Deck 13: Buying a Business

Question 1

What is the first step in deciding whether to buy an existing business?

A) evaluate the balance sheet of the prospective business
B) evaluate the business from the outside
C) review your entrepreneurial strengths and weaknesses
D) evaluate the income stream of the potential business

Answer 1

review your entrepreneurial strengths and weaknesses

Question 2

Which of the following is an examination process intended to protect buyers from unknown liabilities?

A) earnout
B) bulk sale escrow
C) lien
D) ill will

Answer 2

bulk sale escrow

Question 3

According to the Chapter 13 illustration of The Sports Factory, the husband and wife team were saved from a bad purchase by which of the following resources?

A) an escrow company
B) a lawyer
C) a marketplace detective
D) a P/E ratio

Answer 3

a marketplace detective

Question 4

Which association grants brokers with a certificate of competency?

A) Association of International Business Brokers
B) Canadian Business Intermediary
C) International Business Brokers Association
D) Canadian Brokers Association

Question 5

Which of the following is recommended when making a deposit on the purchase of a business?

A) state that the offer is subject to inspection and approval of all records, leases, and inventory
B) use a letter of credit
C) make out a cheque directly to the seller's lawyer
D) record your deposit with the Canadian Revenue Agency (CRA)

Question 6

How is book value calculated?

A) assets plus liabilities
B) owner's equity minus assets
C) owner's equity minus total liabilities
D) liabilities plus assets

Question 7

Which of the following describes accounts receivable and inventory?

A) major liabilities of the business
B) negotiable when purchasing a business
C) increase in value with age
D) forms of goodwill and have value

Question 8

According to the author, which of the following are often the least profitable businesses?

A) ones that have no cosmetic or curb appeal
B) ones that are listed in the business opportunities section of newspapers
C) ones that are found in obscure, low-profile service industries
D) ones that are found in a growth industry

Question 9

Which of the following is a contractual arrangement in which the buyer of the business agrees to make future payments to the seller based on the achievement of defined financial goals?

A) income stream sale
B) escrow sale
C) earnout
D) price-earnings buyout

Question 10

Which of the following best describes ill will?

A) a good reason for buying a business
B) recorded as an other current asset on the balance sheet
C) a negotiating factor when buying a business
D) simple to remedy with new management

Question 11

According to the author, which of the following is a common reason for purchasing an existing business?

A) you are purchasing an existing income stream
B) it is safer than starting a business yourself
C) the business has a low price-earnings ratio
D) the seller is having problems managing the business

Question 12

In the negotiations stage of buying an existing business, which of the following situations does the author recommended you stay away from?

A) seller tries to inflate the price
B) seller's price includes an annual owner salary
C) seller's price includes the value of intangibles
D) seller tries to get as much as possible for goodwill

Question 13

Which of the following is the most common type of asset valuation?

A) marginal book
B) adjusted market
C) adjusted book
D) net asset

Question 14

Which of the following is it essential for a buyer to examine when reviewing a seller's financial statements?

A) initial purchase price of the business
B) value of ill will
C) tangible assets
D) intangible assets

Question 15

Suppose you are prepared to invest $60,000 to buy a business and you want a 20 percent return on your investment. How much cash would have to be available from the cash flow of the new business each year to give you this 20 percent return?

A) $1,200
B) $12,000
C) $60,000
D) $120,000

Question 16

Which of the following is the LEAST important factor in evaluating a business for sale?

A) the financial history of the business
B) the seller's stated reason for selling
C) the return on time and investment
D) accounts receivable and payable

Question 17

Which of the following is most important for the financial records of a small business that is for sale?

A) that they show market value of tangible assets
B) that they are accurate and complete
C) that they are available for you and your accountant to examine when discussions become serious
D) that they show the company's true earning potential

Question 18

What is Step 3 in the earnings-assets pricing formula?

A) calculate the value of intangibles
B) calculate the extra earning power of the business
C) calculate the tangible net worth of the business
D) determine a reasonable annual salary that the owner could earn if similarly employed elsewhere

Question 19

Which of the following is a legal obligation filed against a piece of property?

A) sales escrow
B) lien
C) accounts escrow
D) bulk sales transfer

Question 20

Which of the following is the dollar value obtained when you subtract the total value of the tangible assets from the purchase price?

A) tangible net worth
B) earnout value
C) goodwill
D) net worth value

Question 21

According to the author, if you are asked to put down a deposit, which one of the following is the best method of doing so?

A) write a personal cheque
B) pay cash and ask for a discount
C) deposit the money into an escrow account
D) ask for additional time to gather the funds

Question 22

For which of the following does a business broker normally work?

A) the buyer
B) a neutral third party
C) the seller
D) both the seller and the buyer

Question 23

Which of the following sources is LEAST helpful when investigating the inside workings of a business?

A) suppliers
B) local or regional authorities
C) employees
D) competitors

Question 24

What is the term for the purchase price of a business determined, in large part, by the what the business owns?

A) book value
B) asset-based valuation
C) adjusted book value
D) ability-to-pay valuation

Question 25

Which of the following types of valuation is NOT recommended for valuing a business?

A) ability-to-pay
B) earnout
C) earnings-assets
D) asset-based

Question 26

Which of the following is considered in the ability-to-pay valuation?

A) expected cash flow of the business and the salary of the new owner
B) ability to pay off a loan and the return on assets
C) the asset value of the business and the salary of the new owner
D) the adjusted book value and the ability of a business to pay off its debts

Question 27

Which of the following does the earnings-assets valuation approach NOT take into consideration?

