Chapter.13 Exam Prep Exit/Harvest/Turnaround

Entrepreneurship, 3e (Bamford)

Chapter 13 Exit/Harvest/Turnaround

1) Every small business owner will eventually need or want to exit his or her business.

2) A business is an investment of both time and money.

3) Developing an exit plan makes the family and investors uneasy about the new business.

4) When a small business owner is no longer interested in the company, it is time for an exit strategy.

5) A small business person can effectively operate an existing company and pursue new opportunities at the same time.

6) Harvesting encompasses more than just selling and leaving a business.

7) Public companies have an established market capitalization, which is the value of a business as it exists at the present time.

8) A new business has creative company perquisites for the owners to minimize the tax owed by the organization.

9) The true value of a business is the amount of money that a willing seller and buyer agree upon.

10) It should be clear that a single universal method of valuation is needed when considering the purchase of a private company.

11) Estimating cash flows 10 years into the future and subtracting a salvage value for a firm is a good ballpark floor valuation for a business.

12) If a business is performing poorly, there is virtually no goodwill value.

13) Asset valuation is typically the highest business valuation number that one calculates, unless the business is asset-intensive.

14) An IPO (initial public offering) is the initial listing of a firm as a private entity in the public equities market.

15) Most entrepreneurial businesses run lax operations where every individual has general functions and there is plenty of slack available for cross-training.

16) Attempting a turnaround is the best effort to reverse the decline of a business.

17) It does not take much effort to turn around an entrepreneurial business successfully once it starts into a decline.

18) When a small business is declining, the first step is to retrench.

19) Strategic solutions in a failing company rely on exiting those poor strategic choices that have been made over the years.

20) When a business's performance has declined, the owner may decide to either close it or reverse the decline and conduct a "turnaround."

21) Improving a business's performance is very difficult once it starts into a decline.

22) For an entrepreneurial business, the retrenchment efforts should focus on the firm's forfeiting the control of its cash flow, regardless of the impact to the long-term effort.

23) In a declining business, an effective way to improve operations is to increase marketing to sell more products.

24) In a declining small business, the owner and key managers should resign to improve the chances that the business can turnaround successfully. New owners and managers will likely have better ideas to improve performance.

25) Bankruptcy is an option for an entrepreneur if the turnaround effort does not succeed quickly enough.

26) Chapter 17 bankruptcy allows a firm to be reorganized.

27) When filing Chapter 11 bankruptcy, a firm has 90 days to propose a reorganization plan.

28) In a Chapter 7 bankruptcy filing, selling a business consists of selling the assets of the company.

29) Chapter 12 bankruptcy is used for the protection of family-owned business assets.

30) Chapter 7 bankruptcy is intended for entrepreneurial firms with limited debts and assets.

31) Chapter 13 bankruptcy is used for sole proprietorships.

32) In a Chapter 13 bankruptcy filing, the time to approval is typically slower than other bankruptcy filings, and a creditor committee is required.

33) Since the processes and procedures for bankruptcy are easy and have a short-term impact on the owner of a small business, it is a feasible alternative for a declining business.

34) In bankruptcy proceedings, creditors may be willing to take less than the full amount with the hope that the strength of the distressed firm will return in the future; they will then be in a position to receive more of their debt repayment. 

35) In bankruptcy proceedings, a "haircut" refers to creditors receiving more than the full amount of money that is due to them. 

36) In bankruptcy proceedings, creditors who do not have collateral pledged behind their debt will be paid only if there are funds remaining after other creditors have been paid.

37) If a small business that declares bankruptcy is a corporation or LLC, the owner's personal assets are not affected.

38) The time to begin to think of harvesting the business is

A) at the beginning.

B) after the first quarter of operations.

C) at the break-even part.

D) when there are no more alternatives.

39) A business is an investment of both ________ and ________.

A) time; labor

B) time; money

C) labor; money

D) work; time

40) A small business owner may want to exit the business because

A) the business has done very well but the future does not hold the same potential for similar success.

B) all the assets are in the business.

C) other opportunities are available.

D) all of these.

41) The key starting point for any decision to exit or harvest a firm is

A) establishing the valuation of the firm.

B) devising plans for turnaround.

C) filing for Chapter 7 bankruptcy.

D) reaching a resolution with creditors to accept an amount less than the full payment.

42) Developing an accurate valuation helps

A) provide insight for the founders as to the amount of capital and labor that should be invested in the effort.

B) convince outside equity investors of the potential long-term returns associated with the harvesting of the business.

C) benchmark the growth of the firm by establishing a true starting point.

D) all of these.

43) Market capitalization is the value of a business as it exists

A) at the start of the business.

B) as of the first annual statement.

C) at present.

D) in the future.

44) Which of the following is a benefit paid for by the company, such as vacations, vehicles, gifts, and loans?

