Deck 6: Taking Over an Existing Business

Question 1

Determining the price offered for a business should begin by adding the value of the tangible and intangible assets with the sales potential of the business.

Answer 1

False

Question 2

You should never ask the owners of a business where you are a customer whether they are interested in selling their business.

Answer 2

False

Question 3

A major advantage of purchasing an existing business is that the customers are familiar with the location.

Answer 3

True

Question 4

Asking the owner of a business where you have been a regular customer whether the business is for sale may be one source of finding a potential new business.

Question 5

Word-of-mouth information through friends and family may turn up business opportunities that do not appear through formal channels.

Question 6

Due diligence is the process of fact finding to determine the total condition of a business being considered for purchase.

Question 7

Buying an existing business is becoming a more popular way to own a small business.

Question 8

Having an established supplier relationship is an advantage of buying an existing business.

Question 9

The fact that a business's image is difficult to change is a distinct advantage when taking over an existing business.

Question 10

Real estate brokers may be a good source of potential businesses for sale since their listings may include business real estate.

Question 11

Industry averages exist comparing expenses to sales for every size and type of business.

Question 12

Existing businesses do not have to be scrutinized carefully to determine whether they are a worthwhile investment of time and money.

Question 13

If an existing business is purchased, the buyer may be potentially liable for past business contracts.

Question 14

There are not as many factors that could contribute to the sale of a business as there are reasons for business liquidations.

Question 15

It is important not to let emotions cloud judgment when making business purchase decisions.

Question 16

When the owner of a business decides to sell, the reasons the owner tells prospective buyers may be somewhat different than the actual reasons.

Question 17

Brokers take classes and pass examinations to become certified business intermediaries.

Question 18

When analyzing the financial statements of the business, it is important to rely most heavily on the most recent year of operation.

Question 19

T F A key factor in business valuation is review of what other companies in the industry have sold for.

Question 20

When discussing the purchase of an existing business, it is not necessary to get verbal understandings in writing from the seller.

Question 21

When purchasing a business, the people working there can be disregarded since they will probably not stick around after the business is in new hands.

Question 22

A disadvantage to buying an existing business is which of the following?

A) Image is difficult to change.
B) Customers are familiar with the location.
C) The employees are experienced.
D) Inventory and equipment is in place.

Question 23

Of the 6 million U.S. businesses with 19 or fewer employees, at least _______ are for sale at any given time.

A) 500,000
B) 1 million
C) 2 million
D) 4 million

Question 24

Tangible assets are the product of a firm's past earnings and the basis on which future earnings are projected.

Question 25

An income statement method of business valuation focuses more on cash flow than asset value.

Question 26

Which of the following is not an advantage to buying an existing business?

A) Image is difficult to change.
B) Employees are experienced.
C) The seller may be willing to provide some financing.
D) Inventory and equipment are already in place.

Question 27

An advantage in purchasing an existing business is which of the following?

A) Image is difficult to change.
B) There is an established customer base at the present location.
C) Employees may be loyal only to previous management.
D) The business location is unfamiliar.

Question 28

Discounted cash-flow analysis consists of projecting future cash flows after debts are subtracted and before taxes are paid.

Question 29

When running a family business, there are four overlapping perspectives on its operations: family, management, ownership, and sales.

Question 30

For the Mount Waterman ski resort, the bottom line is that in order to be profitable, it was necessary to

A) Bring in new ownership with fresh ideas
B) Reduce congestion at the resort
C) Invest in snowmaking equipment
D) Go public

Question 31

All of the following are options for getting started as a business owner except

A) Managing a joint venture
B) Inheriting a family business
C) Buying an existing establishment
D) Starting your own business

Question 32

The amount paid for goodwill should be small enough to be recovered with new profits in a reasonably short time period.

Question 33

Goodwill is an example of a tangible asset.

Question 34

Inventory is an example of a tangible asset.

Question 35

Family businesses make up 80 percent of all businesses in the United States and comprise nearly 50 percent of the nation's GNP.

Question 36

The value of a business's intangible assets is easy to determine.

Question 37

About half of all family businesses survive through the second generation.

Question 38

When a family member enters the family business, he or she is immediately accepted by nonfamily employees due to his/her position.

