Deck 13: Planning for the Harvest

Question 1

More recently, the bust-up leveraged buyout was replaced with the build-up leveraged buyout.

Answer 1

True

Question 2

A management buyout can contribute significantly to a firm's operating performance.

Answer 2

True

Question 3

A private placement sale can be more flexible in structure to meet an entrepreneur's needs even though the entrepreneur can not sell stock immediately.

Answer 3

False

Question 4

A strategic buyer is most interested in the stand-alone, cash-generating potential of a business.

Question 5

Investors in a startup company are mainly interested in the new firm's growth and are not particularly interested in an exit plan.

Question 6

Owing to the formulas that guide practice, business valuation has become an exact science.

Question 7

Many entrepreneurs successfully grow their firms, but fail to develop an effective exit plan.

Question 8

Opportunity cost of funds is the rate of return that an investor can earn on another investment of similar risk.

Question 9

The harvesting process encompasses more than just selling and leaving a business.

Question 10

The build-up leveraged buyout is typically used in industries that are dominated by large firms.

Question 11

ESOPs may require educating the buyer about the company's operations for continued company growth.

Question 12

The boost to employee motivation and effort that results from an ESOP will vary significantly from firm to firm.

Question 13

For the entrepreneur who is simply tired of the day-to-day operations of the business, slowly withdrawing cash flows over time may require too much patience.

Question 14

Despite the dot.com bubble, in 2002 and 2003 the number of IPOs dropped slightly, but the total dollars raised increased.

Question 15

With a private equity placement, the firm's equity is sold in public equity markets, but the transaction is handled by a private investment banker.

Question 16

A financial buyer of a small business is most interested in the firm as a stand-alone, cash-generating business.

Question 17

One of the drawbacks of harvesting by withdrawing cash flows slowly is that the owner must seek out a buyer for the eventual sale of the business.

Question 18

The sale of a firm is solely about determining the value of a company.

Question 19

For value-creating firms, owners who decide to harvest by withdrawing cash flows should accelerate the process as much as possible for a company with growth needs.

Question 20

Harvesting is the method entrepreneurs and investors use to grow their firms.

Question 21

While investors always think ahead about how to exit an enterprise, the entrepreneur should focus on daily operational strategies more than the exit strategy.

Question 22

Entrepreneurs who accept stock in payment for the sale of their businesses are usually pleased with the results because they escape a significant tax burden.

Question 23

The harvesting of a business should cause the entrepreneur to ask for advice from the experts who helped build the company.

Question 24

A potential buyer for Teresa's business has mentioned a leveraged buyout, which involves a high level of _____ financing.

A) debt
B) equity
C) strategic
D) unsecured

Question 25

Many entrepreneurs, grateful for their past success, feel the need to give something back to society after selling their company.

Question 26

In earlier years, leveraged buyouts became synonymous with the ____ LBO.

A) bust-up
B) build-up
C) owner-financed
D) publicly funded

Question 27

Jacob has worked for the past five years to build his business but wants to travel more, so he is thinking it is time to harvest.  Harvesting refers to

A) starting a business.
B) managing the growth of a business.
C) exiting a business.
D) diversifying a business.

Question 28

One of the big financial questions associated with selling a business is:

A) To whom should I sell the business?
B) How much should I ask for the business?
C) Should I offer the business to my employees?
D) Would it be better to liquidate the assets?

Question 29

Entrepreneurs frequently do not appreciate the difficulty of selling or exiting a business.

Question 30

Harvesting owners can be paid in cash or in stock of the acquiring firm, with stock generally being preferred over cash.

Question 31

The opportunity to exit a business is triggered by an interested seller.

Question 32

Sylvia, the owner of a clothing boutique, has agreed to sell her business to one of her buyers. This transaction would likely be described as a sale to a(n) _____ buyer.

A) competing
B) employee
C) financial
D) strategic

Question 33

Strategic buyers evaluate acquisition candidates according to the

A) stand-along, cash-generating potential of a target business.
B) synergies they think the target business will create.
C) potential of the target business to preserve employment.
D) quality of the business strategy of the target firm.

Question 34

As Jacob considers exiting or harvesting, he is concerned with which of the following?

A) merely selling and leaving a business
B) the creation of future options
C) the establishment of a benchmark for firm risk
D) capturing future profitability

Question 35

Entrepreneurs often do not make good employees at their former company.

Question 36

The availability of a company's exit options is an important determinant of the appeal of the firm to

A) suppliers.
B) investors.
C) employees.
D) management.

