Deck 15: Succession Planning and Strategies for Harvesting and Ending the Venture

Question 1

It is common for a buyer to purchase a business using notes based on future profits.

Answer 1

True

Question 2

A business,when it comes to selling,will be less valuable if it is on a narrow,well-defined segment.

Answer 2

False

Question 3

In establishing a price for a management buyout the entrepreneur should not include the goodwill value established from past revenue because it can't be quantified.

Answer 3

False

Question 4

About 50 percent of family firms successfully make the transition to the second generation.

Question 5

An ESOP is five to six year plan to sell a business to its employees.

Question 6

One advantage of an ESOP is that the company can obtain a tax benefit by deducting ESOP contributions.

Question 7

An employee stock option plan establishes a new legal entity.

Question 8

One key advantage of an ESOP is that it enhances employee motivation.

Question 9

Since 2010 the number of business filings for bankruptcy has steadily increased each year.

Question 10

ESOPs account for about 20% of the nation's 10 million employees.

Question 11

Presently there are about 11,500 ESOP companies in the United States.

Question 12

Passing the business to an employee ensures the new principal is familiar with the business and the market.

Question 13

The sale of the company to employees is an exit strategy.

Question 14

A "management buyout" is the same thing as an "ESOP."

Question 15

One advantage of an ESOP is that it is easy to establish.

Question 16

The majority of bankruptcies are mid-size businesses.

Question 17

About one third of all new start-ups fail in their first years.

Question 18

The Family Business Institute indicates that about 12 percent of successful ventures survive into the third generation of ownership.

Question 19

An effective succession plan should be communicated only to top management and not all employees.

Question 20

Only 60% of businesses have a succession plan in place.

Question 21

The best management style for a manager undertaking a business turnaround is a bunker mentality.

Question 22

It is best for the entrepreneur to have any litigation in existence transferred to the bankruptcy court.

Question 23

When business failure looks probable,the entrepreneur should seek outside advice.

Question 24

When a venture is in trouble and facing bankruptcy,the entrepreneur should first sit down with his or her spouse and explain what is happening.

Question 25

Which of the following is not an exit strategy?

A)an IPO
B)a private sale of stock
C)liquidation
D)franchising

Question 26

Cash flow is one of the major causes for an entrepreneur to have to declare bankruptcy.

Question 27

If an entrepreneur recognizes the warning signs of bankruptcy early,he or she may be able to prevent it from occurring.

Question 28

Under Chapter 13,the key to enhancing the bankruptcy process is by stressing the significance of the creditors' support during the process.

Question 29

Chapter 7 is the most severe alternative in bankruptcy.

Question 30

The bankruptcy type that is most common is Chapter 7 bankruptcy.

Question 31

Around ____ of businesses make it to the third generation.

A)5%
B)12%
C)30%
D)60%

Question 32

Because it is so severe,Chapter 7 must always be voluntary.

Question 33

All bankruptcies are handled by the U.S.Supreme Court.

Question 34

Under Chapter 13,meeting with groups of creditors to amicably solve issues is usually a good idea.

Question 35

Chapter 11 bankruptcy allows a firm to reorganize and prepare strategies to improve future profits.

Question 36

The Bankruptcy Act of 1978 was designed to protect creditors from receiving nothing in bankruptcy.

Question 37

Bankruptcy can be used as a bargaining chip with creditors to allow the venture to voluntarily reorganize.

Question 38

Bankruptcy protects entrepreneurs from creditors and competitors.

Question 39

More than 50 percent of firms filing for Chapter 11 bankruptcy emerge from the process.

Question 40

Bankruptcy should be a last resort for the entrepreneur.

Question 41

Which of the following is not a purpose of the Bankruptcy Act of 1978?

A)ensure a fair distribution of assets to creditors.
B)protect debtors from unfair depletion of assets.
C)protect debtors from unfair demands by creditors.
D)protect creditors from undue delay of money.

Question 42

Chapter 11 is the type of bankruptcy that results in:

A)extended time payments.
B)liquidation.
C)reorganization.
D)turn around time.

Question 43

The most common method of harvesting a venture is through:

A)direct sale of the business.
B)an IPO.
C)liquidation.
D)employee stock ownership program.

Question 44

ESOPs account for ____ of the nation's 10 million employees.

A)15%
B)35%
C)40%
D)50%

Question 45

Which of the following is not an important part of a succession plan?

A)estimate the firm's value
B)evaluate potential successors based on how similar they are to you
C)provide a transition period so the successor can learn the business
D)set a date for completion of the transition and stick to it

Question 46

The majority of bankruptcies are:

A)corporate bankruptcies.
B)partnership bankruptcies.
C)S Corporation bankruptcies.
D)individual bankruptcies.

