Deck 15: Succession Planning and Strategies for Harvesting and Ending the Venture

Question 1

A business,when it comes to selling,will be less valuable if it is on a narrow,well-defined segment.

Answer 1

False

Question 2

About 75 percent of family firms successfully make the transition to the third generation.

Answer 2

False

Question 3

Only 60% of businesses have a succession plan in place.

Answer 3

True

Question 4

ESOPs account for about 20% of the nation's 10 million employees.

Question 5

An ESOP is five to six year plan to sell a business to its employees.

Question 6

The U.S.Commerce Department indicates that about 70 percent of successful ventures never make it to the second generation of ownership.

Question 7

It is common for a buyer to purchase a business using notes based on future profits.

Question 8

In establishing a price for a management buyout the entrepreneur should not include the goodwill value established from past revenue because it can't be quantified.

Question 9

About one third of all new start-ups fail in their first years.

Question 10

One advantage of an ESOP is that it is easy to establish.

Question 11

An employee stock option plan establishes a new legal entity.

Question 12

One key advantage of an ESOP is that it enhances employee motivation.

Question 13

A "management buyout" is the same thing as an "ESOP."

Question 14

In 2010 the number of bankruptcy filings was around 4 million.

Question 15

Passing the business to an employee ensures the new principal is familiar with the business and the market.

Question 16

Presently there are about 11,500 ESOP companies in the United States.

Question 17

The majority of bankruptcies are mid-size businesses.

Question 18

One advantage of an ESOP is that the company can obtain a tax benefit by deducting ESOP contributions.

Question 19

An effective succession plan should be communicated only to top management and not all employees.

Question 20

The sale of the company to employees is an exit strategy.

Question 21

Around ____ of businesses make it to the third generation.

A)5%
B)12%
C)30%
D)60%

Question 22

Chapter 7 is the most severe alternative in bankruptcy.

Question 23

Which of the following is not an exit strategy?

A)an IPO
B)a private sale of stock
C)liquidation
D)franchising

Question 24

Under Chapter 13,the key to enhancing the bankruptcy process is by stressing the significance of the creditors' support during the process.

Question 25

Under Chapter 13,meeting with groups of creditors to amicably solve issues is usually a good idea.

Question 26

The bankruptcy type that is most common is Chapter 7 bankruptcy.

Question 27

Cash flow is one of the major causes for an entrepreneur to have to declare bankruptcy.

Question 28

Because it is so severe,Chapter 7 must always be voluntary.

Question 29

If an entrepreneur recognizes the warning signs of bankruptcy early,he or she may be able to prevent it from occurring.

Question 30

The Bankruptcy Act of 1978 was designed to protect creditors from receiving nothing in bankruptcy.

Question 31

In 2011 about 9% of business bankruptcies were filed under Chapter 13.

Question 32

All bankruptcies are handled by the U.S.Supreme Court.

Question 33

When business failure looks probable,the entrepreneur should seek outside advice.

Question 34

Bankruptcy can be used as a bargaining chip with creditors to allow the venture to voluntarily reorganize.

Question 35

When a venture is in trouble and facing bankruptcy,the entrepreneur should first sit down with his or her spouse and explain what is happening.

Question 36

Bankruptcy protects entrepreneurs from creditors and competitors.

Question 37

The best management style for a manager undertaking a business turnaround is a bunker mentality.

Question 38

It is best for the entrepreneur to have any litigation in existence transferred to the bankruptcy court.

Question 39

More than 50 percent of firms filing for Chapter 11 bankruptcy emerge from the process.

Question 40

Bankruptcy should be a last resort for the entrepreneur.

Question 41

All of the following are benefits of an ESOP except:

A)the company can deduct contributions to an ESOP.
B)it offers a planned exit in writing.
C)it offers a unique incentive to employees.
D)it is relatively simple to establish.

Question 42

ESOPs account for ____ of the nation's 10 million employees.

A)15%
B)35%
C)40%
D)50%

Question 43

An ESOP:

A)is a device to transfer the business to a small group of key loyal employees.
B)eliminates the need to perform a complete valuation of the venture.
C)motivates employees because they realize they are working for themselves.
D)removes the need for a continuous performance appraisal.

Question 44

Which of the following is not an important part of a succession plan?

A)estimate the firm's value
B)evaluate potential successors based on how similar they are to you
C)provide a transition period so the successor can learn the business
D)set a date for completion of the transition and stick to it

Question 45

In 2011 approximately 21% of business filings were:

A)Chapter 11.
B)Chapter 13.
C)Chapter 7.
D)Chapter 14.

Question 46

Currently ESOPs account for ____ of the private sector workforce.

A)5%
B)10%
C)15%
D)20%

Question 47

When the debt is prorated to the creditors as a settlement in Chapter 11 this is called:

A)Substitution.
B)Evolution.
C)Extension.
D)Composition settlement.

Question 48

The most common method of harvesting a venture is through:

A)direct sale of the business.
B)an IPO.
C)liquidation.
D)employee stock ownership program.