A) Benefits plus

B) Perquisites

C) Exempt benefits

D) Bonuses

45) Rony is the managing director of a fabric manufacturing company. In order to limit the profit of the company and, therefore, the taxes on the business, the management pays a hefty amount to Rony as year-end bonuses. The company also pays for his family vacations and foreign trips. The benefits enjoyed by Rony are called ________.

A) fiscal incidences

B) novated leases

C) swaps

D) perquisites

46) Valuing a business is as much ________ as it is ________.

A) monetary; assets

B) art; assets

C) art; science

D) monetary; science

47) Which of the following is a method to maximize the selling price?

A) Discounted future net cash flow

B) Asset-based valuation

C) Market estimation valuation

D) All of these

48) Which of the following valuation methods requires that the net cash flow be projected for some period of time in the future?

A) Asset-based valuation

B) Price/earnings valuation

C) Discounted future net cash flow

D) Market estimation valuation

49) Which of the following statements is true of discounted future net cash flow?

A) It requires that difference in the cash inflows and outflows of a business be projected for some period of subsequent time.

B) It involves accounting for all of the hard assets of an organization such as buildings, equipment, cash, etc.

C) It is determined by the nature of business, including longevity, business risk, consistency of earning, quality of management, and general economic conditions.

D) It involves taking the earnings of a business and multiplying that figure by the market premium of companies in their industry.

50) Which of the following is a good ballpark floor valuation for a business?

A) Taking the earnings (net profit) of the organization and dividing that figure by a capitalization rate

B) Estimating cash flows five years into the future and adding a salvage value for the firm

C) Locating the price/earnings (P/E) ratio for public companies in the same industry

D) Examining similar companies that have been acquired by looking at the percentage premium being offered in general on all new public acquisitions

51) Which of the following valuation methods requires estimating the value of a business by using the industry price/earnings ratio?

A) Asset-based valuation

B) Price/earnings valuation

C) Capitalization of earnings valuation

D) Discounted future net cash flow

52) ________ is a relatively straightforward valuation system that uses the industry in which a start-up operates.

A) Asset-based valuation

B) Market estimation valuation

C) Price/earnings valuation

D) Discounted future net cash flow

53) Which of the following valuation methods simply totals the value of all of the hard assets of an organization and adds in some value for goodwill?

A) Asset-based valuation

B) Market estimation valuation

C) Price/earnings valuation

D) Capitalization of earnings valuation

54) ________ is performed by taking the earnings (net profit) of an organization; subtracting or adding any unusual items that the lender or investor believes are not customary, normal, or usual items; and dividing that figure by a capitalization rate.

A) Price/earnings valuation

B) Capitalization of excess earnings method

C) Discounted future net cash flow

D) Capitalization of earnings valuation

55) Which of the following valuation methods takes the earnings (or projected earnings) of a small business and multiplies that figure by the market premium of companies in the industry?

A) Asset-based valuation

B) Capitalization of earnings valuation

C) Market estimation valuation

D) Discounted future net cash flow valuation

56) In the context of business valuation, the ________ is determined by examining similar companies that have been acquired or more often by simply looking at the percentage premium being offered in general on all new public acquisitions.

A) minority discount

B) equity value

C) control premium

D) goodwill value

57) In the context of business valuation, which of the following methods works best for firms with hard resources and not an Internet business?

A) Asset-based valuation

B) Price/earnings valuation

C) Discounted future net cash flow

D) Market estimation valuation

58) One reason to hire a certified public accountant (CPA) firm is to

A) audit last year's financial statements.

B) put all of the statements into a standardized format.

C) develop procedures for the accounting of all activities.

D) all of these.

59) A small business founder needs to plan for the type of sale that will ________ their returns.

A) minimize

B) maximize

C) increase

D) decrease

60) Once a decision has been made to sell a business, what choice is available to the small business owner?

A) Sell the business intact to a third party

B) Sell the business to a competitor

C) Do an initial public offering

D) All of these

61) Which of the following is the initial listing of a firm as a public entity on the public equities market?

A) Internal price offering (IPO)

B) Initial public offering (IPO)

C) Internal public offering (IPO)

D) Interactive price offering (IPO)

62) Dura Steel Inc. is a steel manufacturing company, and the owners want to sell the company as most of them are in their early 80s. They do not want to sell it to their competitors as the company owns a lot of cutting-edge technologies and patents. They decide to list the company as a public entity in the public equities market. This listing is known as a(n)

A) alternative public offering (APO).

B) reverse merger takeover (RMT).

C) private investment in public equity (PIPE).

D) initial public offering (IPO).

63) Which of the following is the effort to reverse the decline of a business?

A) Turnaround

B) Quick time

C) Fast around

D) Bridge

64) When a company starts to decline, the first step is to ________.

