Deck 12: Informal Risk Capital, Venture Capital, and Going Public

Question 1

As discussed in the Opening Profile to Chapter 12, a large percentage of small to medium-sized business owners in Canada do not have a formal succession plan for their business, despite having plans to retire within the next five years.

Answer 1

True

Question 2

As discussed in the Opening Profile to Chapter 12, Gerald Schwartz is an example of a very successful entrepreneur who likes to buy distressed businesses, improve them, and then keep them.

Answer 2

False

Question 3

As discussed in the text, between 35% to 50% of all businesses started in Canada do not last three years, while only 20% of businesses reach year 10.

Answer 3

True

Question 4

One of the major causes that lead to business failure is the entrepreneur's inability to identify and deal with problems quickly.

Question 5

The most common reason cited for bankruptcy among young Canadian companies is lack of working capital.

Question 6

Starting a business based on an idea or hobby rather than a true opportunity is rarely a factor in business failure as the enthusiasm and drive of the owner easily compensates for a weak market.

Question 7

Trying to grow too quickly can be a serious problem for a young company that is not capable of handling the large volume of business that a major order would bring.

Question 8

The most common reason for companies that fail after surviving their first five years is management inexperience.

Question 9

An over-reliance on debt as their main source of capital is a problem for many businesses due to the effect it has on monthly cash flow.

Question 10

Approximately 68% of businesses that fail in Canada say that some form of external shock impacted their business.

Question 11

External shocks that may hurt a business include running out of cash, key employee turnover, and lack of profitability.

Question 12

A company in a crisis situation is usually facing some type of cash-related problem, such as an inability to make a loan payment or to pay staff or creditors.

Question 13

As discussed in the text, the first step for an entrepreneur with a business in a crisis situation is to prepare a revised business plan.

Question 14

The purpose of preparing a revised business plan for an entrepreneur with a business in a crisis situation is to show employees and other interested stakeholders why the business is closing and how it will be done.

Question 15

Management Buyout. What is involved and why would it happen?

Question 16

As mentioned in the text, Statistics Canada has found that when in a crisis situation, the hesitation of entrepreneurs to use outside consultants is one of the main reasons that companies go bankrupt.

Question 17

The essential step to filing for protection under the Bankruptcy and Insolvency Act is to contact a bankruptcy trustee.

Question 18

Generally, the first step in a bankruptcy proceeding is to work with the trustee to make a formal proposal to the creditors.

Question 19

In a bankruptcy proceeding in Canada, all creditors must vote to accept the formal proposal or the business will have no choice but to declare bankruptcy immediately.

Question 20

Once a company is declared bankrupt, a receiver is appointed by the courts to take possession of all of the company's assets, which will be sold to pay the creditors in order of priority.

Question 21

As discussed in the Opening Profile to Chapter 12, a large percentage of small to medium-sized business owners in Canada __________.

A) are planning to retire and leave their businesses to their children to run
B) do not have a formal succession plan for their business, despite having plans to retire within the next five years.
C) have no plans to ever retire from their business
D) are waiting for someone outside of their family to offer to buy their business
E) None of the answers apply.

Question 22

As discussed in the Opening Profile to Chapter 12, Gerald Schwartz is an example of a very successful entrepreneur who __________.

A) likes to buy distressed businesses, improve them, and then sell them
B) having made his money, has now retired to a life of leisure to enjoy it
C) likes to buy distressed businesses, improve them, and then keep them
D) is more interested in the social benefits his companies provide than the money they make
E) None of the answers apply.

Question 23

As discussed in the text, research has shown that the failure rate of new businesses within the first three years is __________.

A) less than 35%
B) between 35% and 50%
C) between 50% and 75%
D) over 75%
E) None of the answers apply.

Question 24

Which of the following is not one of the three general categories of pitfalls that an entrepreneur needs to be aware of to ensure the survival of their business?

A) external shocks
B) financial and accounting problems
C) internal pressures
D) management problems

Question 25

As discussed in the text, the most common reason cited for bankruptcy among young Canadian companies is (are) __________.

A) mistakes associated with a growing company
B) inexperienced management
C) inadequate cash flow
D) external shocks
E) None of the answers apply.

