Deck 6: Taking Over an Existing Business

Question 1

Industry-wide ______ ratios are calculated by most trade associations, many commercial banks, and accounting firms.

A) asset
B) expense
C) quality
D) stock

Answer 1

B

Question 2

A business that brings sellers of their businesses together with potential buyers is known as ______.

A) a real estate broker
B) the Small Business Administration (SBA)
C) a business broker
D) the FTC

Answer 2

C

Question 3

Benjamin has recently received a large estate settlement, and he is eager to use the money toward the purchase of a successful business that is already in operation. Which of the following should be discouraged as a source for finding businesses for sale?

A) friends
B) business owners themselves
C) real estate brokers
D) phonebook

Answer 3

D

Question 4

Industry averages for expense ratios comparing expenses to ______ exist for every size and type of business.

A) profits
B) assets
C) liabilities
D) sales

Question 5

Tabitha is considering the purchase of a seemingly successful retail establishment, but first she would like to gain an understanding of why the business is being sold. With whom should she speak?

A) the current owner only
B) the current owner and customers only
C) customers and suppliers only
D) the current owner, customers, and suppliers

Question 6

What of these is used to indicate whether sales volume is increasing or decreasing?

A) financial records
B) independent audit
C) expense ratio
D) working capital statement

Question 7

The financial statements can provide access to ______, a very important piece of information for a prospective buyer to use in determining net profit.

A) sales volume
B) net assets
C) gross assets
D) accounts payable

Question 8

To determine the financial condition of an existing business, it is necessary to compare ______ with ______ to identify where costs can be reduced or more money is needed.

A) operating ratios; fiscal averages
B) operating ratios; industry averages
C) expense ratios; fiscal averages
D) expense ratios; industry averages

Question 9

Within his profession, Alex Wilson serves as an intermediary that brings sellers of businesses together with potential buyers. Alex can best be described as a/an ______.

A) real estate manager
B) financial broker
C) management broker
D) business broker

Question 10

When analyzing financial statements, remember that profits can be increased and expenses can be decreased to make the records look better ______.

A) in the short run
B) in the long run
C) for tax purposes
D) for bank audits

Question 11

Buying an existing business looks appealing to the potential business owner for which of the following reasons?

A) The existing firm is already functioning.
B) The existing firm will always make a profit.
C) The existing firm will have the best employees.
D) The existing firm's owner will always provide financing.

Question 12

Many good business opportunities are never formally advertised. Instead, that information is found through which of the following?

A) the local banker
B) the local college
C) word of mouth
D) the Small Business Administration (SBA)

Question 13

An advantage in purchasing an existing business is which of the following?

A) Image is difficult to change.
B) There is an established customer base at the present location.
C) Employees may be loyal only to previous management.
D) The business location is unfamiliar.

Question 14

According to the text, there are ______ thousands of small businesses for sale at any given time.

A) tens of
B) hundreds of
C) thousands of
D) a few

Question 15

A list of liabilities of an existing business would include ______.

A) a list of accounts receivable
B) an inventory of products and materials
C) liens by creditors against any assets
D) a list of accounts payable

Question 16

Before any serious discussion of purchasing a business occurs, a/an ______ should be conducted.

A) financial ratio analysis
B) income statement analysis
C) independent audit
D) IRS review

Question 17

To ensure that all back taxes have been paid, a potential buyer should inspect ______.

A) unaudited financial documents
B) income tax returns
C) the seller's books
D) loan agreements

Question 18

Financial information can be sensitive information. In order to allay the fears of the seller, a potential buyer could ______.

A) not ask to see financial information
B) only show the information to an accountant
C) only show the information to a banker
D) write a letter of confidentiality

Question 19

Family, friends, the newspaper, the Small Business Administration (SBA), a local banker, and real estate brokers may all have information on ______.

A) possible sources of funding
B) possible businesses for sale
C) possible businesses soon to be terminated
D) possible venture capitalists

Question 20

A disadvantage to buying an existing business is which of the following?

A) Image is difficult to change.
B) Customers are familiar with the location.
C) The employees are experienced.
D) Inventory and equipment is in place.

Question 21

To effectively use operating ratios, a prospective buyer should ______.

A) compare them to industry standards
B) use them to identify problems that exist and make changes
C) use them as a basis for valuing the business
D) compare them to the closest competitor

Question 22

A method of determining the value of a business based on the worth of its assets is called ______.

A) balance sheet method of business valuation
B) asset method of business valuation
C) income statement method of valuation
D) cash-flow method of valuation

Question 23

Assets that a business owns that can be seen and examined are known as ______.

A) intangible assets
B) tangible assets
C) long-term equity
D) accounts payable

Question 24

Samantha was in the final stages of selling her existing business, but she backed out of the deal at the last minute because the buyer asked her to sign a contract stating that she would not enter into a similar business within the state for at least 15 years. This is an example of ______.

