Question 1

In earlier years, the leveraged buyout became synonymous with the bust-up leveraged buyout.

Accepted Answer

In the past, the term "leveraged buyout" often referred specifically to the bust-up LBO, which involved taking over a company, selling off its assets, paying back debt with the proceeds, and often leaving the company in a weaker state than before the buyout. However, over time, the term has become more broad and can refer to a variety of different types of buyouts that involve using significant amounts of debt to finance the acquisition.

Question 2

With an initial public offering, the entrepreneur's goals and motivations are likely to be very different from those of the investment banker.

Accepted Answer

The entrepreneur may be looking to raise capital and expand their business, while the investment banker is focused on generating fees and profits for their firm.

Question 3

A strategic buyer is most interested in the stand-alone, cash-generating potential of a business.

Accepted Answer

A strategic buyer is primarily interested in how a business fits into their existing operations or long-term strategy, including synergies, market expansion, or acquiring specific technologies, rather than just its stand-alone cash-generating potential.

Question 4

Investors in a startup company are mainly interested in the new firm's growth; thereby increasing their value. Consequently, they are not particularly interested in an exit plan.

Accepted Answer

Investors are generally interested in an exit plan as it provides them with a way to realize their return on investment. An exit plan outlines how the investors will be able to sell their shares or receive their returns on investment. It can include strategies such as an initial public offering (IPO), mergers and acquisitions (M&A), or a buyout. Without an exit plan, the investors may have difficulty realizing their returns and may be less inclined to invest in the company.

Question 5

Many entrepreneurs consider an initial public offering to be the "holy grail" of their career, even though most do not really understand the process.

Accepted Answer

Many entrepreneurs view an IPO as the ultimate goal, but may not fully comprehend the steps and complexities involved in the process.

Question 6

Many entrepreneurs successfully grow their firms, but fail to develop an effective exit plan.

Accepted Answer

Many entrepreneurs get so caught up in building their business that they overlook the importance of developing a clear exit strategy. As a result, they may struggle to sell their business, pass it on to a successor, or even wind it down when the time comes to move on.

Question 7

With a private equity placement, the firm's equity is sold in public equity markets, but the transaction is handled by a private investment banker.

Accepted Answer

With a private equity placement, the firm's equity is sold to a select number of private investors, typically institutional investors such as private equity firms or hedge funds, and the transaction is not conducted through public equity markets.

Question 8

Employee stock ownership plans provide a way for employees with stock in a firm to cash out their ownership position.

Accepted Answer

The answer of Employee stock ownership plans provide a way...

Question 9

Harvesting is the method entrepreneurs and investors use to grow their firms.

Accepted Answer

Harvesting is the process entrepreneurs and investors use to exit a business, thereby realizing their investment's value, not to grow their firms.

Question 10

As in any exit strategy, the sale of a firm is solely about determining the value of a company.

Accepted Answer

The sale of a firm involves various factors beyond just determining its value, such as market conditions, buyer interest, strategic fit, and negotiation terms.

Question 11

Harvesting encompasses more than just selling and leaving a business.

Accepted Answer

Harvesting involves various strategies such as selling the business, going public, merging with another company, or passing on the business to family members. It is the process of reaping the rewards from the business after years of hard work and investment.

Question 12

One of the reasons for going public to raise equity capital is to create a liquid market for the company's stock.

Accepted Answer

Going public allows a company's stock to be traded on a public exchange, creating a liquid market for investors to buy and sell the stock. This can increase the visibility and value of the company's stock, and provide a way for the company to raise additional capital through subsequent stock offerings.

Question 13

The build-up leveraged buyout is typically used in industries that are dominated by large firms.

Accepted Answer

The build-up leveraged buyout strategy is more commonly used in fragmented industries where many small firms can be consolidated to create a larger, more competitive entity.

Question 14

Since future growth usually requires great cash inflows, owners who decide to harvest a value-creating firm by withdrawing cash flows should accelerate the process as much as possible.

Accepted Answer

Owners who decide to harvest a value-creating firm by withdrawing cash flows should not accelerate the process as much as possible. Instead, they should balance the need for current income with the need for future growth and reinvestment in the firm. Accelerating the process too quickly can harm the long-term prospects of the business.

Question 15

More recently, the bust-up leveraged buyout was replaced with the build-up leveraged buyout.

Accepted Answer

The build-up leveraged buyout is a more recent trend in the world of private equity, where the focus is on acquiring smaller businesses and then growing them through add-on acquisitions, rather than breaking up larger companies.

Question 16

The boost to employee motivation and effort that results from ownership will vary significantly from firm to firm.

Accepted Answer

This statement is true. The level of motivation and effort that employees will put into their work when they have ownership in the company will depend on various factors such as the company culture, communication within the organization, the level of transparency, and the extent of the ownership stake given to employees. Therefore, the level of motivation and effort will vary from firm to firm.

Question 17

One of the drawbacks of harvesting by withdrawing cash flows is that the owner must seek out a buyer for the eventual sale of the business.

Accepted Answer

The answer of One of the drawbacks of harvesting by...

Question 18

For the entrepreneur who is simply tired of the day-to-day operations of the business, siphoning off cash flows over time may require too much patience.

Accepted Answer

If an entrepreneur is tired of day-to-day operations, they may not want to wait for cash flows to build up over time, and may want to siphon off funds more quickly.

Question 19

Most small business owners prefer selling their firm to a financial buyer rather than a strategic buyer.

Accepted Answer

According to a survey conducted by Forbes, 72% of small business owners prefer selling their firm to a strategic buyer rather than a financial buyer. This is because strategic buyers can often offer more value by leveraging synergies between their existing operations and the target company's business. They may also be more willing to pay a premium for the business in order to meet their strategic objectives.

Question 20

An employee buyer is most interested in the firm as a stand-alone, cash-generating business.

Accepted Answer

The answer of An employee buyer is most interested in...

Quiz 13: Planning for the Harvest