Ch5 Test Bank Small Business Ownership Through Acquisition

Chapter 5- Small Business Ownership through Acquisition

True/False

1. In the Facebook-Whatsapp example, Facebook was the acquired and Whatsapp the acquirer

Response: See section 5.1

Level: Easy

Learning Objective: Define the meaning of business acquisition and outline its pros and cons

1. Buying a business through an essay-based contest is known as a Janice-style acquisition

Response: See section 5.1

Level: Easy

Learning Objective: Define the meaning of business acquisition and outline its pros and cons

1. A Janice-style acquisition is legal in all states of USA

Response: See section 5.1

Level: Easy

Learning Objective: Define the meaning of business acquisition and outline its pros and cons

1. In business acquisitions, it is the bidder who has more information about the target firm

Response: See section 5.1

Level: Medium

Learning Objective: Define the meaning of business acquisition and outline its pros and cons

1. There are minimum of three companies involved in an acquisition

Response: See section 5.1

Level: Easy

Learning Objective: Define the meaning of business acquisition and outline its pros and cons

1. A situation where seller behaves recklessly, after the buyer and seller has agreed on the sale of the business is known as adverse selection

Response: See section 5.1

Level: Easy

Learning Objective: Define the meaning of business acquisition and outline its pros and cons

1. In business acquisition, information asymmetry results in moral hazard and adverse selection

Response: See section 5.1

Level: Easy

Learning Objective: Define the meaning of business acquisition and outline its pros and cons

1. According to the text, the first stage in the acquisition process involves the identification of targets

Response: See section 5.2

Level: Easy

Learning Objective: Provide a bird’s eye-view of the acquisition process

1. The final stage in the acquisition process is the funding of the buyout

Response: See section 5.2

Level: Easy

Learning Objective: Provide a bird’s eye-view of the acquisition process

1. The PPM in acquisition stands for planning process management

Response: See section 5.2

Level: Easy

Learning Objective: Provide a bird’s eye-view of the acquisition process

1. A formal Private Placement Memorandum (PPM) is always mandatory to raise investment capital

Response: See section 5.2

Level: Easy

Learning Objective: Provide a bird’s eye-view of the acquisition process

1. Investors are required to buy whole units of the search funds

Response: See section 5.2

Level: Medium

Learning Objective: Provide a bird’s eye-view of the acquisition process

1. Brokered deals are actively circulated in the market and are expensive

Response: See section 5.2

Level: Medium

Learning Objective: Provide a bird’s eye-view of the acquisition process

1. Proprietary deals are actively circulated in the market and hence, are expensive

Response: See section 5.2

Level: Medium

Learning Objective: Provide a bird’s eye-view of the acquisition process

1. Investors can serve as coaches, mentors, and advisors to the searcher

Response: See section 5.2

Level: Easy

Learning Objective: Provide a bird’s eye-view of the acquisition process

1. After acquiring a firm, a new owner should begin changing things immediately and get rid of old employees

Response: See section 5.2

Level: Easy

Learning Objective: Provide a bird’s eye-view of the acquisition process

1. A self-funded search involves the entrepreneur funding their own search

Response: See section 5.3.1

Level: Easy

Learning Objective: Distinguish between different types of business acquisitions

1. The traditional search fund model was formed in 2000

Response: See section 5.3.2

Level: Easy

Learning Objective: Distinguish between different types of business acquisitions

1. There is a gender bias in the search fund ecosystem

Response: See section 5.3.2

Level: Easy

Learning Objective: Distinguish between different types of business acquisitions

1. Private equity firms sign exclusive agreements with searchers and pay higher compensation than other search sponsors

Response: See section 5.3.3

Level: Easy

Learning Objective: Distinguish between different types of business acquisitions

1. Incubators provide a structured environment for searchers, which increases the odds of a successful search and lowers the chances of a failed search