Question 49

What percentage of firms manage to emerge from the Chapter 11 process?

A)10-15%
B)20-25%
C)40-50%
D)70-80%

Question 50

A common reason why companies do not come out successfully from a Chapter 11 bankruptcy is because they ____.

A)are in denial.
B)don't have legal representation.
C)wait too long to file for protection.
D)do not understand the bankruptcy process.

Question 51

According to the Small Business Administration,the failure rate of new businesses within the first few years is:

A)less than 25%.
B)about 70%.
C)50%.
D)about 33%.

Question 52

Chapter 11 is the type of bankruptcy that results in:

A)extended time payments.
B)liquidation.
C)reorganization.
D)turn around time.

Question 53

This occurs when two or more of the largest creditors agree to postpone any claims,acting as stimulus for smaller creditors to also agree to the plan.

A)Extension.
B)Evolution.
C)Substitution.
D)Composition settlement.

Question 54

Which of the following is not a purpose of the Bankruptcy Act of 1978?

A)ensure a fair distribution of assets to creditors.
B)protect debtors from unfair depletion of assets.
C)protect debtors from unfair demands by creditors.
D)protect creditors from undue delay of money.

Question 55

The majority of bankruptcies are:

A)corporate bankruptcies.
B)partnership bankruptcies.
C)S Corporation bankruptcies.
D)individual bankruptcies.

Question 56

Exchanging stock or something else for existing debt under Chapter 11 bankruptcy is called:

A)amendment.
B)extension.
C)composition settlement.
D)substitution.

Question 57

A two to three year plan to sell a business to employees is:

A)an ESOP.
B)an acquisition.
C)succession.
D)the most popular method of exit.

Question 58

The U.S.Commerce Department indicates that about ___ percent of successful ventures never make it to the second generation of ownership.

A)50
B)60
C)70
D)80

Question 59

Which methods of bankruptcy require the entrepreneur to come up with a payment plan?

A)Chapters 11 and 13
B)Chapters 7 and 11
C)Chapters 7 and 13
D)Chapters 7,11,and 13

Question 60

About 70% of the bankruptcy filings in 2011 were of this variety:

A)Chapter 7.
B)Chapter 13.
C)Chapter 11.
D)Chapter 18.

Question 61

The most severe form of bankruptcy is:

A)Chapter 7.
B)Chapter 11.
C)Chapter 13.
D)prepackaged bankruptcy.

Question 62

Given the cultural climate of the U.S. ,business failure and bankruptcy:

A)mean the entrepreneur can never hope to start over.
B)carry such a stigma that the entrepreneur is disgraced and ostracized.
C)do not have to be the end for the entrepreneur.
D)means that there would be a change in the outlook of the people.

Question 63

What are some of the warning signs of bankruptcy?

Question 64

Explain the advantages and disadvantages of an ESOP.
A.Advantages
1.It offers a unique incentive to employees that can enhance their motivation to put in extra time or effort.Employees recognize that they are working for themselves and hence will focus their efforts on innovations that contribute to the long-term success of the venture.
2.It provides a mechanism to pay back those employees who have been loyal to the venture,particularly during more difficult times.
3.It allows the transfer of the business under a carefully planned written agreement.
4.The company can reap the advantage of deducting the contributions to the ESOP or any dividends paid on the stock.
B.Disadvantages
1.Complex to establish.
a.It requires a complete valuation of the venture to establish the amount of the ESOP package.
B.it raises issues such as taxes,payout ratios,amount of equity to be transferred per year,and the amount actually invested by the employees.
c.The agreement also must specify if the employees can buy or sell additional shares of stock once the plan has been completed.

Question 65

From the chapter on the characteristics of an entrepreneur,we know that after the failure of a business entrepreneurs are likely to:

A)continue starting new ventures.
B)look for a position working for someone else.
C)go to work for the government.
D)try again and fail.

Question 66

List the critical factors that an effective succession plan needs to consider.
A.The role of the owner in the transition stage: Will he or she continue to work full time? Part time? Or will the owner retire?
B.Family dynamics: Are some family members unable to work together?
C.Income for working family members and shareholders.
D.The current business environment during the transition.
E.Treatment of loyal employees.

Question 67

The early signs of bankruptcy include all of the following except:

A)key personnel leave the company.
B)payroll taxes are not paid.
C)suppliers demand payment in cash.
D)all of the above are early signs of bankruptcy.

Question 68

Stress points are a result of all of the following except:

A)sales.
B)the need for new key personnel.
C)major capital investment.
D)lack of time.

Question 69

The early signs of bankruptcy are most often:

A)apparent to the entrepreneur.
B)interrelated.
C)occur in isolated instances.
D)unavoidable.

Question 70

Suggestions for surviving bankruptcy include all of the following except:

A)focus efforts on preparing a realistic reorganization plan.
B)understand how protection against creditors works.
C)file only after cash runs out.
D)maintain good records.

Question 71

Identify and define the three major types of bankruptcy.