A) a reasonable intellectual property contract
B) an unreasonable intellectual property contract
C) a reasonable noncompete clause
D) an unreasonable noncompete clause

Question 25

Of all the tangible assets of a business, ______ and ______ should be examined most closely because they may be worth less than the seller is asking.

A) inventories; equipment
B) receivables; inventory
C) equipment; receivables
D) inventories; receivables

Question 26

Which of the following by itself could be a reason a business owner wants to sell a business?

A) inventory that is fresh and balanced
B) accounts receivable that are 60 days old or older
C) the outlived usefulness of equipment
D) accounts receivable that are 30 days old or older

Question 27

Aging accounts receivable refers to the process of ______.

A) determining their present value
B) determining their effect on sales
C) determining how many are still collectible and discounting them accordingly
D) determining future customer lists

Question 28

Along with purchasing a successful ice cream shop, Wilma acquired the building, as well as ice cream making equipment and enough inventories to operate for a month. These are best known as what type of assets?

A) short-term assets
B) tangible assets
C) long-term assets
D) intangible assets

Question 29

A provision that restricts the seller from entering the same type of business within a specified area for a certain amount of time is known as ______.

A) due disclosure
B) a good cause clause
C) a noncompetitive clause
D) just disclosure

Question 30

Rob is selling a business with machinery that has been protected from unauthorized use or infringement for the next three years. What type of intangible asset does this involve?

A) goodwill
B) trademark
C) patent right
D) copyright

Question 31

Assets that have value to a business but are not visible are known as ______.

A) intangible assets
B) tangible assets
C) long-term assets
D) current assets

Question 32

The intangible asset that allows a business to earn a higher return than a comparable business might generate with the same tangible assets is known as ______.

A) intangible assets
B) tangible assets
C) preferred merchandise lines
D) goodwill

Question 33

Expense ratios are useful because they are ______.

A) standards or guides
B) absolute measures of profitability
C) significant in the number that is computed
D) error free

Question 34

Few businesses that are for sale have a high amount of ______ value.

A) current asset
B) long-term asset
C) goodwill
D) equipment

Question 35

Intellectual property is a valuable ______.

A) intangible asset
B) tangible asset
C) goodwill asset
D) current asset

Question 36

Patents, copyrights, and trademarks protect against unauthorized use or infringements for which of the following time periods?

A) indefinitely
B) for an unknown time period
C) five to seven years
D) for a definite time and usage period

Question 37

Trade names, customer lists, and goodwill are examples of which kinds of assets?

A) intangible assets
B) tangible assets
C) only current assets
D) only long-term assets

Question 38

The prospective buyer should determine a price for the business by adding the value of tangible and intangible assets with the ______ potential.

A) sales
B) expenses
C) income
D) profit

Question 39

When evaluating the worth of the inventory for purchasing purposes, the primary concern should be ______.

A) whether enough inventory is currently stocked
B) good supplier relationships
C) no "dead stock" that is listed at its original value
D) fresh inventory

Question 40

Inventory, equipment, and building are examples of what kinds of assets?

A) intangible assets
B) tangible assets
C) only current assets
D) only long-term assets

Question 41

The difference between the purchase price of a company and the net value of the tangible assets is called ______.

A) asset value
B) profit
C) goodwill
D) liquidation value

Question 42

When the buyer and the seller have agreed on the terms of the sale, the closing can be handled by ______.

A) an accountant
B) the buyer and seller themselves
C) escrow settlement
D) a nonpartial third party

Question 43

______ is a current value for a company's long-term future cash flows.

A) Future value
B) Dead value
C) Discount value
D) Terminal value

Question 44

The worth of tangible assets is determined using which of the following methods?

A) balance sheet method of business valuation
B) asset method of business valuation
C) income statement method of valuation
D) cash-flow method of valuation

Question 45

A settlement attorney during a closing represents ______.

A) the buyer
B) the seller
C) the buyer and the seller
D) neither--the lawyer is a neutral third party

Question 46

Using installment payments to finance a new business ensures that the business is paid for through ______.

A) a loan
B) sales
C) earnings
D) the valuation of tangible assets

Question 47

Which of the following is a guideline that should be followed in a family business?

A) to be hired, family members must meet more stringent criteria than nonfamily members
B) family members should be supervised by older family members whenever possible
C) family members should stay in entry-level positions indefinitely
D) family members must meet the same standards as nonfamily members in performance reviews

Question 48

Goodwill can be seen as compensation to the seller for which of the following?

A) beginner's mistakes that the new owner will not have to make
B) tangible assets
C) sales potential
D) customer lists

Question 49

The most realistic approach for the buyer in determining the value of tangible assets is through ______.

A) book value
B) replacement value
C) liquidation value
D) balance sheet valuation

Question 50

A unique factor in a family business that makes it different from all other businesses is ______.