Question 37

Jack is a professional who assists in the buying and selling of businesses.  Jack is:

A) a stock broker.
B) an investment broker.
C) a real estate broker.
D) a business broker.

Question 38

As a financial buyer, Ted is likely to evaluate acquisition candidates according to their:

A) stand-alone, cash generating potential of a target business.
B) synergies they think the target business will create.
C) potential of the target business to preserve employment.
D) level of debt the target business has accumulated.

Question 39

Entrepreneurs should think very carefully about their motives for exiting a business and what they plan to do after the harvest.

Question 40

A build-up leveraged buyout involves

A) developing the business to make it an attractive takeover target.
B) acquiring businesses that occupy a higher level in the market channel.
C) a longer time horizon than a bust-up leveraged buyout.
D) constructing a larger enterprise to be taken public via an IPO.

Question 41

Harvey has invested all of his money in his thriving business. He would like to recoup some of investment, but not completely sell off his business. This might be a good time for him to consider selling stock to the public in a(n):

A) ESOP
B) IPO
C) MBO
D) LBO

Question 42

Marvin is planning to sell his company to his management team. Marvin will be financing part of the purchase.  This type of arrangement is a form of:

A) ESOP
B) IPO
C) PPO
D) LBO

Question 43

Eleanor has money to invest and is considering buying a company.  When comparing her alternatives, her ________ on any investment is the  rate of return that she could earn on a similar investment

A) projected future value
B) sunk cost
C) present value
D) opportunity cost

Question 44

Going public can be beneficial to a firm by helping it

A) create a liquid currency to fund future acquisitions.
B) avoid becoming a takeover target in the future.
C) erect a shield against the fluctuations of the stock market.
D) offer better compensation packages to attract superior management talent.

Question 45

Jill is purchasing a web design company that has patented a new form of technology.  Which purchase would be best for her in relation to the web design company's liabilities?

A) Buy the firm's assets.
B) Buy the firm's stock.
C) Merge the company with her present company.
D) Any of the above three would be acceptable.

Question 46

An employee stock ownership plan represents

A) a good way for a business founder to build his/her position in the company.
B) an opportunity for employees to acquire an ownership interest in their company.
C) a harvest method of choice.
D) an effort to ease investor concerns.

Question 47

Pat, owner of Pat's Welding, LLC, would like to let someone else run the day to day operations while he continues to draw an income from the business.  Because the business is an LLC, Pat will not have to be concerned about:

A) a reduction in the value of the company.
B) seller financing.
C) paying a brokerage fee.
D) double taxation on his income.

Question 48

Charles and Nancy have decided to sell their family business and would like to transfer ownership to the next generation.  Which harvesting form would be best?

A) cash flow distribution
B) initial public offering
C) private placement
D) selling to a strategic buyer

Question 49

Paul is approaching retirement and has decided to siphon off funds from his company rather than sell it.  From his perspective, the advantage of systematically withdrawing cash from the firm is:

A) retaining control
B) preserving cash for later reinvestment
C) greater latitude in seeking out a buyer for the firm
D) increasing long-term returns from the business

Question 50

Valerie is beginning to think of harvesting her company.  Which question should be asked first?

A) Why does she want to harvest?
B) What is the value of her firm?
C) Does the firm have a leadership succession plan in the event that the firm sells?
D) What will be the method of payment?

Question 51

Vasily is selling his business.  As a harvesting owner we would expect him to prefer _____ over _____.

A) cash, stock
B) debt, equity
C) equity, debt
D) stock, cash

Question 52

Two years ago, Harold inherited $30,000 and decided to open a coffee shop in his hometown instead of buying stock in Ford Motor Company. The rate of return he could have earned on his investment in Ford stock represents his

A) lost profit.
B) opportunity cost of funds.
C) investment opportunity.
D) potential profit.

Question 53

Matt owns a car dealership that is very profitable. Since he plans to retire in 5-10 years, Matt has decided to retain ownership for now, but without continuing to grow the business. This change would also allow him to invest for retirement some of the cash that the business is now generating. Which harvesting method does this example illustrate?

A) A delayed sellout
B) A strategy to release the firm's free cash flows to the owners
C) Offering stock to the public through an IPO
D) Issuing a private placement of stock

Question 54

The value of a business is determined by

A) what the owner believes the business is worth.
B) what a valuation formula determines its worth is to the owner.
C) what a valuation formula determines its worth is to the buyer.
D) what a buyer with the cash is prepared to pay.

Question 55

The mere fact that a firm is earning high rates of return on the firm's asset indicates that

A) the firm is worth more as a going concern than as a dead one.
B) downsizing is likely to be an economically sound option for the business.
C) it is time to start growing the business again.
D) it might be wise to further limit the cash flows returned to investors.

