Exam 7: Buying an Existing Business

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

Which of the following valuation methods does not consider the future income-earning potential of a business?

A family limited partnership allows entrepreneurs to transfer their business to their children,however,the entrepreneur will forfeit all control over the business from that point forward.

Which of the following statements concerning financing the purchase of an existing business is true?

A method of valuing a business that recognizes that a buyer is purchasing the future income (earning)potential is the earnings approach.

A method of valuing a business based on the value of the company's net worth is the:

Because so many business owners take money from their companies' sales without reporting it as income,a business buyer should expect to pay for undocumented,"phantom" profits when buying an existing business.

Goodwill is an intangible asset that the business buyer cannot depreciate or amortize for tax purposes.

Most small businesses have market values that exceed their book value.

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

An entrepreneur who is considering purchasing a business is analyzing a company's accounts receivable.The following table summarizes her findings. Age of Accounts Amount Probability of Collection 0 - 30 days $12,000 .96 31 - 60 days $ 4,000 .87 61 - 90 days $ 2,500 .71 91 - 120 days $ 1,400 .65 121 + days $ 800 .24 How much should this potential buyer be willing to pay for these accounts receivable?

The discounted future earnings approach to valuing an existing business involves estimating the company's net income for several years into the future and then discounting those future earnings back to their present value.

A new owner of an existing business can generally introduce change and innovation almost as easily as if the company were a new business because employees and customers expect change in business practice when there is a change in ownership.

Although selling the business outright is the cleanest exit path for an entrepreneur,it may have negative tax consequences,and it often excludes the option of "staying on" and exiting gradually.

The valuation approach that considers the value of goodwill is the:

Is Ms.Todd's asking price reasonable? How much should Lauren offer Ms.Todd at the beginning of the negotiation process?

Under the capitalized earnings approach to business valuation,firms with lower risk factors are more valuable than those with higher risk factors.

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.

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:

Owners who do not want to sell a business outright,but want to stay around for a while or surrender control gradually can use a restructuring strategy.