Question 1

Very few closely held businesses are family owned.

Accepted Answer

This statement is false. Many closely held businesses are family owned.

Question 2

Succession issues tend to be easier for small family owned firms than for large publicly traded firms.

Accepted Answer

Succession planning in small family-owned firms often involves complex emotional, familial, and financial issues, making it sometimes more challenging than in larger publicly traded firms where succession can be managed through more formal, structured processes.

Question 3

Restricted stock is often issued to employees of privately held firms as a significant portion of their total
compensation.Such stock is similar to other types of common stock except that its sale on the open market is prohibited for a period of time.

Accepted Answer

Restricted stock is indeed similar to common stock but with the added restriction of not being able to sell it on the open market for a certain period of time.

Question 4

The market model of corporate governance is readily applicable to privately held,family owned firms.

Accepted Answer

The market model of corporate governance is primarily designed for publicly traded companies where governance is exercised through the market mechanisms, such as mergers and acquisitions, and the discipline of the market. Privately held, family-owned firms often rely on different governance structures that are more centered around family control and less influenced by market mechanisms.

Question 5

Valuation of privately held businesses may involve substantial adjustment of the discount or capitalization
rate.

Accepted Answer

This is true. Valuation of privately held businesses may involve substantial adjustment of the discount or capitalization rate based on various factors like size of the company, industry norms, risk profile, growth prospects, etc.

Question 6

Before selling a business,an owner may increase advertising expenses in order to inflate profits.

Accepted Answer

Increasing advertising expenses would typically increase costs, not inflate profits. Higher expenses without a corresponding increase in sales would actually reduce profit margins.

Question 7

In adjusting base year income,an appraiser must be aware of the implications of various accounting
methods for value.During periods of inflation,businesses frequently use the last-in,first out method to
value inventories.This approach results a reduction in the cost of sales and an increase in gross profits and taxable income.

Accepted Answer

During periods of inflation, the last-in, first-out (LIFO) method results in the most recent, higher-cost items being recognized as the cost of sales, leading to higher reported costs of goods sold, lower gross profits, and lower taxable income, not an increase in gross profits and taxable income.

Question 8

The primary purpose of the buyer adjusting the seller earnings is to provide an accurate estimate of the
current year's operating income or cash flow in the base year.

Accepted Answer

The buyer adjusting the seller earnings is done to ensure that the financial statements present an accurate picture of the company's financial health and performance, which in turn helps in estimating the current year's operating income or cash flow in the base year.

Question 9

A private corporation is a firm whose securities are not registered with state or federal authorities.

Accepted Answer

A private corporation is not required to register its securities with state or federal authorities, unlike a public corporation which does have this requirement.

Question 10

The term capitalization refers to the conversion of a future income stream into a present value,and it is a
term often used by business appraisers when future income or cash flows are not expected to grow or to grow at a constant rate.

Accepted Answer

This is a correct definition of capitalization.

Question 11

The M&A market for employer firms tends to be concentrated among smaller firms,as firms in the United States with 99 or fewer employees account for 98% of all firms with employees.

Accepted Answer

This statement is true, as smaller firms make up the majority of employer firms, it follows that the M&A market for these types of firms would also be concentrated among them.

Question 12

In many family owned firms,family influence is exercised by family members holding senior management positions,seats on the board of directors,and through holding super-voting stock (i.e.,stock with multiple voting rights).

Accepted Answer

This statement is true. Many family owned firms rely on family members to hold senior management positions and seats on the board of directors, and some families may also hold super-voting stock to maintain control of the company.

Question 13

Privately owned businesses are often referred to as "closely held" since they are usually characterized by a small group of shareholders controlling operating and managerial policies of the firm.

Accepted Answer

This statement is true as closely held businesses are typically owned and controlled by a small group of shareholders, often family members or close associates, who make decisions about the company's operations and management.

Question 14

Membership or subscription businesses,such as health clubs and magazine publishers,may inflate revenue by booking the full value of muliyear contracts in the first year of the contract.

Accepted Answer

Membership or subscription businesses commonly use the practice of booking the full value of multiyear contracts in the first year to inflate their revenue. This is because they are receiving payment for future services upfront, and it can make their financial statements look better in the short term. However, it also means they will have lower revenue in the following years of the contract.

Question 15

Fair value is by necessity more subjective than the concept of fair market value,because it represents the
dollar value of a business based upon an appraisal of the tangible and intangible assets of the business.

Accepted Answer

Fair value takes into account both tangible and intangible assets, which can be difficult to appraise objectively, making it more subjective than fair market value which is based solely on market conditions.

Question 16

Firms that are family owned but not managed by family members are often well managed,as family shareholders with large equity stakes carefully monitor those charged with managing the business.

Accepted Answer

This statement is true. Family shareholders with large equity stakes have a strong interest in ensuring that the business is well managed, so they are likely to carefully monitor non-family members who are in positions of management.

Question 17

Family owned businesses account for about 89% of all businesses in the U.S.

Accepted Answer

According to the Family Business Alliance, family owned businesses account for approximately 89% of all businesses in the U.S.

Question 18

Intangible assets such as customer lists,intellectual property,licenses,distributorships agreements,leases,
regulatory approvals,and employment contracts may offer significant sources of value.

Accepted Answer

Intangible assets can indeed offer significant sources of value for a company. They are not physical assets but rather represent legal or contractual rights, or even simply a company's reputation or brand recognition. These assets can be valued and can contribute to a company's overall worth.

Question 19

All family owned businesses are small.

Accepted Answer

There are some family owned businesses that are large, such as Walmart and Ford Motor Company.

Question 20

If the buyer believes that the seller has overstated revenue in a specific accounting period,the buyer can reconstruct revenue by examining usage levels,in the same accounting period,of the key inputs required to produce the product or service.

Accepted Answer

By examining the usage levels of key inputs required to produce the product or service in the same accounting period, the buyer can reconstruct revenue and determine if the seller has overstated it.

Quiz 10: Analysis and Valuation of Privately Held Companies

Very few closely held businesses are family owned.

Succession issues tend to be easier for small family owned firms than for large publicly traded firms.

Restricted stock is often issued to employees of privately held firms as a significant portion of their total compensation.Such stock is similar to other types of common stock except that its sale on the open market is prohibited for a period of time.

The market model of corporate governance is readily applicable to privately held,family owned firms.

Valuation of privately held businesses may involve substantial adjustment of the discount or capitalization rate.