Question 39

Buying an existing business looks appealing to the potential business owner for which of the following reasons?

A) The existing firm is already functioning.
B) The existing firm will always make a profit.
C) The existing firm will have the best employees.
D) The existing firm's owner will always provide financing.

Question 40

Goodwill is the term used to describe the difference between the purchase price of a company and the net value of the tangible assets.

Question 41

Tabitha is considering the purchase of a seemingly successful retail establishment, but first she would like to gain an understanding of why the business is being sold. With whom should she speak?

A) The current owner only
B) The current owner and customers only
C) Customers and suppliers only
D) The current owner, customers, and suppliers

Question 42

Benjamin has recently received a large estate settlement, and he is eager to use the money towards the purchase of a successful business that is already in operation. Which of the following should be discouraged as a source for finding businesses for sale?

A) Friends
B) Business owners themselves
C) Real estate brokers
D) Phonebook

Question 43

Within his profession, Alex Wilson serves as an intermediary that brings sellers of businesses together with potential buyers. Alex can best be described as a/an

A) Real estate manager
B) Financial broker
C) Management broker
D) Business broker

Question 44

Financial information can be sensitive information. In order to allay the fears of the seller, a potential buyer could

A) Not ask to see financial information
B) Only show the information to an accountant
C) Only show the information to a banker
D) Write a letter of confidentiality

Question 45

A business that brings sellers of their businesses together with potential buyers is known as

A) A real estate broker
B) The Small Business Administration (SBA)
C) A business broker
D) The FTC

Question 46

Industry averages for expense ratios comparing expenses to ________ exist for every size and type of business.

A) Profits
B) Assets
C) Liabilities
D) Sales

Question 47

If the business that is being purchased involves inventory, the bulk sales provisions of the ___________ need to be followed.

A) FTC
B) NAFTA
C) UCC
D) SBA

Question 48

When analyzing financial statements, remember that profits can be increased and expenses can be decreased to make the records look better

A) In the short run
B) In the long run
C) For tax purposes
D) For bank audits

Question 49

Industry-wide _________ ratios are calculated by most trade associations, many commercial banks, and accounting firms.

A) Asset
B) Expense
C) Quality
D) Stock

Question 50

What of these is used to indicate whether sales volume is increasing or decreasing?

A) Financial records
B) Independent audit
C) Expense ratio
D) Working capital statement

Question 51

Family, friends, the newspaper, the Small Business Administration (SBA), a local banker, and real estate brokers may all have information on

A) Possible sources of funding
B) Possible businesses for sale
C) Possible businesses soon to be terminated
D) Possible venture capitalists

Question 52

Expense ratios are useful because they are

A) Standards or guides
B) Absolute measures of profitability
C) Significant in the number that is computed
D) Error free

Question 53

Many good business opportunities are never formally advertised. Instead, that information is found through which of the following?

A) The local banker
B) The local college
C) Word of mouth
D) The Small Business Administration (SBA)

Question 54

A list of liabilities of an existing business would include

A) A list of accounts receivable
B) An inventory of products and materials
C) Liens by creditors against any assets
D) A list of accounts payable

Question 55

When gathering information about an existing business in order to evaluate its potential, all but which of the following questions should be asked?

A) What is the profit record?
B) Are there liens against any equipment?
C) Can the lease be renewed?
D) Did the previous owner pay bills on time?

Question 56

To ensure that all back taxes have been paid, a potential buyer should inspect

A) Unaudited financial documents
B) Income tax returns
C) The seller's books
D) Loan agreements

Question 57

Before any serious discussion of purchasing a business occurs, a/an ______________ should be conducted.

A) Financial ratio analysis
B) Income statement analysis
C) Independent audit
D) IRS review

Question 58

When gathering information about an existing business in order to evaluate its potential, all but which of the following questions should be asked?

A) How many previous owners has the business had?
B) What is the condition of the inventory?
C) Is the equipment in good condition?
D) Has the owner ever been convicted of a felony?

Question 59

To determine the financial condition of an existing business, it is necessary to compare _________ with _________ to identify where costs can be reduced or more money is needed.