Question 26

As discussed in the text, starting a business based on an idea or hobby can prove to be a problem for a young company for which of the following reasons?

A) The owner spends too much time enjoying the hobby and not enough time working.
B) The owner's love for the hobby overshadows the lack of a true opportunity for the business to succeed.
C) The owner spends too much time working and not enough time enjoying the hobby.
D) The hobby becomes too much like work and the owner gets tired of it.
E) None of the answers apply.

Question 27

Common pitfalls of young companies include which of the following?

A) starting a business based on an idea or hobby rather than a true opportunity
B) failure to anticipate or control costs
C) human resource problems
D) failing to execute the business plan
E) All of the answers are correct.

Question 28

Which of the following is not a common pitfall of young companies, as discussed in the text?

A) failing to execute the business plan
B) inability of the entrepreneur to become a manager
C) failure to anticipate or control costs
D) starting a business based on a hobby rather than a true opportunity
E) human resource problems such an inability to hire good people

Question 29

"It is easy to design a cost control system on paper, but it is much tougher to execute one, especially if you have not done this in the past"- this is the description of which Management Problem

A) Failure to anticipate or control costs.
B) Starting a business based on an idea or hobby
C) Human resource problems.
D) Failing to execute a business plan.
E) Trying to grow too quickly.

Question 30

"Rather than creating a true opportunity, they assume that since they love something and they want to work in a related business, they can make money."- this is the description of which Management Problem

A) Failure to anticipate or control costs.
B) Starting a business based on an idea or hobby
C) Human resource problems.
D) Failing to execute a business plan.
E) Trying to grow too quickly.

Question 31

"an inability to hire people, problems attracting excellent employees"- this is the description of which Management Problem

A) Failure to anticipate or control costs.
B) Starting a business based on an idea or hobby
C) Human resource problems.
D) Failing to execute a business plan.
E) Trying to grow too quickly.

Question 32

"some entrepreneurs can write a great business plan, they may actually lack the skills to implement the plan properly."- this is the description of which Management Problem

A) Failure to anticipate or control costs.
B) Starting a business based on an idea or hobby
C) Human resource problems.
D) Failing to execute a business plan.
E) Trying to grow too quickly.

Question 33

"results of quick expansion often cause businesses to borrow additional funds, expand operations, and/ or act without planning."- this is the description of which Management Problem

A) Failure to anticipate or control costs.
B) Starting a business based on an idea or hobby
C) Human resource problems.
D) Failing to execute a business plan.
E) Trying to grow too quickly.

Question 34

"spending two to three years researching their idea prior to starting their company, and then work 50- to 80-hour weeks during the early years"- this is the description of which Management Problem

A) Failure to anticipate or control costs.
B) Entrepreneur burnout.
C) Human resource problems.
D) Failing to execute a business plan.
E) Trying to grow too quickly.

Question 35

A human resource problem common to a young business that the entrepreneur has relatively little control over is (are) __________.

A) hiring mistakes due to poor interviewing skills
B) lack of motivation by employees
C) poorly defined roles and responsibilities
D) difficult in attracting top performing sales people to join an unproven company
E) None of the answers apply.

Question 36

As discussed in the text, Canadian companies that manage to survive their first five years are more prone to fail due to __________.

A) external shocks
B) failing to execute the business plan
C) mistakes associated with managing a growing company
D) poor capital structure
E) None of the answers apply.

Question 37

As discussed in the text, mature firm management problem(s) include which of the following?

A) not using outside advisors effectively
B) poorly planned or executed expansion
C) human resource issues such as losing key employees
D) inability of the entrepreneur to become a manager
E) All of the answers are correct.

Question 38

Which of the following was not a mature firm management problem discussed in the text?

A) not using outside advisors effectively
B) inability of the entrepreneur to become a manager
C) poorly planned or executed expansion
D) failure to anticipate or control costs
E) human resource issues such as losing key employees

Question 39

For a mature firm, a poorly planned or executed expansion can be a problem for the business for which of the following reasons?

A) Diversification across different product lines lowers risk.
B) The entrepreneur can lose focus on his (or her) profitable products or markets.
C) An expansion into unprofitable products can drain valuable cash from the business.
D) The entrepreneur can lose focus on his (or her) profitable products or markets and an expansion into unprofitable products can drain valuable cash from the business.
E) All of the answers are correct.

