Chapter 35 — Exercises

Work these with a calculator and a blank sheet. Items marked with a dagger (†) have worked solutions in the answers appendix. Show your arithmetic; a growth decision that cannot be defended line by line has not been made, it has been felt.

Unless a problem says otherwise, use the Bellwether figures established in the chapter: revenue \$1,550,000, operating profit \$261,020 (16.8%), debt service \$69,500, cash after debt service \$191,520, personal exposure \$1,367,600, project cost \$620,000, 95 covers a night against a 77-cover cash break-even and a 132-cover kitchen ceiling, and a 57% incremental contribution margin.

A. Recall and definitions

1. State the seven gates of the second-location test in your own words, and say which one Chapter 21 answered and which one Chapter 34 left open.

2. † Define owner dependence and describe the absence audit, including the three bins and what each bin tells an operator to do next.

3. What is the difference between unit economics and a restaurant's P&L? Name one thing unit economics includes that the P&L does not.

4. Define above-unit overhead and give four items that belong in it. Why is it zero at one unit?

5. What is a line extension? List four, and state which one adds a new personal guaranty.

6. Explain the difference between the cushion and the headroom in a restaurant's cover count, using Bellwether's 77 / 95 / 132.

7. In one sentence each, distinguish licensing from franchising, and state why the distinction is decided by a regulator rather than by the title on the document.

8. Why does the chapter call a management bench a requirement for every growth option rather than only for a second location?

B. Applied reasoning

9. † An operator tells you their restaurant clears 15% operating profit and they are ready for a second location. What are the first three questions you ask, and what would each answer change?

10. A broker offers a space at a rent 18% below market, available in ninety days. Write the three-sentence reply that a disciplined operator sends. Then write the reply they actually send, and explain the difference.

11. Chapter 2 established that the running project is share-taking in a supplied market. Explain, in a paragraph, why that fact is a strength in a concept chapter and a liability in a growth chapter.

12. † The chapter argues that "two units is the worst number of units." Reconstruct the argument without looking, using the overhead-per-unit table, and state what an operator must be willing to commit to in order to cross the valley.

13. An operator's second unit opens at 80% of the first unit's revenue and clears 10.2% in year one. Their spouse says "that's a great first year." They are right. Explain why the business is still worse off, in four sentences.

14. Why does cannibalization concentrate on the weakest nights? Describe a restaurant where it would not, and say what would have to be true of its week.

15. The chapter claims that opening a second building "converts a bounded loss into an unbounded one." Explain the mechanism without using the word guaranty more than once.

16. Give two arguments for a second location that the chapter does not adequately answer. Then answer them.

C. Cost this

17. † A second unit is projected at \$1,180,000 of revenue with a 30.0% COGS, a 36.0% labor cost, \$91,000 of occupancy, 14.0% other operating, and 3.0% G&A. Compute prime cost in dollars and percent, total costs, operating profit in dollars and percent. Does it clear the 60% prime-cost benchmark?

18. Price a four-person leadership team at market: a general manager at \$70,000, a chef de cuisine at \$76,000, and two sous chefs at \$56,000 each. Load all four at 22% for payroll taxes and benefits. What is the total, and what is it as a percentage of \$1,300,000 of sales?

19. † An owner-operator's restaurant reports \$212,000 of operating profit on \$1,340,000 of sales. The two owners draw a combined \$84,000. Replacing them at market costs \$168,000 loaded. Compute owner-adjusted unit profit in dollars and as a percentage. What does the answer say about whether the model repeats?

20. A catering program runs 60 events at a \$3,100 average, with food at 26%, direct event labor at 23%, and rentals and transport at 9%. Compute contribution before coordination. Then subtract a coordinator at 16 hours a week at \$27 loaded across 52 weeks. What is the net, and what is it per event?

21. † A co-packer quotes a minimum run of 3,000 jars at a landed cost of \$2.85 each, with \$8,900 of one-time costs. The jar sells for \$11 in the dining room and \$4.20 through a distributor. Compute the margin per jar in each channel, the total first-run cost, and how many jars must sell in each channel to recover the one-time costs alone.

22. A restaurant's equipment lease is \$72,000 financed over five years at roughly the same implied terms as Bellwether's (\$60,000 producing \$15,250 a year). Estimate the annual payment. State one reason your estimate could be materially wrong.

