Chapter 35 — Self-Check Quiz

Twenty-four questions. Answer without looking back, then check the key at the bottom. Anything you miss twice, reread the section it points to.

Multiple choice

1. The second-location test is best described as:

  • A. a scorecard where five of seven is a pass
  • B. a gate where all seven must be true
  • C. a checklist to complete after signing the lease
  • D. a lender's underwriting standard

2. Owner-adjusted unit profit restates a unit's operating profit by:

  • A. removing debt service
  • B. adding back depreciation
  • C. putting market-rate management in the labor line in place of the owner's work
  • D. excluding the owner's distributions

3. Above-unit overhead at a one-unit restaurant is typically:

  • A. 3–5% of sales
  • B. about 2.5% of sales
  • C. zero, because the owner absorbs it
  • D. the same as G&A

4. In the chapter's model, a second unit that opens well still reduces the partners' annual cash by:

  • A. \$27,524
  • B. \$80,520
  • C. \$163,996
  • D. \$290,996

5. Cannibalization concentrates on weak nights because:

  • A. guests prefer new restaurants on weeknights
  • B. strong nights have a waitlist that backfills a transferred reservation
  • C. weeknight guests live closer to the new site
  • D. weeknight covers have a lower check average

6. Bellwether's cushion, correctly stated, is:

  • A. 37 covers — the gap between the 95-cover plan and the 132-cover ceiling
  • B. 18 covers — the gap between the 95-cover plan and the 77-cover cash break-even
  • C. 55 covers — the gap between break-even and the ceiling
  • D. 132 covers — the kitchen's capacity

7. The chapter argues that two units is the worst number of units because:

  • A. two locations cannot be supervised by two people
  • B. you buy the full overhead of a company and have only two units to amortize it across
  • C. lenders dislike two-unit borrowers
  • D. the second unit always underperforms the first

8. Catering's ceiling at Bellwether is set by:

  • A. demand in the market
  • B. the coordinator's available hours
  • C. roughly 16 BOH prep hours a week that do not collide with service prep
  • D. the size of the van

9. The same jar of salsa earns \$8.90 in the dining room and \$1.40 through a distributor because:

  • A. the product is different
  • B. distributors demand a lower-quality formulation
  • C. in the dining room you have already paid for the rent, the staff, and the guest's attention
  • D. shipping costs consume the difference

10. Under the FTC Franchise Rule, an arrangement is classified as a franchise based on:

  • A. the title of the agreement
  • B. whether the parties call each other franchisor and franchisee
  • C. what the arrangement does — trademark license, significant control or assistance, and a required payment
  • D. the size of the fee

11. The only growth capital that costs nothing on rate, guaranty, and control is:

  • A. an SBA 7(a) loan
  • B. a landlord tenant-improvement allowance
  • C. outside equity
  • D. retained cash

12. A management bench sufficient for two buildings requires:

  • A. two leaders
  • B. four leaders
  • C. five leaders — one per seat plus one in development
  • D. eight leaders

13. The chapter's stabilized model shows a two-unit group producing:

  • A. more cash than one unit, on more exposure
  • B. less cash than one unit today, on 89% more revenue and 108% more exposure
  • C. exactly the same cash as one unit
  • D. a loss

14. Filling Tuesday, Wednesday, and Thursday to the chapter's targets moves the cushion from:

  • A. 18 covers to 12.4
  • B. 18 covers to 28
  • C. 37 covers to 55
  • D. 28 covers to 18

15. Chapter 30's residency test is compelling because it:

  • A. guarantees the concept will work elsewhere
  • B. tests demand for the concept at a price point in a different trade area for \$430 of downside
  • C. produces meaningful revenue
  • D. satisfies the bench requirement

16. A single unit held for a full term is described as a "self-de-leveraging asset" because:

  • A. the lease guaranty is forgiven at year five
  • B. the note amortizes and the lease term runs down, so exposure falls every year with nothing resetting it
  • C. equipment depreciates
  • D. rent falls over time

True or false

17. A second unit's pro forma is correctly compared against zero, since the alternative is not building it.

18. A restaurant that succeeds by taking share in a supplied market has more room to open nearby than one that filled a genuine gap.

19. An incremental contribution margin of 57% is valid for evaluating both a 28-cover-a-week change and a decision to close a shift.

20. Deferring a second unit's general manager hire by moving an owner-partner into the chair saves that salary without other cost.

Short answer

21. In two sentences, explain why the reported operating margin of an owner-operated restaurant overstates the margin that repeats when the model is duplicated.

22. Bellwether's unit two must clear an 18.5% operating margin at stabilization for the group merely to match today's cash. Show, in one line, where that hurdle comes from.

23. Name the four axes on which the chapter ranks every growth option, and say which one operators most often skip and why it matters most.

24. State, in one sentence each, what the plan's answer is, what the binding milestone is, and what that milestone implies about timing.

