Deck 7: Buying an Existing Business

Question 1

When evaluating the assets of an existing business, the inventory ________.

A)is always current and salable
B)usually appreciates over time, making the business a bargain
C)should be judged on the basis of its market value, not its book value
D)is usually stated honestly and does not need an independent audit

Answer 1

C

Question 2

An entrepreneur who is considering purchasing a business is analyzing a company's accounts receivable. The following table summarizes her findings. Age of Accounts Amount Probability of Collection
0 - 30 days $12,000 .96
31 - 60 days $ 4,000 .87
61 - 90 days $ 2,500 .71
91 - 120 days $ 1,400 .65
121⁺ days $ 800 .24
How much should this potential buyer be willing to pay for these accounts receivable?

A)Nothing; a buyer should never purchase existing accounts receivable.
B)$20,700
C)$17,877
D)Not enough information given to determine

Answer 2

C

Question 3

According to Pepperdine University research, most small to medium business purchases take less than 3 months to be completed.

Answer 3

False

Question 4

The process of investigating the details of a company that is for sale to determine the strengths, weaknesses, opportunities and threats facing it is known as the ________ process.

A)hidden market
B)due diligence
C)skimming
D)business assessment

Question 5

The due diligence process of analyzing and evaluating an existing business ________.

A)may be just as time consuming as the development of a comprehensive business plan for a start-up
B)helps to determine if the company will generate sufficient cash to pay for itself and leave you with a suitable rate of return on your investment
C)helps to determine what the company's potential for success is
D)All of the above

Question 6

Advantages to buying an existing business that you do not have with a startup include ________.

A)greater access to venture capital
B)the opportunity to participate in a national advertising campaign
C)inventory is in place and trade credit is established
D)easy implementation of innovations and changes from past policies

Question 7

An entrepreneur should never purchase a business that is losing money.

Question 8

The due diligence process in analyzing and evaluating an existing business can be just as time consuming as the development of a comprehensive business plan for a start-up.

Question 9

The due diligence process that involves analyzing and evaluating an existing business for possible purchase is much less time-consuming than the process of developing a comprehensive business plan for a start-up.

Question 10

When buying a business, an entrepreneur can usually purchase equipment and fixtures at prices well below their book value.

Question 11

Your friend Susan is considering purchasing an existing business. How would you explain to her what due diligence is, why it is important, and the critical areas of it?

Question 12

A principal advantage of buying an existing business is the purchaser's ability to rely on the previous owner's experience.

Question 13

Which of the following is a potential disadvantage of purchasing an existing business?

A)The employees inherited with the business may not be suitable.
B)The previous owner may have created ill will among the company's customers.
C)Equipment and facilities may be obsolete or inefficient.
D)All of the above

Question 14

Briefly describe the advantages and the disadvantages of buying an existing business.

Question 15

Accounts receivable are rarely worth face value and should be "aged" when evaluating a company's assets.

Question 16

When done correctly, the due diligence process will ________.

A)reveal both the positive and negative aspects of an existing business
B)be time consuming and expensive
C)most often result in the purchase of the business
D)rarely prove to be beneficial

Question 17

For a new owner of an existing business, physical facilities and equipment costs are very similar to what would have been spent on a startup with all new facilities and equipment.

Question 18

A new owner of an existing business can generally introduce change and innovation almost as easily as if the company were a new business because employees and customers expect change in business practice when there is a change in ownership.

Question 19

With an existing business, the new owner can depend on employees to help him make money while he is learning the business.

Question 20

In too many cases, the excitement of being able to implement a "fast entry" into the market causes an entrepreneur to rush into a deal and make unnecessary mistakes in judgment.

Question 21

The letter of intent is a ________ document.

A)binding
B)nonbinding
C)transferable
D)final

Question 22

Which of the following is not a stage in acquiring a business?

A)due diligence
B)negotiation
C)valuation
D)transition

Question 23

Paige Dominick is considering purchasing an existing business. She has asked you to advise her on her purchase. How would you explain to her what a letter of intent is and why it is important?

Question 24

The business acquisition process should begin with the search for potential companies to acquire.

Question 25

The first step an entrepreneur should take when buying an existing business is to ________.

A)explore financing options
B)prepare a list of potential candidates
C)analyze his or her skills, abilities, and interests in an honest self-audit
D)contact existing business owners in the area and ask if their companies are for sale

Question 26

The last step in acquiring a business is closing the deal.

Question 27

Which of the following is typically not a question to ask in conducting a self-inventory?

A)What business activities do you enjoy least?
B)What kind of business do you not want to avoid?
C)Which industries interest you most?
D)What do you expect to get out of the business?

Question 28

Transition is the final step in acquiring a business.

Question 29

The first stage in acquiring a business is ________.

A)search
B)due diligence
C)valuation
D)negotiation

Question 30

Bizbuysell.com and Bizquest are examples of Internet sites that provide access to ________.

A)business brokers
B)franchises available for sale
C)the hidden market of companies for sale
D)All of the above

Question 31

Negotiation take place ________.