Question 40

To be successful managing a mature firm, an entrepreneur __________.

A) will use the same skill set that was used during the start-up phase of the business
B) should strive to become more innovative
C) should trust their judgement in making decisions on the fly
D) needs to rely more on careful planning and risk management practices
E) None of the answers apply.

Question 41

As discussed in the text, in comparison to entrepreneurs, managers tend to __________.

A) be more practical
B) rely more on planning
C) practice risk management
D) All of the answers are correct.
E) None of the answers apply.

Question 42

The most common pitfall(s) for business in the finance and accounting area include which of the following?

A) undercapitalization
B) poor capital structure
C) inability to manage working capital
D) All of the answers are correct.
E) None of the answers apply.

Question 43

In the section of Chapter 12 discussing "Financial and Accounting Problems: Common Pitfalls", it is noted - "entrepreneurs in a rush to get their business started fail to raise enough funds to properly run their business."which common pitfall is this associated with?

A) undercapitalization
B) poor capital structure
C) inability to manage working capital
D) All of the answers are correct.
E) None of the answers apply.

Question 44

In the section of Chapter 12 discussing "Financial and Accounting Problems: Common Pitfalls", it is noted - "The problem with debt is that it often comes with monthly payment commitments that can be difficult to manage"which common pitfall is this associated with?

A) undercapitalization
B) poor capital structure
C) inability to manage working capital
D) All of the answers are correct.
E) None of the answers apply.

Question 45

In the section of Chapter 12 discussing "Financial and Accounting Problems: Common Pitfalls", it is noted - "Often they have to pay monthly bills, deal with creditors, and order additional supplies"which common pitfall is this associated with?

A) undercapitalization
B) poor capital structure
C) inability to manage working capital
D) All of the answers are correct.
E) None of the answers apply.

Question 46

As a common financial and accounting problem for a business, undercapitalization refers to __________.

A) not having enough funds in the business to properly run the business
B) not having a large enough voice in the markets in which it wants to compete
C) an over-reliance on debt as the main source of capital
D) not making productive use of the working capital available
E) None of the answers apply.

Question 47

For an entrepreneur, a reliance on debt as his or her main source of capital can be a problem for which of the following reasons?

A) Most forms of debt require monthly payments of principal and interest, which hurts cash flow just when the company needs it most.
B) Too much debt can hinder the firm's ability to raise more capital.
C) Too much debt can raise the cost of additional capital.
D) All of the answers are correct.
E) None of the answers apply.

Question 48

Entrepreneurs are prone to mismanage cash by __________.

A) not saving enough cash when business is good
B) paying off bills too quickly
C) failing to anticipate changes in annual expenses
D) All of the answers are correct.
E) None of the answers apply.

Question 49

Which of the following statements regarding the impact of external shocks on a business is (are) true?

A) Approximately 68% of businesses that fail in Canada say that some form of external shock impacted their business.
B) A proper business plan should have contingency plans in it to deal with most external shocks that may adversely affect the business.
C) Most business failures result from mismanagement, poor financial and accounting practices, and shocks in the external environment-not the shocks themselves.
D) All of the answers are correct.
E) None of the answers apply.

Question 50

External shocks that may adversely affect a business include which of the following?

A) downturn in the economy
B) new competition
C) loss of suppliers
D) changes in laws or regulations
E) All of the answers are correct.

Question 51

Which of the following is not an external shock that may adversely affect a business, as discussed in the text?

A) loss of suppliers
B) undercapitalization
C) changes in laws or regulations
D) demographic shifts that influence demand
E) new competition

Question 52

As discussed in the text, for many entrepreneurs, waiting too long to fix small problems in their business can result in __________.

A) a loss of time
B) much bigger problems later on
C) loss in productivity due to dissatisfied employees
D) All of the answers are correct.
E) None of the answers apply.

Question 53

A warning sign(s) that an entrepreneur should pay attention to include which of the following?

A) negative changes in liquidity ratios
B) failure to achieve business plan objective(s)
C) loss of clients or key employees
D) cost overruns
E) All of the answers are correct.

