Deck 10: Buying an Existing Business

Question 1

of the advantages of buying a business, as opposed to that of starting one, is there is more room for creativity.

Answer 1

False

Question 2

possibility of buying a business at a bargain price is dependent, in part, on the owner's reasons for selling.

Answer 2

True

Question 3

best way to determine the value of a business is to base it on what similar businesses have sold for.

Answer 3

False

Question 4

Because entrepreneurs are self-reliant and energetic, they are usually the best ones to sell the business.

Question 5

size of the market is one of the environmental problems a company can have.

Question 6

of the results of new owners taking over a company is that the company's history of labor-management relations is erased by the change in ownership.

Question 7

Businesses that are one-man shows often provide special difficulties for anyone who buys them.

Question 8

businesses that are for sale are handled by business brokers.

Question 9

a business is listed in the classified ads of a newspaper or is in the hands of a broker, the owner has no interest in selling it.

Question 10

The seller of a business sets the price; the market determines its value.

Question 11

The book value of a firm's assets is what you would get for them if you were to sell them.

Question 12

The two basic considerations in determining the value of a business are goodwill and owner equity.

Question 13

Intangible assets are the legal obligations of a firm to its creditors.

Question 14

Perhaps the most important source of power during negotiations of any kind is information.

Question 15

Among the advantages of buying an existing business, over the option of starting one, are the following:

A) there is less risk.
B) less time and effort are required.
C) the possibility of buying at a bargain price.
D) all of the above.
E) none of the above.

Question 16

One of the reasons why starting a new business can be risky is

A) the stability of its work force.
B) the perseverance of its founder.
C) rising trends in employment levels.
D) all of the above.
E) none of the above.

Question 17

Less time and effort are required to take over an existing business than to start a new one because

A) new businesses usually require intensive efforts to build a customer base.
B) operations of a new business have to be worked out.
C) employees often must be hired.
D) suppliers typically must be located.
E) all of the above.

Question 18

Part of the risk associated with the start-up of a new business is that

A) the entrepreneur can't be sure she has taken care of all of the elements that must mesh for the business to succeed.
B) there is certain to be more competition than if an existing business is purchased.
C) the role of the owner is not well-defined.
D) none of the above.

Question 19

Part of the prospective buyer's task in preparing for negotiations to buy a business includes talking with

A) competitors.
B) customers.
C) suppliers.
D) employees of the business.
E) all of the above.

Question 20

The I know what it cost me approach to the determination of the selling price of a business

A) often leads to an inflated estimate of the value of the business.
B) includes the personal sacrifices made by the owner.
C) is based on the way in which the owner reflects back on his or her experience.
D) all of the above.
E) none of the above.

Question 21

The possibility of buying a business at a bargain price depends on

A) the owner's reasons for selling.
B) the owner's financial sophistication.
C) the way in which the sale is handled.
D) all of the above.
E) none of the above

Question 22

In negotiating with an owner for the purchase of his or her business you should

A) believe whatever you are told.
B) listen to what the owner says but verify the information later and dig deeper.
C) assume that all you are going to get from the owner is lies.
D) none of the above.

Question 23

If the owner of a business decides what the selling price will be, that price

A) may be too high or may be too low because the owner may not be aware of its real value.
B) should be right because who would know better than the owner what the business is really worth.
C) will be too high because the owner is bound to charge the highest price possible.
D) none of the above.

Question 24

Owners of small businesses use various approaches to determine how much to ask for the business; among these approaches are the following:

A) the I know what it cost me approach.
B) the I know what I have to take out of here approach.
C) the approach that is based on the price commanded by similar firms.
D) all of the above.

Question 25

Buying a business from its founder

A) can be a difficult experience when he or she has a sizeable emotional investment in it.
B) almost always goes smoothly because the founder is glad to get out.
C) usually is easy because the founder has probably done it before.
D) none of the above.

Question 26

Buying a business from the family of a deceased founder

A) is especially difficult because of the grief factor.
B) provides excellent tax savings opportunities.
C) is often made easier because the family wants to sell it quickly.
D) none of the above.

Question 27

The way in which the sale is made

A) has no bearing on price.
B) is determined by state legal requirements.
C) does not vary from entrepreneur to entrepreneur.
D) is specified by ancient custom.
E) none of the above

Question 28

When it comes time to sell a business the owner

A) often does so personally because that is in keeping with the self-reliance typical of entrepreneurs.
B) almost never does so personally because entrepreneurs know turning to someone else is the best way to do it.
C) are precluded by law from doing so.
D) first usually makes an offer to suppliers.
E) none of the above.

Question 29

Intermediaries are often used in selling a business; they are

A) also called brokers.
B) agents who arrange the sale.
C) able to provide the business owner with important advantages.
D) all of the above.
E) none of the above.

Question 30

Among the advantages of using a broker to sell a business are the following:

A) elimination of tax liabilities.
B) elimination of sale-gain reporting requirements.
C) establishment of a corporate liability shield.
D) none of the above.