Answer key **1. B.** All seven must be true. In a business with an 18-cover cushion, each failure is independently capable of consuming the entire margin of safety, so partial credit is meaningless. (§35.1) **2. C.** Market-rate management replaces the owner's uncompensated or under-compensated work. The adjustment is the *difference* between the owners' current draw and the loaded cost of replacing them. (§35.2) **3. C.** Zero — the owner does the bookkeeping, the insurance calls, and the coordination at the kitchen table for free. That is exactly why the cost appears as a surprise at two units. (§35.3) **4. C.** \$163,996: cash after debt service falls from \$191,520 to \$27,524. The four drag items — \$80,520 of unit-one management, \$87,000 of overhead, \$85,300 of new debt service, and \$38,176 of lost contribution — total \$290,996 against unit two's \$127,000 of operating profit. (§35.3) **5. B.** Friday and Saturday backfill a transferred reservation from the waitlist within the hour; Tuesday and Wednesday have no queue, so every transferred cover is a lost cover. (§35.4) **6. B.** 18 covers. The 37 is headroom to the ceiling — upside that may never sell. Confusing the two makes a fragile business look robust. (§35.4) **7. B.** One unit has no above-unit overhead; a four- or five-unit group spreads it. Two units pay company overhead on restaurant volume, which is the deepest part of the valley. (§35.3) **8. C.** Monday, which is dark, plus Sunday after brunch — about 16 usable BOH hours, or roughly two events a week at 8 prep hours each. Push past it and catering starts eating the dining room, which is Chapter 29's failure case. (§35.7) **9. C.** Your restaurant's advantage is that the rent, the staff, and the guest's attention are already paid for. In a grocery aisle you have none of those and you are buying all of them back at market, plus the distributor's and the grocer's margins. (§35.7) **10. C.** The Rule classifies by what the arrangement does, not by what the document is titled. Broadly: a trademark license, plus significant control over or assistance with operations, plus a required payment. Chapter 36 covers this properly; use a franchise attorney. (§35.7) **11. D.** Retained cash — no rate, no guaranty, no control given up. Which is why earning more inside the guaranty you have already signed is the cheapest growth capital that exists. (§35.6) **12. C.** Five: a general manager and a kitchen leader in each building, plus one person deep enough to absorb a resignation without triggering a search during service. Bellwether has two, and both are owners. (§35.5) **13. B.** Group cash of \$138,000 against the single unit's \$191,520 — \$53,520 less, on \$2,930,000 of revenue instead of \$1,550,000 and \$2,838,600 of exposure instead of \$1,367,600. (§35.3) **14. B.** From 18 covers to 28, a 56% increase in the margin of safety — the opposite of what the second restaurant does, which is to reduce it to 12.4. (§35.8) **15. B.** Ten Monday nights in someone else's kitchen for \$430 of downside — 0.07% of the project cost. No other test in the book has that ratio of information to money. (§35.2, Ch. 30) **16. B.** The note amortizes, the lease term runs down, and nothing resets the clock. Every new unit on the growth path adds a fresh ten-year guaranty and a note at the top of its amortization. (§35.8) **17. False.** The correct comparison is the group with the second unit against the group without it. The alternative to building is not going out of business; it is continuing to run a restaurant that clears \$191,520 a year. (§35.3) **18. False.** The reverse. A share-taking restaurant's advantage is relative to alternatives in a drive time, and its second unit's strongest competitor in an overlapping trade area is itself. A restaurant that filled a gap has more room, because its second unit competes with the gap. (§35.4) **19. False.** An incremental margin is valid only for modest changes around the current operating point, where no fixed costs move. Closing a shift changes salaried labor, purchasing, and scheduling — a structural change, and the marginal rate will mislead you. (§35.4) **20. False.** You cannot save the same salary twice. Unit one's \$80,520 general manager was purchased specifically to replace the partner who moved. The two structures are within about \$2,400 of each other and differ only in which building has an owner standing in it. (§35.5) **21.** The reported margin contains the value of everything the owner does unpaid — purchasing relationships, the schedule, the table touched at 8:40, the cook who answers the phone at 3:40 — none of which is in an operations manual because there isn't one. Duplicating the model means buying that labor at market in both buildings, and depending on the owners' draw the honest repeatable margin can fall from 16.8% to as low as 5.5%. (§35.2) **22.** \$157,700 (unit one, after \$22,800 of lost contribution and the \$80,520 general manager) plus unit two's profit, less \$74,000 of overhead and \$154,800 of debt service, must equal \$191,520 — so unit two's profit must be \$262,620, which on \$1,420,000 of sales is 18.5%. (§35.3) **23.** Capital, new personal guaranty, owner-hours per week, and reversibility. Operators skip the guaranty, and it matters most because it is what determines whether a failure is a bad year or a personal bankruptcy — it converts a bounded loss into an unbounded one. (§35.3, §35.6) **24.** The answer is "not yet." The binding milestone is the bench: five leaders on payroll, each twelve months in seat. Hiring takes three to six months and the twelve months follow, and the absence test cannot even begin until the bench exists — which puts the earliest defensible reconsideration date about twenty-four months out. (Business Plan checkpoint)