A)throughout the five stages in acquiring a business
B)in the due diligence stage
C)in the valuation stage
D)in the transition stage

Question 32

When acquiring a business, the buyer should ________.

A)conduct a self-analysis of skills, abilities, and interests
B)develop a list of criteria that define the "ideal business" for the buyer
C)prepare a list of potential candidates that meet the criteria
D)All of the above

Question 33

The nondisclosure agreement is a nonbinding document.

Question 34

The letter of intent is a nonbinding document.

Question 35

Roughly ________ businesses change ownership each year.

A)200,000
B)300,000
C)400,000
D)500,000

Question 36

Which of the following is not a source for the hidden market?

A)Networking
B)Business brokers
C)Industry contacts
D)All of the above are sources for the hidden market

Question 37

The first step in buying a business is not searching out potential acquisition candidates.

Question 38

The ________ market consists of low-profile companies that might be for sale but are not advertised as such.

A)venture capitalist
B)franchise
C)hidden
D)broker

Question 39

A typical letter of intent addresses terms such as price and terms of payment.

Question 40

The primary focus of the self-audit is to identify the type of business that you will be happiest and most successful owning.

Question 41

The goal of the due diligence process is to discover exactly what the buyer is purchasing and avoid any unpleasant surprises ________ the deal is closed.

A)before
B)after
C)during
D)while

Question 42

You can look at investing in the due diligence process as choosing to pay now or pay later.

Question 43

A prospective buyer should evaluate the business's assets to determine their true value.

Question 44

________ involves the process of studying, reviewing, and verifying all the relevant information concerning an acquisition.

A)Negotiation
B)Due diligence
C)Valuation
D)Opportunity identification

Question 45

The market approach is the most common business valuation method.

Question 46

Book value is the same as market value.

Question 47

The ________ method considers the future income potential of the business.

A)earnings
B)market
C)balance sheet
D)fixed price

Question 48

Asset valuation is an important part of the due diligence process. Why?

Question 49

"Why do you want to buy the business," is one of the four important areas to investigate in the due diligence process.

Question 50

The due diligence process involves investigating four critical areas of the business, which are ________, asset valuation, legal issues, and financial condition.

A)negotiation
B)business valuation
C)motivation
D)planning

Question 51

The market approach uses the price/earnings ratios of similarly traded businesses to estimate the value of a company.

Question 52

Goodwill is the difference between an established, successful business and one that has yet to prove itself.

Question 53

Opportunity cost is the cost of exploiting a choice.

Question 54

The ________ method establishes the value of a company by computing the book value of its net worth, or owner's equity.

A)earnings
B)market
C)balance sheet
D)multiples

Question 55

Value is determined in the market, not on a balance sheet.

Question 56

What is the "hidden market?"

Question 57

________ is the difference between an established, successful business and one that has yet to prove itself.

A)Net worth
B)Equity
C)Multiple
D)Goodwill

Question 58

Discounted future earnings is the most common business valuation method.

Question 59

The most common reason for an owner to sell his or her business is planned retirement.

Question 60

Opportunity cost is the cost of the next best alternative.

Question 61

One of the closing documents required is the non-disclosure agreement (NDA).

Question 62

Value is what a business is actually worth.

Question 63

The structure of the deal refers to the ________.

A)price paid
B)method of payment
C)terms and conditions of payment
D)legality of the process

Question 64

What is an ESOP?

Question 65

Which of the following should a business owner do to avoid a bumpy transition?

A)Concentrate on communicating with employees.
B)Devote time to selling the vision for the company to its key stakeholders.
C)Consider asking the seller to serve as a consultant until the transition is complete.
D)All of the above.

Question 66

A non-compete is usually one of the documents required for closing.

Question 67

What should the new owner do to avoid a bumpy transition?

Question 68

The majority of the deals make it from the letter of intent stage to the final closing.

Question 69

The old saying "the devil is in the details" holds true when buying a business.

Question 70

Closing the sale of a business is a complex legal process.

Question 71

Which of the following is not a document required to close the deal?

A)Letter of intent
B)Bill of sale
C)Asset purchase agreement
D)Non-compete agreement

Question 72

Once the deal stage is complete, the transition stage begins with the actual closing of the purchase.

Question 73

A letter of intent is a firm commitment by both sides that they are ready to move toward closing the sale of the business.

Question 74

________ is what a business is actually worth.

A)Price
B)Goodwill
C)Equity
D)Value

Question 75

Communicating with employees helps smoothen the transition.

Question 76

To avoid a bumpy transition, it is important to not ask the seller to remain as a consultant.

Question 77

The ________ of the deal is more important than the price the seller agrees to pay.

A)structure
B)art
C)value
D)speed

Question 78

The negotiation zone is the area within which the two parties can reach agreement.

Question 79

Earn-out is when the seller agrees to accept a percentage of the sales price and stays on to manage the business for a few more years under the new owner.

Question 80

What is the market approach to business valuation?