Question 31

The independence of spirit and action so characteristic of many entrepreneurs

A) can betray the entrepreneur when it comes time to sell the business.
B) is particularly troublesome when a business is started.
C) is quite useful when it comes time to sell the business.
D) has been proven to be a myth.
E) none of the above.

Question 32

Some businesses that are on the market suffer a limitation due to

A) the environment.
B) internal problems.
C) departure of the current owner.
D) all of the above.

Question 33

A business' environmental problems might include:

A) a market that is too small.
B) an inappropriate legal structure.
C) a history of labor-management problems.
D) all of the above.
E) none of the above.

Question 34

A business' internal problems

A) are unique to that business.
B) could include a poor corporate image.
C) can be very troublesome for new owners.
D) all of the above.
E) none of the above.

Question 35

One-man shows are firms closely linked to the current owner; these businesses

A) provide excellent prospects for purchase.
B) are closely regulated by the Small Business Administration.
C) are found primarily in manufacturing.
D) all of the above.
E) none of the above.

Question 36

Businesses that are on the market can be found

A) in The Wall Street Journal.
B) in the classified ads of local newspapers.
C) business broker listings.
D) all of the above.
E) none of the above.

Question 37

The reasons for selling a business

A) may include the fact that it is struggling.
B) are of little or no relevance to the buyer.
C) have shown a dramatic shift over the years since the end of World War I.
D) none of the above.

Question 38

The indirect approach to locating a business, for possible purchase, that is not on the market

A) includes contacting lawyers, bankers, accountants, etc.
B) is intended to uncover the names of prospects.
C) does not include the use of brokers.
D) all of the above.
E) none of the above.

Question 39

The direct approach to locating a business that is not on the market

A) puts the prospective buyer in contact with the business owner without the use of an intermediary.
B) is outlawed in many southern states.
C) is based on the philosophy of fishing around where you know nothing about the business but will learn later.
D) none of the above.

Question 40

If a business being considered for purchase is experiencing slumping sales

A) it could be in the down part of an industry cycle.
B) it could be that the industry is undergoing a long-term downward movement.
C) it could be caused by an internal problem in the firm.
D) all of the above.

Question 41

The value of a business

A) is determined when the owner first sets the price.
B) is determined when the buyer and seller agree on a price.
C) is the same thing as the asking price.
D) is never the same thing as the asking price.
E) none of the above.

Question 42

Which of the following is an approach to determining the value of a firm's assets?

A) Replacement value
B) Future earnings
C) The straight-line system
D) Discounted expenses flow
E) All of the above

Question 43

The book value of a firm's assets

A) is one of four approaches to asset evaluation.
B) reflects the original cost of the assets minus depreciation.
C) seldom matches actual value.
D) all of the above.
E) none of the above.

Question 44

The two basic considerations that should be included in determining the price of a business include

A) the value of the business' assets and its future earnings.
B) book value and liquidation value.
C) taxing levels and start-up costs.
D) entry costs and departure proceeds.
E) none of the above.

Question 45

The liquidation value approach to determining the value of assets is

A) highly conservative in that it minimizes the costs to the buyer should failure occur.
B) based on what would be realized if assets had to be sold.
C) the best approach only if the concern about possible financial loss is so strong that even a little risk is unacceptable.
D) all of the above.
E) none of the above.

Question 46

The various ways of computing the value of a company's assets

A) show remarkable consistency.
B) have their respective origins in different industries.
C) must be included in official sales documents.
D) all of the above.
E) none of the above.

Question 47

The item goodwill

A) reflects a company's reputation in the marketplace.
B) is an intangible asset.
C) is reflected on the company's balance sheet.
D) all of the above.
E) none of the above.

Question 48

When someone buys a business he or she gets

A) the tangible assets.
B) the liabilities.
C) the intangible assets.
D) all of the above.
E) none of the above.

Question 49

Which of the following is not included when someone buys a business?

A) The tangible assets
B) The liabilities
C) The intangible assets
D) All of the above
E) None of the above

Question 50

All things considered, the most useful figure in the determination of the value of assets during seller-buyer negotiations is

A) the random selection point.
B) the random walk determinant.
C) the invariate range.
D) the bargainer range.
E) none of the above.

Question 51

The process of discounting future cash flows

A) is based on the fact that money to be collected in the future is worth less than money now held.
B) includes interest rates as a factor.
C) includes the year in which payment is to be received as a factor.
D) all of the above.
E) none of the above.

Question 52

The seller's dilemma is that

A) she does not know the value of her business but must nonetheless set the price.
B) he does not know who the real prospects for selling the business are.
C) she must have a use for the proceeds of the sale before the sale is made.
D) none of the above.

Question 53

The degree of satisfaction experienced by the buyer and seller

A) depends solely on price.
B) is inversely related, i.e., as the satisfaction of one individual increases, the satisfaction of the other must decrease.
C) is affected by the process used during negotiations.
D) none of the above.

Question 54

The following are sources of power of the parties involved in negotiations:

A) information.
B) time.
C) alternatives.
D) all of the above.
E) none of the above.

Question 55

Which of the following is not a source of power of the parties in negotiations?

A) Information
B) Time
C) Alternatives
D) All of the above