Question 1

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 about 89% of all businesses in the U.S.

Question 2

All family owned businesses are small.

Accepted Answer

While some family owned businesses are small, there are many that are large corporations such as Walmart, Ford, and Samsung which are family owned businesses.

Question 3

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 4

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 other common stock but has restrictions on its sale for a period of time.

Question 5

Very few closely held businesses are family owned.

Accepted Answer

It is actually true that very few closely held businesses are family owned. While some closely held businesses may be family-owned or run by a small group of individuals, many are owned by private equity firms or other investors.

Question 6

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 7

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

Adjusting the seller's earnings helps to provide a more accurate estimate of the current year's operating income or cash flow in the base year. This is important for the buyer to make informed decisions about the value of the business being purchased.

Question 8

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. According to data from the US Census Bureau, firms with 99 or fewer employees make up 98% of all firms with employees. Therefore, the M&A market is likely to be concentrated among these smaller firms.

Question 9

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

Family influence is often exerted through senior management positions, board seats, and super-voting stock in family-owned firms.

Question 10

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

Accepted Answer

Valuation of privately held businesses often requires adjusting the discount or capitalization rate due to factors such as lack of liquidity, control, and marketability compared to publicly traded companies.

Question 11

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 may use a accounting method called "deferred revenue" or "unearned revenue" to book the full value of multiyear contracts in the first year of the contract. This can inflate revenue in the short term but may lead to lower revenue in the future years of the contract.

Question 12

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

Accepted Answer

A private corporation does not sell its stocks publicly, and therefore does not require registration with state or federal authorities.

Question 13

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 14

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 15

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

Family-owned firms with non-family management are often well-managed due to the close monitoring of family shareholders with significant equity stakes.

Question 16

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 is a true statement.

Question 17

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 usage levels of key inputs required to produce the product or service, the buyer can estimate the revenue generated during the specific accounting period and reconstruct revenue.

Question 18

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 19

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 such as customer lists, intellectual property, licenses, distributorships agreements, leases, regulatory approvals, and employment contracts can contribute to a company's overall value.

Question 20

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 are subjective in nature and can vary depending on the appraiser's judgment. Fair market value is based solely on market conditions and may be considered more objective.

Quiz 10: Analysis and Valuation