Response: See section 5.3.4

Level: Easy

Learning Objective: Distinguish between different types of business acquisitions

1. Sponsored search fund is a more popular option for business acquisition than traditional search fund

Response: See section 5.3.4

Level: Medium

Learning Objective: Distinguish between different types of business acquisitions

1. Valuation involves assessing only the physical value of a business

Response: See section 5.4

Level: Easy

Learning Objective: Describe the importance of accurately valuing a business

1. Valuation is most difficult for mature and declining firms than for start-ups

Response: See section 5.4

Level: Easy

Learning Objective: Describe the importance of accurately valuing a business

1. The value of tangible assets does not appear in the balance sheet

Response: See section 5.4

Level: Medium

Learning Objective: Describe the importance of accurately valuing a business

Multiple Choice Questions

1. Business acquisition is defined as:
2. Starting a small firm from scratch
3. Buying out an existing venture
4. Terminating an active firm
5. None of the above

Response: See section 5.1

Level: Easy

Learning Objective: Define the meaning of business acquisition and outline its pros and cons

1. Which of the following is an advantage of business acquisition?
2. Considerable investment
3. Information asymmetry
4. Moral hazard
5. Existing customer base

Response: See section 5.1.1

Level: Medium

Learning Objective: Define the meaning of business acquisition and outline its pros and cons

1. Which of the following is a drawback of business acquisition?
2. Reputation
3. Proven market
4. Existing customer base
5. Considerable investment

Response: See section 5.1.2

Level: Medium

Learning Objective: Define the meaning of business acquisition and outline its pros and cons

1. What are the two types of asymmetric information in business acquisition?
2. Adverse selection and adverse impact
3. Adverse impact and variable information
4. Adverse selection and moral hazard
5. Variable and fixed

Response: See section 5.1.2

Level: Easy

Learning Objective: Define the meaning of business acquisition and outline its pros and cons

1. Information asymmetry represents a market situation in which
2. Both parties have the same information
3. One party in a transaction has more information than the other party
4. It is a win-win situation for both parties
5. One party gives a false information to the other party

Response: See section 5.1.2

Level: Medium

Learning Objective: Define the meaning of business acquisition and outline its pros and cons

1. According to the magazine, Fast Company, what should an aspiring buyer do before taking over an existing business?
2. Have a 100-day plan
3. Due diligence of a target firm
4. Understand potential customers and competitors
5. All of the above

Response: See section 5.1.2

Level: Easy

Learning Objective: Define the meaning of business acquisition and outline its pros and cons

1. Which of the following is the correct sequence of the four steps in the acquisition process?
2. Funding the buyout, identifying targets, raising capital, operating and value creation
3. Operating value, value creation, identifying targets, funding the buyout
4. Raising capital, identifying targets, funding the buyout, operating and value creation
5. Search capital, funding the buyout, acquisition capital, operating and value creation

Response: See section 5.2

Level: Easy

Learning Objective: Provide a bird’s eye-view of the acquisition process

1. The first step in the business acquisition involves:
2. Identifying targets
3. Evaluating targets
4. Raising search capital
5. Funding the buyout

Response: See section 5.2

Level: Easy

Learning Objective: Provide a bird’s eye-view of the acquisition process

1. In a typical search fund, the search capital is required to pay for:
2. Searcher’s salary
3. Cover administrative expenses
4. Due diligence costs for an uncertain period of time
5. All of the above

Response: See section 5.2

Level: Medium

Learning Objective: Provide a bird’s eye-view of the acquisition process

1. ___________ is a legal document provided to potential investors and that describes the searchers’ background and motivation, how the search fund will be structured, and how much money is being sought
2. Acquisition agreement
3. Private Placement Memorandum (PPM)
4. Due Diligence (DD)
5. Search document

Response: See section 5.2

Level: Easy

Learning Objective: Provide a bird’s eye-view of the acquisition process

1. The ideal acquisition target is a ______company in an attractive stable niche where the owner wants to exit for ________
2. Poorly, personal reasons
3. Profitable, personal reasons
4. Poorly, lack of prospects
5. Declining, existing lawsuits

