Question 1

A competent owner is a master of day-to-day operations of the business and can help a buyer to make a smooth transition into business ownership.

Accepted Answer

A competent owner who is knowledgeable about the day-to-day operations of the business can provide valuable guidance and support to a buyer during the transition period. This can include providing training, sharing key contacts and suppliers, and offering advice on how to maintain high levels of customer satisfaction. As such, having a competent owner involved in the sale of a business can help ensure a smoother and more successful transition for the new owner.

Question 2

Business evaluations based on balance sheet methods offer one key advantage: they consider the future earning potential of the business.

Accepted Answer

Business evaluations based on balance sheet methods focus on the current financial position of the company and do not take into account the future earning potential. This type of evaluation looks at assets, liabilities, and equity to determine the company's net worth. Future earning potential is usually analyzed through other methods such as income and cash flow analysis.

Question 3

The balance sheet technique of determining a business's value uses the company's net worth or owner's equity as the firm's value,but it oversimplifies the valuation process.

Accepted Answer

The balance sheet technique only considers the net worth or owner's equity and does not take into account other important factors such as future earning potential, market conditions, industry trends, and management capabilities. Therefore, it oversimplifies the valuation process and may not provide an accurate estimate of a business's true value.

Question 4

Goodwill is the difference between an established,successful business and one that has yet to prove itself.

Accepted Answer

Goodwill is the value of a business that is built over time and based on reputation, customer loyalty, brand recognition, and other intangible assets. A business with established goodwill has a positive reputation and is likely to have a loyal customer base, whereas a new business has yet to establish this reputation and customer base. Therefore, goodwill is a key factor that sets apart an established, successful business from one that has yet to prove itself.

Question 5

Loan contracts sometimes prohibit assignments with due-on-sale clauses.

Accepted Answer

Loan contracts may include a due-on-sale clause that prohibits the transfer of the loan to another party through an assignment or sale. This clause allows the lender to accelerate the loan and demand repayment in full if the property securing the loan is sold or transferred, which protects the lender's interests and prevents unauthorized transfers of the loan.

Question 6

If the corporation,rather than the business seller,signs a restrictive covenant,the seller may not be bound by its terms.

Accepted Answer

If the corporation signs a restrictive covenant, it is the corporation that is bound by the terms of the covenant, not the individual seller. The seller may still be bound by a separate restrictive covenant that they signed personally.

Question 7

A business owner who buys a company whose financial statements show a pattern of short-term profitability is guaranteed of getting a good deal.

Accepted Answer

Short-term profitability does not necessarily indicate long-term success or sustainability. The business owner needs to conduct a thorough analysis of the company's financial statements and performance history before making any purchase decisions.

Question 8

The adjusted balance sheet method of valuing a business changes the book value of net worth to reflect actual market value.

Accepted Answer

The adjusted balance sheet method takes into consideration the market value of assets and liabilities, and therefore adjusts the book value of net worth to reflect a more accurate market value.

Question 9

In most business sales,the buyer bears the responsibility of determining whether or not the business is a good value.

Accepted Answer

In most business sales, it is the buyer's responsibility to conduct due diligence and determine whether the business is a good value. The seller's responsibility is to provide accurate and complete information to the buyer to assist in their decision-making process.

Question 10

Traditional lenders of capital often shy away from deals involving the purchase of an existing business.

Accepted Answer

Traditional lenders, such as banks, often perceive the purchase of an existing business as riskier than other types of loans, such as those for real estate or new equipment, due to uncertainties about the business's future performance and profitability.

Question 11

Any liens against a business must be satisfied by the current owner before the sale can be consummated.

Accepted Answer

Liens can be transferred to the new owner if agreed upon by both parties, or they can be satisfied by the seller before the sale. The specifics depend on the terms of the sale agreement.

Question 12

The entrepreneur who buys an existing business must recognize that accounts receivable rarely are worth their "face value."

Accepted Answer

When an entrepreneur buys an existing business, they must recognize that accounts receivable may not be worth their face value due to customers who may not pay or are late in paying. The receivables may need to be either discounted or written off after the sale.

Question 13

Ralph buys a software business from Waldo in Columbus,Ohio.As part of the deal,Waldo signs a covenant not to compete by opening another software business anywhere in Ohio for the rest of his life.Such a covenant would be enforceable.

Accepted Answer

Covenants not to compete must be reasonable in both time and geographic scope to be enforceable. A lifetime ban covering an entire state is generally considered too broad and unreasonable.

Question 14

Before purchasing an existing business,an entrepreneur should analyze closely both direct and indirect competitors.

Accepted Answer

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Question 15

If a banker requires the current loan on a business to be paid at the time of the sale to the new owner,the banker will require a due-on-sale clause in the agreement.

Accepted Answer

A due-on-sale clause allows the lender to demand payment of the loan balance in full when the property securing the loan is sold or transferred to a new owner, making it a common requirement for bank loans on businesses or properties.

Question 16

"Knocking on the doors" of businesses an entrepreneur would like to buy-although they are not advertised "for sale"-is a waste of time.

Accepted Answer

Some entrepreneurs have successfully acquired businesses by directly approaching owners even if they were not advertised for sale. However, it can be time-consuming and not always successful, so it may not be the most efficient way to find a business to buy.

Question 17

When an entrepreneur purchases an existing business,he or she essentially is purchasing its future profit potential.

Accepted Answer

When an entrepreneur purchases an existing business, they typically do so with the expectation that they will be able to generate future profits from the business. While they may pay a premium for the business based on its past performance, the ultimate goal is to leverage its existing customer base, assets, and brand equity to generate returns over the long term. However, it is important to note that the entrepreneur's ability to realize this profit potential will depend on a variety of factors, including market conditions, competitive pressures, and their own skills and resources.

Question 18

Most business buyers can expect to find detailed,accurate,and audited financial records in the companies they are looking at buying.

Accepted Answer

Many small to medium-sized businesses may not have detailed, accurate, and audited financial records readily available, as they might not adhere to the same stringent financial reporting standards as larger corporations.

Question 19

Neither the balance sheet method nor the adjusted balance sheet method of valuing a business considers the future earning power of the business.

Accepted Answer

Both the balance sheet method and the adjusted balance sheet method only consider the current assets and liabilities of a business and do not take into account the potential future earnings of the business. Other valuation methods, such as the income approach or market approach, consider the future earning potential of the business.

Question 20

The best method for valuing a business is to use established rules of thumb.

Accepted Answer

While rules of thumb can be helpful for estimating the value of a business, they should not be the sole method used for valuation. Other methods such as the income approach, market approach, or asset-based approach should also be considered and tailored to the specific business being valued.

Quiz 7: Buying an Existing Business