Question 54

Warning signs: "If these ratios fall below normal levels, it may indicate a crisis is on the horizon"is an indication of which problem?

A) negative changes in liquidity ratios
B) positive changes in liquidity ratios
C) Business plans
D) Write-offs
E) None of the answers are correct.

Question 55

Warning signs: "If the entrepreneur is failing to fulfill objectives or deviating from strategy for no explicable reason"is an indication of which problem?

A) negative changes in liquidity ratios
B) positive changes in liquidity ratios
C) Business plans
D) Write-offs
E) None of the answers are correct.

Question 56

Warning signs: "writing off accounts receivable as uncollectible or is writing off assets"is an indication of which problem?

A) negative changes in liquidity ratios
B) positive changes in liquidity ratios
C) Business plans
D) Write-offs
E) None of the answers are correct.

Question 57

To an entrepreneur, the loss of key employees or clients, failure to achieve business plan objectives, and drastic changes in the external environment should be considered __________.

A) normal events in the life of a new business
B) challenges that should be addressed when free time is available
C) warning signs that need management attention
D) external shocks that are not under his or her control and therefore, should not be stressed over
E) None of the answers apply.

Question 58

In most cases, a business in a crisis situation __________.

A) is usually facing some type of cash-related problem such as inability to pay creditors or employees
B) got that way with little or no warning to the entrepreneur
C) was affected by internal shocks beyond their control
D) has very little choice but to close and liquidate the assets
E) None of the answers apply.

Question 59

An entrepreneur with a business in crisis should do which of the following first?

A) Prepare a revised business plan for the next six months.
B) Analyze all aspects of their current situation to try to determine what the problem(s) is (are).
C) Communicate with all interested stakeholders what the current situation is.
D) Suspend operations until the problem(s) are sorted out.
E) None of the answers apply.

Question 60

The second thing an entrepreneur with a business in crisis should do is __________.

A) prepare a revised business plan for the next six months
B) analyze all aspects of their current situation to try to determine what the problem(s) is (are)
C) communicate with all interested stakeholders what the current situation is
D) suspend operations until the problem(s) are sorted out
E) None of the answers apply.

Question 61

A creditor of a business in crisis wants to __________.

A) feel confident that the entrepreneur has a plan in place to turn the company around
B) limit their losses in any way they can
C) avoid negotiating with the entrepreneur until the very end so that they will be in a better bargaining position
D) feel confident that the entrepreneur has a plan in place to turn the company around and limit their losses in any way they can
E) All of the answers are correct.

Question 62

As part of a turnaround plan, an entrepreneur with a business in crisis will want to __________.

A) rein in unnecessary expenses at once
B) scale back operations and focus on selling the most profitable products
C) raise cash as soon as possible using equity, collecting receivables, and/or selling inventory
D) start to negotiate repayment plans with creditors
E) All of the answers are correct.

Question 63

The threat of bankruptcy as a negotiating tactic with creditors is only likely to work __________.

A) on unsecured creditors
B) if the company has substantial assets to back up the threat
C) on secured creditors
D) if the entrepreneur feels that they have nothing to lose
E) None of the answers apply.

Question 64

An entrepreneur with a business in crisis may not have the capability of turning the company around due to __________.

A) being too attached to the company
B) an inability to see what the problems are
C) a lack of experience in negotiating with creditors
D) All of the answers are correct.
E) None of the answers apply.

Question 65

Research done by Statistics Canada has shown that the one of the main reasons that companies go bankrupt is due to __________.

A) the hesitation of entrepreneurs to use outside consultants to help them when the business is in crisis
B) the entrepreneur giving up when faced with the enormity of the task of turning the business around
C) not having an exit strategy for their business
D) an inability to overcome the external shocks that put their business in crisis
E) None of the answers apply.

Question 66

In Canada, the essential step to filing for protection under the Bankruptcy and Insolvency Act is __________.

A) to register a petition with the appropriate provincial/territorial authority
B) to close the business and surrender the business registration
C) to contact a bankruptcy trustee
D) to meet with the creditors of the business to negotiate a settlement
E) None of the answers apply.

Question 67

The purpose of filing for protection under the Bankruptcy and Insolvency Act is __________.