A) Operating ratios; fiscal averages
B) Operating ratios; industry averages
C) Expense ratios; fiscal averages
D) Expense ratios; industry averages

Question 60

The income statement can provide access to ____________, a very important piece of information for a prospective buyer to use in determining net profit.

A) Sales volume
B) Net assets
C) Gross assets
D) Accounts payable

Question 61

Along with purchasing a successful ice cream shop, Wilma acquired the building, as well as ice cream making equipment and enough inventories to operate for a month. These are best known as what type of assets?

A) Short-term assets
B) Tangible assets
C) Long-term assets
D) Intangible assets

Question 62

The intangible asset that allows a business to earn a higher return than a comparable business might generate with the same tangible assets is known as

A) Intangible assets
B) Tangible assets
C) Preferred merchandise lines
D) Goodwill

Question 63

Of all the tangible assets of a business, _______ and _____ should be examined most closely because they may be worth less than the seller is asking.

A) Inventories, equipment
B) Receivables, inventory
C) Equipment, receivables
D) Inventories, receivables

Question 64

Assets that a business owns that can be seen and examined are known as

A) Intangible assets
B) Tangible assets
C) Long-term equity
D) Accounts payable

Question 65

A provision that restricts the seller from entering the same type of business within a specified area for a certain amount of time is known as

A) Due disclosure
B) A good cause clause
C) A noncompetitive clause
D) Just disclosure

Question 66

Aging accounts receivable refers to the process of

A) Determining their present value
B) Determining their effect on sales
C) Determining how many are still collectible and discounting them accordingly
D) Determining future customer lists

Question 67

Trade names, customer lists, and goodwill are examples of which kinds of assets?

A) Intangible assets
B) Tangible assets
C) Only current assets
D) Only long-term assets

Question 68

Assets that have value to a business but are not visible are known as

A) Intangible assets
B) Tangible assets
C) Long-term assets
D) Current assets

Question 69

Inventory, equipment, and building are examples of what kinds of assets?

A) Intangible assets
B) Tangible assets
C) Only current assets
D) Only long-term assets

Question 70

To effectively use operating ratios, a prospective buyer should

A) Compare them to industry standards
B) Use them to identify problems that exist and make changes
C) Use them as a basis for valuing the business
D) Compare them to the closest competitor

Question 71

Intellectual property is a valuable __________.

A) Intangible asset
B) Tangible asset
C) Goodwill asset
D) Current asset

Question 72

Machinery that has no, or very little, value is referred to as

A) Dead stock
B) Long weight
C) A payable
D) A receivable

Question 73

The prospective buyer should determine a price for the business by adding the value of tangible and intangible assets with the _____________ potential.

A) Sales
B) Expenses
C) Income
D) Profit

Question 74

Samantha was in the final stages of selling her existing business, but she backed out of the deal at the last minute because the buyer asked her to sign a contract stating that she would not enter into a similar business within the state for at least 15 years. This is an example of

A) A reasonable intellectual property contract
B) An unreasonable intellectual property contract
C) A reasonable noncompete clause
D) An unreasonable noncompete clause

Question 75

Any of the following may be included as an owner benefit of a small business except

A) Pretax profit
B) Employees' salary
C) Ownner's salary
D) Additional owner perks

Question 76

Which of the following by itself could be a reason a business owner wants to sell a business?

A) Inventory that is fresh and balanced
B) Accounts receivable that are 60 days old or older
C) The outlived usefulness of equipment
D) Accounts receivable that are 30 days old or older

Question 77

When evaluating the worth of the inventory for purchasing purposes, the primary concern should be

A) Whether enough inventory is currently stocked
B) Good supplier relationships
C) No "dead stock" that is listed at its original value
D) Fresh inventory

Question 78

Rob is selling a business with machinery that has been protected from unauthorized use or infringement for the next three years. What type of intangible asset does this involve?

A) Goodwill
B) Trademark
C) Patent right
D) Copyright

Question 79

Few businesses that are for sale have a high amount of _________ value.

A) Current asset
B) Long-term asset
C) Goodwill
D) Equipment

Question 80

Patents, copyrights, and trademarks protect against unauthorized use or infringements for which of the following time periods?

A) Indefinitely
B) For an unknown time period
C) Five to seven years
D) For a definite time and usage period