A) file bankruptcy

B) seek more investors

C) retrench

D) stabilize

65) Fit and Fab Company is a boutique in the United States that offers custom-made designer wears to its customers. It used to source expensive material from the U.S. market. However, this resulted in huge losses for the company. The owners want to turn around the declining business. They control the cash outflow by sourcing the material from Asian countries that offer quality material and fabrics at half the price. Identify the technique used by Fit and Fab Company to reverse its decline.

A) Selection

B) Repositioning

C) Stabilization

D) Retrenchment

66) What term is used to describe the efforts to reverse the decline of a business?

A) Turnaround

B) Haircut

C) Retrench

D) None of these

67) Hot Tacos Inc. is a start-up business that offers a variety of tacos to its customers. Some bad strategic and operational decisions result in huge losses for the company. Its owners encourage the chief chef to try different flavors and launch an innovative taco flavor to attract lost customers. This new taco proves to be a huge hit, and the firm regains its lost glory and profit. Identify the effort that Hot Tacos Inc. adopted to reverse its losses.

A) "Workout"

B) "Haircut"

C) "Cramdown"

D) "Turnaround"

68) Why is it so difficult to turn around a small business whose performance is declining?

A) Small businesses have limited slack resources.

B) Government regulations on small businesses limit the ability to innovate.

C) Economic issues, such as the interest rate charged on loans, make it difficult to get the loans needed to overcome problems.

D) None of these

69) A business that is declining due to operations problems struggles with

A) not selling enough products or services.

B) not being efficient in producing the product.

C) both of these.

D) none of these.

70) Which chapter of bankruptcy allows a firm to be reorganized in 90 days?

A) 7

B) 11

C) 12

D) 13

71) When a firm files a ________ bankruptcy, it receives immediate protection against all lawsuits and other efforts to collect from the firm.

A) Subchapter S

B) Subchapter C

C) Chapter 7

D) Chapter 11

72) Which of the following statements is true of the fast-track version of Chapter 11 bankruptcy?

A) It shows how back taxes will be brought current over a five-year period.

B) It shows how unsecured creditors will be paid first.

C) It gives creditors far more control than in a larger organization Chapter 11 filing.

D) It is used if a firm's debts are more than $3 million.

73) Richard has invested $5 million in a roof installation company. Because of some bad strategic decisions made by the company owners, the company runs into losses. It files Chapter 11 bankruptcy. The company owners and Richard reach a resolution, and Richard agrees to accept $3 million in the hope that the firm will regain its glory in the future. This reduction in the amount of money that Richard accepts is known as a(n)

A) "look up."

B) "haircut."

C) "workout."

D) "slack."

74) Which chapter of bankruptcy provides for selling a business's assets?

A) 7

B) 11

C) 12

D) 13

75) Which chapter of bankruptcy is used by family farming businesses?

A) 7

B) 11

C) 12

D) 13

76) Which chapter of bankruptcy is intended for small firms with limited debts and assets?

A) 7

B) 11

C) 12

D) 13

77) In a successful Chapter 11 bankruptcy, a business owner may be able to do all of the following EXCEPT

A) terminate leases and other contracts.

B) terminate union agreements.

C) force creditors to accept an equitable plan for reorganization.

D) sell the assets and keep the money for personal expenses.

78) Chapter 12 and Chapter 13 bankruptcies are used by what kinds of businesses that cannot be turned around?

A) S and C corporations

B) Limited liability corporations

C) Partnerships and limited liability partnerships

D) Family-owned businesses and sole proprietors

79) Which legal form of business best protects an owner's personal assets when he or she must declare business bankruptcy?

A) Corporation and limited liability corporation

B) Partnership and limited liability partnership

C) Sole proprietor

D) All of these

80) ________ valuation is a method of business valuation that totals all of the hard assets of an organization and adds in some value for goodwill.

81) A(n) ________ is an option for high-growth businesses to sell their stock as a public entity in the public equities market. 

82) A method of business valuation that takes the earnings of a business and multiplies that figure by the market premium of companies in its industry is called ________. 

83) One way to determine the value of a publicly traded company is to divide the current earnings per share of stock into the price per share. This is called the ________ ratio. 

84) Maintaining an estimate of the value of a business as it grows and develops is the responsibility of the ________.

85) ________ is the effort to reverse the decline of a business.

86) A business owner who is facing multiple problems that are causing the business to decline may choose to attempt a(n) ________ to reverse the decline and improve performance. 

87) A(n) ________ is invoked when there are instances where a business must simply be closed, and selling the business consists of selling the "assets" of the business.

88) A valuation of a firm helps the owner to understand the true value of the company. List the five elements for true valuation.

89) What are the three steps an owner follows when deciding to sell or harvest the business?

90) List the five methods of valuation of a firm.

91) List the four processes of getting the word out that a business is for sale.

92) List and describe the four chapters of bankruptcy.

93) Briefly discuss the characteristics of Chapter 13 bankruptcy.