D. Model this

23. † Build the group-level year-one comparison for a second location with these inputs: unit one operating profit \$284,000; contribution lost to cannibalization \$41,000; a new unit-one general manager at \$79,000 loaded; unit two operating profit \$118,000; above-unit overhead \$92,000; unit one debt service \$71,000; unit two debt service \$88,000. What does the second unit do to the owners' cash, and what operating profit would unit two have needed for the owners to break even against the single-unit outcome?

24. A restaurant's dinner week runs 71 / 78 / 96 / 121 / 130 covers, Tuesday through Saturday, against a cash break-even of 82 and a ceiling of 140. Compute the weekly average and the cushion. Then model a second unit taking 9% of each night's covers gross, with 70% backfill on Friday and Saturday and none earlier in the week. Compute the new average and the new cushion.

25. † Using the week in question 24 and a \$52 average check with a 55% incremental contribution margin, compute the annual sales and contribution lost at unit one.

26. A postal-code report shows 28% of covers in an area 7 minutes from the current restaurant and 4 minutes from a proposed site, and 11% in an area 10 minutes from current and 8 from the site. What is the overlap, does it clear the chapter's one-fifth threshold, and what is the single piece of additional data that would most change your reading?

27. Build the small-format alternative: a 42-seat counter model, 2.4 turns a day, six days a week, at a \$21 average check. Compute annual revenue. Then apply a 30% COGS, 27% labor, \$52,000 occupancy, 13% other operating, and 3% G&A, and compute operating profit in dollars and percent.

E. Read this and find the leak

28. † An operator presents a second-location pro forma showing unit two at \$1,300,000 of revenue, a 12% operating margin, and \$96,000 of debt service, concluding "it adds \$60,000 a year." List every line missing from that analysis and estimate the true effect using this chapter's structure.

29. A two-unit group's consolidated P&L shows 8.1% operating profit on \$2,900,000, and the owner says "we're doing better than the industry average." What is wrong with the comparison, and what is the correct benchmark?

30. A catering program's P&L shows a 44% contribution margin and no labor line for coordination. The chef-owner says "I handle that." Quantify the omission at 50 events, and state where the cost is actually appearing on the company's statements.

F. Write this

31. Write the one-page memo a chef-owner sends their partner explaining why the answer to the second location is "not yet." Maximum 400 words. It must contain at least three numbers and must not be discouraging.

32. † Write the written scope for a general manager who is being hired to make the absence test passable. Include what they own, what they decide without asking, what they escalate, and how their performance is measured. Maximum one page.

33. Draft the milestone schedule the partners would post in the office: eight milestones, each with an owner, a measurement, and a date. Use the chapter's milestones but assign realistic dates from today.

34. Write the email declining a licensing offer from a hotel group, in a way that keeps the relationship and leaves the door open for two years from now.

G. Judgment and ethics

35. A landlord offers your partner a second space and mentions, in passing, that they have another operator interested. Your partner wants to sign this week. You believe the business fails five of the seven gates. Describe how you handle the conversation, and what you would put in writing.

36. † Your general manager — the one person who could make the absence test passable — tells you they have been offered a partnership stake in a competing restaurant. You cannot match the equity. What do you do, what do you not do, and what does this reveal about the fragility of a bench of one?

37. A retail broker tells you they can get your product into a regional grocery chain, but you will need to fund demos and accept payment terms of 60 days. Work through what that does to your cash, and decide. Reference Chapter 33.

38. Your second unit's opening is six weeks away and the chef de cuisine you hired has resigned. You can open on time with a sous running the kitchen, or delay six weeks at roughly \$16,000 of carrying cost. Argue both sides, then choose and defend it.

H. Business Plan extensions

39. † Compute the true owner-adjusted margin for the running project under a fourth scenario: the partners draw a combined \$150,000, loaded. State what that does to Milestone 3 and whether the plan's "not yet" would change.

40. Write the Growth section's one-paragraph executive summary — the version that appears at the front of the plan, not the section itself. It must state the answer, the reason, and the date, in under 120 words.

41. The plan commits to three inside-the-walls programs totaling \$128,336 of contribution against \$50,600 of capital. Stress-test it: assume each program delivers only 60% of target and costs 130% of budget. Recompute the return on capital and say whether the plan still holds.

42. Schedule Chapter 30's residency test — ten Monday nights at \$430 of total downside — as a formal experiment. State the hypothesis, the measurement, the decision rule (what result means yes and what means no), and what you would do differently if the result is ambiguous.