A) tangible net worth
B) earnout
C) profit of the business
D) earning capacity of the owner

Question 28

On which of the following does the value of a business depend LEAST?

A) industry outlook
B) the nature of the business
C) the level of interest rates
D) the owner's reason for selling

Question 29

What is a noncompetition covenant?

A) a verbal agreement that you will not compete for the same target customer
B) a written agreement that you will not share the same suppliers
C) a written agreement in which the seller will not set up a competitive business nearby within a period of time
D) a mutually agreed upon fee to be paid to the buyer in the chance the seller will be opening a competitive business nearby

Question 30

Which of the following is the calculation for ROI?

A) hours spent × value of your time per hour
B) hours spent / value of your time per hour
C) hours spent ? value of your time per hour
D) hours spent + value of your time per hour

Question 31

Which of the following best describes Action Step 60?

A) Write a letter of inquiry.
B) Investigate a business from the outside.
C) Investigate the ill will.
D) Investigate a business from the inside.

Question 32

As described in the Chapter 13 case, what mistake did Ben and Sally Raymundo make?

A) they did not hire a lawyer
B) they believed what the seller said
C) they waited too long to buy the business
D) they used an escrow company

Question 33

Which valuation approach is used when both earning potential and asset value are taken into consideration?

A) earnings-assets
B) ability-to-pay
C) asset-based
D) adjusted book value

Question 34

Which of the following is a top recommendation from the author when making the decision to buy?

A) use the newspaper to find the best deal
B) find the "hungry seller"
C) go through a business broker
D) always go through bulk sales escrow

Question 35

According to the author, what is the most important area to concentrate on when negotiating?

A) ill will
B) goodwill
C) terms
D) price

Question 36

According to the textbook, the purchase of an existing business is always harder to finance than starting a new business from scratch.

Question 37

You are encouraged to explore businesses for sale whether you are serious about buying or not.

Question 38

When you are considering the purchase of a business, you should compare what your money could do if you invested it elsewhere.

Question 39

According to the textbook, many sellers are emotionally attached to their business and underestimate its worth.

Question 40

According to the textbook, the major reason for buying an ongoing business is the income stream.

Question 41

Seller-assisted financing is a possible option in the purchase of a business.

Question 42

A business broker is a lawyer who specializes in representing people who want to sell.

Question 43

According to the textbook, the classified ads are a good way to find the best business opportunities.

Question 44

An escrow company is a neutral third party (usually a lawyer) that holds deposits and deeds until all agreed-on conditions are met.

Question 45

According to the textbook, when a business is for sale, the selling terms may be more important than the selling price.

Question 46

Before you buy an existing business, it is advisable to examine income tax records from past years.

Question 47

The balance sheet will show the market value of equipment and fixtures.

Question 48

If you are thinking about buying a business, it is not a good idea to meet with your banker until you are ready to make a final offer.

Question 49

You have to be careful because accountants define goodwill as a tangible asset.

Question 50

Noncompetition covenants are illegal in Canada.

Question 51

The price of a business should be based on the return on your investment plus the value of your management time.

Question 52

You should buy a business based on its price-earnings ratio.

Question 53

According to the textbook, studying a business from the outside will tell you whether you should go inside and probe it more deeply.

Question 54

A lien is money held in escrow while you evaluate the business.

Question 55

According to the textbook, goodwill has no value and should never be considered as part of the purchase price of a business.

Question 56

A bulk sales escrow is an examination process intended to protect a buyer from unknown liabilities.

Question 57

Earnouts occur when the business is fully or partially purchased with its future earnings.

Question 58

According to the textbook, when determining the value of a business, it is important to calculate the value of the seller's time in managing the business.

Question 59

When purchasing a business, inventory and fixtures should be appraised at original cost.

Question 60

If you are selling a consulting business, you would likely use an asset-based valuation method to determine the business value.

Question 61

According to the textbook, before purchasing a business you should probe the depths of ill will.

Question 62

An escrow company is a neutral third party that holds deposits and deeds until all agreed-upon conditions are met.

Question 63

According to the textbook, if you are careful, you don't really need a lawyer when it comes time to purchase a business.

Question 64

The business inventory that you are purchasing should be physically counted and evaluated.

Question 65

Items carried in the normal course of doing business that are intended for sale are called inventory.

Question 66

A person who specializes in representing people who want to sell their businesses is called a _____________ _____________.

Question 67

A legal obligation filed against a piece of property is called a ______________.

Question 68

Things that your business owns that you can see and touch (e.g., real estate, equipment, and inventory) are called ___________ ___________.

Question 69

An examination process intended to protect buyers from unknown liabilities is known as a ____________ ___________ ____________.

Question 70

An agreement that will prevent the seller from setting up the same kind of business close to your business is called a ______________ _____________.

Question 71

A business valuation approach that takes into consideration both earning potential and asset value is a(n) _________________ __________________.

Question 72

The book value is the owner's equity, or total assets - total liabilities. The book value amended to reflect market values is the _____________ _____________ _____________.

Question 73

A neutral third party that holds deposits and deeds until all agreed-upon conditions are met is known as a(n) ______________ _________________.

Question 74

Define the term earnout.

Question 75

As a potential buyer, what should you do when considering the financial figures presented to you by the seller?

Question 76

Buyer, beware! List five reasons for selling a business that will favour the seller.

Question 77

When buying a business, what is the meaning of the term goodwill?

Question 78

Give an example of ill will.

Question 79

Explain the role of a business broker.

Question 80

In the text, 10 common red flags or statements were provided from a prospective seller that should make you very cautious. If you hear any of these statements, you should get ready to do a thorough investigation.
List three red flags.