Question 56

Having publicly traded stock can be beneficial to owners in that a public market offers

A) greater liquidity.
B) protection against an unwanted harvest.
C) insight into how to improve the performance of the firm.
D) a justification for refusing requests for ESOP options.

Question 57

An IPO occurs when a company offers its stock to

A) investment practitioner organizations.
B) family.
C) intrastate private investors.
D) the general public.

Question 58

Which statement best characterizes business valuation?

A) Valuation is almost a perfect science.
B) Since there are so many intangibles, valuation is mostly an art.
C) The buyer determines the value of a business.
D) Negotiation skills play an important part in valuation.

Question 59

Nettie's Knits, Inc. paid taxes on its net income then distributed part of the earnings as dividends to investors.  These investors paid tax on the dividends they received.  This practice is know as:

A) initial public offering.
B) double taxation.
C) twice taxation.
D) harvesting taxation.

Question 60

Leonard wants to sell his business but the bank will not lend the buyer enough money.  Between personal savings and the bank loan, the buyer has about 70% of the asking price.  Which of the following options would be best for Steve in this situation?

A) Look for a different buyer.
B) Lower the asking price.
C) Retain a 30% ownership in the business and a seat on the advisory board.
D) Offer to finance the remaining 30%, accepting payments over the next few years.

Question 61

In a harvest situation, the exiting owners are usually paid in cash or

A) tangible assets.
B) imputed goodwill.
C) favorable publicity.
D) stock.

Question 62

Before he executes his exit strategy, Arthur should:

A) understand why he wants out.
B) make sure his heirs approve his exit strategy.
C) find a hobby to occupy his time.
D) plan his budget based on the sudden inflow of cash.

Question 63

Paul and Vivian have decided to create a harvest plan for their landscaping business.  They recognize selling the company will affect them since they won't be going to work every day but have asked you for advice on what to expect as to the impact and how to best proceed.  What will you say to them?

Question 65

Post-harvest entrepreneurs may become disillusioned when they realize their sense of identity

A) was associated with the quest for wealth.
B) derived from interactions with employees.
C) was intertwined with their business.
D) does not return after joining in social or charitable work.

Question 66

Uncertainties accompanying an impending sale of a business often

A) lead to lower employee morale.
B) attract the attention of the Securities and Exchange Commission .
C) cause the deal to fall through.
D) increase costs from added legal services.

Question 67

Russell has sold his small variety store to a large retail chain but has agreed to stay on and manage the store.  Russell should expect

A) freedom from responsibility.
B) a feeling of elation with her new wealth.
C) greater independence.
D) culture conflict.

Question 68

When is the right time to begin thinking about an exit strategy?

A) When the owner wants to retire
B) When a willing buyer expresses an interest
C) When declining health forces the owner to leave active management
D) When the money is first investedint he business

Question 69

After harvesting, many entrepreneurs who remain with their firm as an employee experience _________ conflicts.

A) financial
B) practical
C) cultural
D) tactical

Question 70

Which group is always concerned about how to exit a business?

A) Investors
B) Entrepreneurs
C) Employees of the firm
D) Investment bankers

Question 71

John is developing a harvest plan and figuring the value of his art gallery. What two issues are of importance?

Question 72

Name four benefits of using an IPO as a harvesting method..

Question 73

Ellen is a dentist and has decided to develop a harvest plan. She wants her efforts to be successful and effective. Discuss suggestions for crafting an effective exit strategy.

Question 74

List the three basic types of acquisitions and identify the purpose of each type.

Question 75

Arthur's company is doing well but he has grown a bit tired of the daily grind.  The idea of selling is appealing to him.  What would you recommend Arthur do next?

A) Ask his advisory board for their opinions.
B) Ask a business broker what his business is worth.
C) Go public.
D) Get advice from someone who has sold a business.

Question 76

The effects of the harvesting process include

A) a reduction in time and energy.
B) an increased managerial focus.
C) an increase in momentum.
D) poor performance.

Question 77

What are professional and personal issues an entrepreneur may face in the period of time from when the harvest is announced and it is completed?

Question 78

List and describe three types of LBO sales to financial buyers.

Question 79

Todd's small company, Nimbus, developed a video game called Combat Skill  that took off among gamers.  Farbase EAD is a large video game developer with its own gaming system that has offered to buy Nimbus. Explain this type of harvest transaction and what motivations Farbase EAD may have for purchasing Nimbus.

Question 80

List and briefly explain the four basic harvest strategies for the small business.