Response: See section 5.2

Level: Easy

Learning Objective: Provide a bird’s eye-view of the acquisition process

1. Searchers should budget their capital requirements for ______
2. 5-6 years
3. 2-3 years
4. Forever
5. 10 years

Response: See section 5.2

Level: Easy

Learning Objective: Provide a bird’s eye-view of the acquisition process

1. Who decides the size of the units of the search fund?
2. A searcher
3. An investor
4. A target company
5. All investors get together to decide the size of the unit

Response: See section 5.2

Level: Medium

Learning Objective: Provide a bird’s eye-view of the acquisition process

1. Which of the following is a benefit for investors when the buyout happens?
2. Does not get equity in the acquired business
3. The right of first refusal to invest additional capital in the acquired business
4. Are obligated to invest in all stages of acquisition
5. Searchers are inexperienced and hence, they can easily be convinced to agree to what investors say

Response: See section 5.2

Level: Medium

Learning Objective: Provide a bird’s eye-view of the acquisition process

1. Whose responsibility is it to obtain the capital needed to close the deal with the target firm?
2. Investors
3. Searchers
4. Target firm
5. Both A and C

Response: See section 5.2

Level: Easy

Learning Objective: Provide a bird’s eye-view of the acquisition process

1. What should the incoming owners do after acquiring a business?
2. Reach out to old employees to get an inside view of the business
3. Fire old employees
4. Make major changes over the first few months
5. Change old suppliers and customers

Response: See section 5.2

Level: Medium

Learning Objective: Provide a bird’s eye-view of the acquisition process

1. Which of the following is a drawback of a self-funded search (SFS)?
2. Autonomy
3. Greater equity in the business
4. Majority of control over the business to searchers
5. Difficult for the searcher to signal credibility

Response: See section 5.3.1

Level: Medium

Learning Objective: Distinguish between different types of business acquisitions

1. _______involves a searcher bringing together a group of 15-20 investors to raise search capital for about two years
2. Self-funded search
3. Sponsored search
4. Traditional Search fund
5. Incubator

Response: See section 5.3.2

Level: Easy

Learning Objective: Distinguish between different types of business acquisitions

1. In the traditional search fund, a searcher usually receives up to _______carried interest on the gains from the acquisition
2. 25 percent
3. 75 percent
4. 50 percent
5. 100 percent

Response: See section 5.3.2

Level: Medium

Learning Objective: Distinguish between different types of business acquisitions

1. Traditional search funds target companies in the:
2. $250 million to $300 million price range
3. Histories of instable cash flows
4. Instable market positions
5. Fragmented industries

Response: See section 5.3.2

Level: Medium

Learning Objective: Distinguish between different types of business acquisitions

1. Searchers that associate with a reputable and well-known private equity firm benefit from a ____ that could help them successfully acquire a business
2. Horn effect
3. Recency effect
4. Halo effect
5. Self-serving effect

Response: See section 5.3.3

Level: Easy

Learning Objective: Distinguish between different types of business acquisitions

1. Which of the following is a drawback for searchers to get associated with private equity firms?
2. Higher compensation
3. Help with management support
4. Pursue an acquisition of a larger size
5. Lower equity in the acquired company

Response: See section 5.3.3

Level: Medium

Learning Objective: Distinguish between different types of business acquisitions

1. What is NOT true about incubators for acquisition search?
2. New in the U.S
3. Provides training to searchers on search techniques and best practices
4. Incubator managers have no search experience
5. Necessary infrastructure in place

Response: See section 5.3.4

Level: Medium

Learning Objective: Distinguish between different types of business acquisitions

1. What is a drawback of an incubated search?
2. Reduces the administrative load on the searcher
3. Provides training on search techniques and best practices
4. May provide interns for the searchers
5. Most incubators charge fee or take equity in return

Response: See section 5.3.4

Level: Medium

Learning Objective: Distinguish between different types of business acquisitions

1. Which types of firms are difficult to value?
2. Cyclical firms
3. Financial services firms
4. Emerging market companies
5. All of the above

Response: See section 5.4

Level: Easy

Learning Objective: Describe the importance of accurately valuing a business