A) the profit margin
B) the asset ownership
C) the sales potential
D) the intricate succession planning needed

Question 51

The capitalization rate when figuring goodwill should be a figure assigned to show ______.

A) risk and expected growth rate of future earnings
B) risk and profit minus taxes
C) expected growth rate and profit
D) expected growth rate and the value of tangible assets

Question 52

Which of the following types of business are characterized by two or more members of the same family who control or are directly involved in and own a majority of the business?

A) sole proprietorships
B) partnerships
C) corporations
D) family-owned businesses

Question 53

The longer it takes someone to pay their account receivable, the less likely they are to ______.

A) ever pay the account
B) make repeat purchases
C) make a profit
D) become a bad debt expense

Question 54

Scenario 6-1. Jerry Jones is a young entrepreneur straight out of college. After taking a course in Small Business Management, Jerry has decided that he would like to purchase an existing business and hopefully avoid some beginner's errors. He spends some time looking and finally finds a business that appeals to him, a small sporting goods store. Jerry loves to fish and hunt. The store currently has a huge inventory in place. Jerry decides to pursue purchasing the business further.

-In Scenario 6-1, since the sporting goods store has a huge inventory, Jerry needs to be familiar with which of the following codes?

A) code of ethics
B) code of inventory purchasing
C) Uniform Commercial Code
D) inventory commercial code

Question 55

The most practical method of paying for a business is ______.

A) paying a lump-sum
B) paying in installments
C) a loan from the bank
D) a loan from the Small Business Administration (SBA)

Question 56

A method of determining the value of a business based on its profit potential is known as a/an ______.

A) balance sheet method of business valuation
B) asset method of business valuation
C) income statement method of valuation
D) cash-flow method of valuation

Question 57

To protect yourself from unknown tax liabilities when buying the stock of a business, it makes sense to place part of the purchase price in an escrow account that is earmarked to pay for any corporate liabilities. This is referred to as ______.

A) holdback money
B) thinning the assets
C) escrow settlement
D) goodwill

Question 58

Stan owns a body shop, and his cousin recently came to him desperate to get a job. Stan, who is not currently looking to hire anyone, is concerned about the effect of a new hire on profits. This concern stems from which family business perspective?

A) family
B) ownership
C) marketing
D) external

Question 59

Scenario 6-1. Jerry Jones is a young entrepreneur straight out of college. After taking a course in Small Business Management, Jerry has decided that he would like to purchase an existing business and hopefully avoid some beginner's errors. He spends some time looking and finally finds a business that appeals to him, a small sporting goods store. Jerry loves to fish and hunt. The store currently has a huge inventory in place. Jerry decides to pursue purchasing the business further.

-In Scenario 6-1, which of the following would have been a good source of information on current businesses that are for sale that is often overlooked?

A) newspapers
B) place of current employment
C) word of mouth through family, friends, and current business acquaintances
D) business brokers

Question 60

In purchasing an existing business, Alice has decided to lease the equipment and fixtures from the original owner rather than purchasing it outright to save money initially. This is an example of ______.

A) holdback money
B) thinning the assets
C) escrow settlement
D) goodwill

Question 61

Due diligence is the process of fact finding to determine the total condition of a business being considered for purchase.

Question 62

Industry averages exist comparing expenses to sales for every size and type of business.

Question 63

Having an established supplier relationship is an advantage of buying an existing business.

Question 64

When discussing the purchase of an existing business, it is not necessary to get verbal understandings in writing from the seller.

Question 65

Buying an existing business is becoming a more popular way to own a small business.

Question 66

If an existing business is purchased, the buyer may be potentially liable for past business contracts.

Question 67

A major advantage of purchasing an existing business is that the customers are familiar with the location.

Question 68

A key factor in business valuation is review of what other companies in the industry have sold for.

Question 69

Word-of-mouth information through friends and family may turn up business opportunities that do not appear through formal channels.

Question 70

Determining the price offered for a business should begin by adding the value of the tangible and intangible assets with the sales potential of the business.

Question 71

You should never ask the owners of a business where you are a customer whether they are interested in selling their business.

Question 72

There are not as many factors that could contribute to the sale of a business as there are reasons for business liquidations.

Question 73

When the owner of a business decides to sell, the reasons the owner tells prospective buyers may be somewhat different than the actual reasons.

Question 74

The fact that a business's image is difficult to change is a distinct advantage when taking over an existing business.

Question 75

When analyzing the financial statements of the business, it is important to rely most heavily on the most recent year of operation.

Question 76

Asking the owner of a business where you have been a regular customer whether the business is for sale may be one source of finding a potential new business.

Question 77

Existing businesses do not have to be scrutinized carefully to determine whether they are a worthwhile investment of time and money.

Question 78

Brokers take classes and pass examinations to become certified business intermediaries.

Question 79

Real estate brokers may be a good source of potential businesses for sale since their listings may include business real estate.

Question 80

It is important not to let emotions cloud judgment when making business purchase decisions.