Question 47

Which methods of bankruptcy require the entrepreneur to come up with a payment plan?

A)Chapters 11 and 13
B)Chapters 7 and 11
C)Chapters 7 and 13
D)Chapters 7,11,and 13

Question 48

Currently ESOPs account for ____ of the private sector workforce.

A)5%
B)10%
C)15%
D)20%

Question 49

The most severe form of bankruptcy is:

A)Chapter 7.
B)Chapter 11.
C)Chapter 13.
D)prepackaged bankruptcy.

Question 50

A two to three year plan to sell a business to employees is:

A)an ESOP.
B)an acquisition.
C)succession.
D)the most popular method of exit.

Question 51

Exchanging stock or something else for existing debt under Chapter 11 bankruptcy is called:

A)amendment.
B)extension.
C)composition settlement.
D)substitution.

Question 52

The Family Business Institute indicates that about ___ percent of successful ventures make it to the second generation of ownership.

A)40
B)20
C)30
D)10

Question 53

Suggestions for surviving bankruptcy include all of the following except:

A)focus efforts on preparing a realistic reorganization plan.
B)understand how protection against creditors works.
C)file only after cash runs out.
D)maintain good records.

Question 54

An ESOP:

A)is a device to transfer the business to a small group of key loyal employees.
B)eliminates the need to perform a complete valuation of the venture.
C)motivates employees because they realize they are working for themselves.
D)removes the need for a continuous performance appraisal.

Question 55

According to the Small Business Administration,the failure rate of new businesses within the first few years is:

A)less than 25%.
B)about 70%.
C)50%.
D)about 33%.

Question 56

In 2014 both business and non-business bankruptcy filings were:

A)Below 1 million
B)About 1 million
C)About 1.5 million
D)More than 2 million

Question 57

When the debt is prorated to the creditors as a settlement in Chapter 11 this is called:

A)Substitution.
B)Evolution.
C)Extension.
D)Composition settlement.

Question 58

A common reason why companies do not come out successfully from a Chapter 11 bankruptcy is because they ____.

A)are in denial
B)don't have legal representation
C)wait too long to file for protection
D)do not understand the bankruptcy process

Question 59

All of the following are benefits of an ESOP except:

A)the company can deduct contributions to an ESOP.
B)it offers a planned exit in writing.
C)it offers a unique incentive to employees.
D)it is relatively simple to establish.

Question 60

This occurs when two or more of the largest creditors agree to postpone any claims,acting as stimulus for smaller creditors to also agree to the plan.

A)Extension.
B)Evolution.
C)Substitution.
D)Composition settlement.

Question 61

From the chapter on the characteristics of an entrepreneur,we know that after the failure of a business entrepreneurs are likely to:

A)continue starting new ventures.
B)look for a position working for someone else.
C)go to work for the government.
D)try again and fail.

Question 62

What are some of the warning signs of bankruptcy?

Question 63

Explain the advantages and disadvantages of an ESOP.
A.Advantages
1.It offers a unique incentive to employees that can enhance their motivation to put in extra time or effort.Employees recognize that they are working for themselves and hence will focus their efforts on innovations that contribute to the long-term success of the venture.
2.It provides a mechanism to pay back those employees who have been loyal to the venture,particularly during more difficult times.
3.It allows the transfer of the business under a carefully planned written agreement.
4.The company can reap the advantage of deducting the contributions to the ESOP or any dividends paid on the stock.
B.Disadvantages
1.Complex to establish.
a.It requires a complete valuation of the venture to establish the amount of the ESOP package.
B.it raises issues such as taxes,payout ratios,amount of equity to be transferred per year,and the amount actually invested by the employees.
c.The agreement also must specify if the employees can buy or sell additional shares of stock once the plan has been completed.

Question 64

Stress points are a result of all of the following except:

A)sales.
B)the need for new key personnel.
C)major capital investment.
D)lack of time.

Question 65

Identify and define the three major types of bankruptcy.
Provides the opportunity to reorganize and make the venture more solvent
Voluntarily allows individuals with regular income the opportunity to make extended time payments
Requires the venture to liquidate,either voluntarily or involuntarily

Question 66

Given the cultural climate of the U.S. ,business failure and bankruptcy:

A)mean the entrepreneur can never hope to start over.
B)carry such a stigma that the entrepreneur is disgraced and ostracized.
C)do not have to be the end for the entrepreneur.
D)means that there would be a change in the outlook of the people.

Question 67

The early signs of bankruptcy include all of the following except:

A)key personnel leave the company.
B)payroll taxes are not paid.
C)suppliers demand payment in cash.
D)all of these are early signs of bankruptcy.

Question 68

The early signs of bankruptcy are most often:

A)apparent to the entrepreneur.
B)interrelated.
C)occur in isolated instances.
D)unavoidable.