Question 1

Mitchell Schlimer, founder of the Let's Talk Business Network, a support community for entrepreneurs, says that, initially, about ________ percent of small business owners who sell their companies to larger businesses remain with the acquiring company.

Accepted Answer

The answer of Mitchell Schlimer, founder of the Let's Talk...

Question 2

The process of investigating the details of a company that is for sale to determine the strengths, weaknesses, opportunities and threats facing it is known as the:

Accepted Answer

The process of investigating the details of a company that is for sale to determine the strengths, weaknesses, opportunities and threats facing it is known as the due diligence process. This involves an in-depth analysis of the company's financial performance, assets, liabilities, contracts, legal issues, and other relevant information. The purpose of due diligence is to provide the potential buyer with a comprehensive understanding of the business and its current status, so they can make an informed decision about whether or not to proceed with the acquisition.

Question 3

When buying a business, an entrepreneur can usually purchase equipment and fixtures at prices well below their book value.

Accepted Answer

When buying a business, the entrepreneur can negotiate the purchase price of equipment and fixtures, which is often lower than their book value. This can be beneficial for the new owner, as they can acquire necessary assets at a lower cost.

Question 4

With an existing business, the new owner can depend on employees to help him make money while he is learning the business.

Accepted Answer

When taking over an existing business, there are usually employees who already know the day-to-day operations and can continue to generate revenue while the new owner learns the ropes.

Question 5

You are considering purchasing Babcock Office Supply. You estimate that the company's earnings next year will be $67,400. You have found three similar companies whose stock is publicly traded. Their P/E ratios are 6.8, 7.4, and 7.1. Using the market approach, you estimate Babcock Office Supply to be worth:

Accepted Answer

The estimated value of Babcock Office Supply is calculated by taking the average P/E ratio of the similar companies and multiplying it by the estimated earnings. The average P/E ratio is (6.8 + 7.4 + 7.1) / 3 = 7.1. Therefore, the estimated value is 7.1 * $67,400 = $478,540.

Question 6

An ESOP:

Accepted Answer

An ESOP (Employee Stock Ownership Plan) allows owners to transfer ownership to employees, is most beneficial in profitable companies, and is typically more advantageous for companies with more than 15-20 employees.

Question 7

The ________ approach to valuing a business uses the price-earnings ratios of similar businesses to establish the value of a company.

Accepted Answer

The market approach to valuing a business uses market data, such as price-earnings ratios of similar businesses, to establish the value of a company. This is based on the idea that a company's value is determined by what the market is willing to pay for similar companies. The other options (balance sheet, capitalized earnings, discounted future earnings) are different methods of valuation that do not rely on market data.

Question 8

For a new owner of an existing business, physical facilities and equipment costs are very similar to what would have been spent on a startup with all new facilities and equipment.

Accepted Answer

For a new owner of an existing business, the costs for physical facilities and equipment can be significantly lower than starting from scratch, as they are often included in the purchase price of the business, and there is no need to buy everything new.

Question 9

Which of the following strategies would not be suitable for an entrepreneur who wants to surrender control of the company gradually?

Accepted Answer

Straight business sale means selling the entire business at once, which would not be suitable for an entrepreneur who wants to surrender control gradually. The other options allow for a gradual transfer of control. A family limited partnership involves transferring ownership to family members while retaining control, restructuring allows for the reorganization of the business structure to facilitate the transfer of control, and a two-step sale involves selling a portion of the business initially and gradually transferring the remaining equity.

Question 10

The due diligence process in analyzing and evaluating an existing business can be just as time consuming as the development of a comprehensive business plan for a start-up.

Accepted Answer

Due diligence involves thorough research and analysis of a company's financial and operational performance, legal obligations, market position, and other factors, which can be time consuming and detailed. This process is necessary to assess the risks and potential benefits of investing in or acquiring an existing business. Similarly, creating a comprehensive business plan for a start-up also requires significant research and analysis. Both processes can take considerable time and effort to complete.

Question 11

The ________ approach to valuing a business assumes that a dollar earned in the future is worth less than that same dollar is today.

Accepted Answer

The discounted future earnings approach is based on the time value of money, which assumes that a dollar earned in the future is worth less than a dollar earned today due to inflation and the potential for investment opportunities. This approach discounts projected future earnings back to their present value to determine the current value of the business.

Question 12

Which of the following valuation techniques is best suited for determining the value of service businesses?

Accepted Answer

The discounted future earnings approach is best suited for determining the value of service businesses as it takes into account the expected future cash flows generated by the business. Service businesses typically rely heavily on intangible assets such as customer relationships, brand recognition, and reputation, which can be difficult to value using traditional balance sheet techniques. The discounted future earnings approach allows for a more comprehensive analysis of the value drivers for service businesses.

Question 13

A company's P/E ratio is:

Accepted Answer

The P/E (price-to-earnings) ratio is the market value per share divided by the earnings per share (EPS) of a company. It is a valuation ratio used to determine the relative value of a company's shares in the marketplace. EPS is the amount of earnings per share of common stock outstanding, and the market value per share is the current market price of one share of common stock. Therefore, choice A is the correct definition of a company's P/E ratio.

Question 14

Which of the following is a disadvantage of the market approach to valuing a business?

Accepted Answer

The market approach to valuing a business has disadvantages related to finding comparable companies with representative earnings estimates, as well as the necessary comparison between publicly traded and privately owned companies. Therefore, D is the correct answer.

Question 15

This type of business sale is best for those entrepreneurs who want to step down and turn over the control of the company to the new buyer as soon as possible.

Accepted Answer

A straight business sale allows the current owner to step down and transfer ownership and control to the new buyer immediately. This is a good option for those who want to exit the business completely and do not wish to be involved in the operations any longer. The other options, such as earn-out, sale of controlling interest, or ESOP, may involve a prolonged transition period or require the current owner to remain involved in the business in some capacity.

Question 16

Which of the following is a drawback of the market approach of evaluation?

Accepted Answer

The answer of Which of the following is a drawback...

Question 17

________ gives owners the security of a sales contract but permits them to stay at the "helm" for several years.

Accepted Answer

The answer of ________ gives owners the security of a...

Question 18

To avoid a stalled deal, a buyer should:

Accepted Answer

Going into a negotiation with a ranked list of objectives helps the buyer to prioritize what is most important and what they are willing to compromise on. This allows for a more productive negotiation and can help to avoid a stalled deal. Choices A, B, and D advocate for inflexible, unyielding negotiation tactics, which can often lead to a stalemate.

Question 19

Some business brokers differentiate between the types of buyers: ________ buyers see buying a business as a way to generate income and ________ buyers view the purchase as part of a larger picture to offer a long-term advantage.

Accepted Answer

Financial buyers focus on income generation, while strategic buyers look for long-term advantages.

Question 20

A(n) ________ allows owners to "cash out" by selling their companies to their employees as gradually or as quickly as they choose.

Accepted Answer

An Employee Stock Ownership Plan (ESOP) allows business owners to sell some or all of their company to their employees through a trust fund. This enables owners to gradually sell their shares to employees over time or sell the entire company at once.

Quiz 7: Buying an Existing Business