A) to get some breathing room to deal with creditors
B) stop any legal action against the company that is in progress
C) to invalidate the personal guarantees signed by the entrepreneur
D) to get some breathing room to deal with creditors and stop any legal action against the company that is in progress
E) All of the answers are correct.

Question 68

Generally, the first thing that a bankruptcy trustee will do for a business is __________.

A) ensure a fair distribution of assets to creditors
B) have the assets of the business appraised for their liquidation value
C) protect debtors from unfair demands by creditors
D) develop a proposal for settlement of the outstanding debts and present it to creditors
E) None of the answers apply.

Question 69

Generally, in a bankruptcy proceeding, the purpose of the initial proposal to the creditors is to __________.

A) wipe the debts of the business clean and start over
B) liquidate the assets of the business and pay the creditors
C) reorganize the company with new ownership
D) allow the entrepreneur to settle the outstanding debts and continue to operate the business
E) none of the business

Question 70

When making the initial proposal to creditors in a bankruptcy proceeding, the option(s) open to creditors include which of the following?

A) accepting a smaller percentage of what is owed
B) extending the payment terms
C) trading debt for equity in the business
D) All of the answers are correct.
E) None of the answers apply.

Question 71

After the initial proposal to creditors in a bankruptcy proceeding is made, the secured creditors __________ for the proposal to be formally accepted.

A) and the unsecured creditors must agree to the proposal by a simple majority
B) must agree to the proposal by a simple majority representing at least 2/3 of the outstanding debt
C) must agree to the proposal unanimously
D) and the unsecured creditors must agree to the proposal unanimously
E) None of the answers apply.

Question 72

Rejection of the initial proposal to creditors in a bankruptcy proceeding results in __________.

A) further negotiation between the parties until a settlement is reached
B) the company being declared bankrupt automatically
C) a civil court case
D) binding arbitration by a court-appointed mediator
E) None of the answers apply.

Question 73

Companies in Canada can be placed into bankruptcy for which of the following reasons?

A) The entrepreneur fails to live up to the terms of the proposal agreed to with the creditors.
B) The creditors defeat the formal proposal.
C) The owner of the business asks for bankruptcy protection.
D) One or more creditors petition the company into bankruptcy through the courts.
E) All of the answers are correct.

Question 74

Once a company has been declared bankrupt, which of the following happens next?

A) A receiver is appointed by the courts to take possession of the company's assets.
B) The company is sold by the receiver as an operating business to the highest bidder.
C) The company's assets will be sold by the receiver and the creditors paid in order of security.
D) A receiver is appointed by the courts to take possession of the company's assets and the company's assets will be sold by the receiver and the creditors paid in order of security.
E) All of the answers are correct.

Question 75

Once bankruptcy has been formally declared and resolved, the entrepreneur will be discharged from all debts of the business with the exception of __________.

A) any credit that was personally guaranteed by the entrepreneur
B) any employee deductions and/or taxes owed to Revenue Canada and provincial tax authorities
C) any wages owed to employees (in some provincial jurisdictions)
D) All of the answers are correct.
E) None of the answers apply.

Question 76

What is an ESOP (Employee Stock Option Plan).

Question 77

As discussed in the text, failure of a business to an entrepreneur __________.

A) usually results in the entrepreneur working for someone else for the rest of their career
B) makes it next to impossible to secure financing for another venture
C) should not constrain future success, provided that the entrepreneur learned something from the experience
D) usually results in trying again with even more drive and determination
E) All of the answers are correct.

Question 78

To an entrepreneur, the time spent trying to save a dying business __________.

A) should be considered as an opportunity cost
B) should be left open-ended to ensure all effort is made
C) should be limited to three times the asset value of the business
D) should be claimed as services donated to the business for income tax purposes
E) None of the answers apply.

Question 79

Which of the following would be considered an exit strategy for a business?

A) initial public offering (IPO)
B) private sale of stock
C) succession by a family member(s)
D) liquidation of the company
E) All of the answers are correct.

Question 80

As discussed in the text, an entrepreneur should have an exit strategy or plan in place for their business venture __________.

A) near the end of its useful life
B) by the time they reach 60 years of age
C) at the start-up stage of the business
D) if they survive the first five years
E) None of the answers apply.