMBRELLA           none
  CERTIFICATE HOLDER [your restaurant]
  ADDITIONAL INSURED not listed
  POLICY PERIOD      expired 4 months ago

32. The exposure ladder. For a restaurant with a ten-year lease guaranty of \$980,000, a \$300,000 guaranteed note, and \$140,000 of owner equity, state the total personally guaranteed obligation and the total capital at risk. Then answer the question a first-time operator always asks: "how much general liability is enough?" — and explain why the honest answer is not a number.

F. Judgment, writing, and the Business Plan (33–36)

33. Ethics, three situations. One paragraph each.

(a) The license will not issue for another six weeks. Your front-of-house partner suggests opening anyway and letting guests bring their own wine, "since we're not selling it." What do you do, and what do you say?

(b) Your broker suggests reporting alcohol as 15% of receipts rather than 28% because "the underwriter just wants a range," which would lower the liquor liability premium by about \$1,400. Evaluate.

(c) An ADA demand letter arrives asserting three barriers. Two are real and cheap to fix; one you believe is wrong. Your bookkeeper suggests fixing the two quietly and not responding. Evaluate.

34. † Write the memo. A guest has fallen on a wet floor near the service station and been taken to hospital. Draft the internal incident memo, to file, that the manager on duty writes before leaving the building — what happened, when, who was involved, what was observed, what was done, who was notified. No speculation, no admissions, no conclusions about fault. Then state, in one sentence each, who receives it and why.

35. Business Plan extension. Build the Licensing & Compliance table for Bellwether — or for your own concept, if you are working Appendix C. Two columns: one-time pre-opening cost and recurring annual cost. Total both. Then write the two-sentence honest caption that belongs underneath it, including what the one-time column does to the \$35,000 pre-opening line.

36. Business Plan extension. Write the insurance and exposure section of the plan's risk narrative. Paragraph one states the personally guaranteed obligation in dollars and shows how it was computed. Paragraph two states the insurance schedule, its total, and where each part sits on the P&L. Paragraph three states plainly what insurance does not reach and what would have to happen for the guarantees to be called. Neither reassuring nor alarmist — accurate.