Chapter.6 Taking Over an Existing Business Test Bank

Test Bank

Chapter 6: Taking Over an Existing Business

Multiple Choice

1. 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.

KEY: Learning Objective: 6.1: Compare the advantages and disadvantages of buying an existing business.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.1: Business-Buyout Alternative

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

2. 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.

KEY: Learning Objective: 6.1: Compare the advantages and disadvantages of buying an existing business.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.1: Business-Buyout Alternative

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

3. 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.

KEY: Learning Objective: 6.1: Compare the advantages and disadvantages of buying an existing business.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.1: Business-Buyout Alternative

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

4. 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

KEY: Learning Objective: 6.2: Propose ways of locating a suitable business for sale.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.2: How Do You Find a Business For Sale?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

5. 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

KEY: Learning Objective: 6.2: Propose ways of locating a suitable business for sale.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.2: How Do You Find a Business For Sale?

Difficulty Level: Easy

TOP: AACSB Standard: Reflective thinking

6. 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

KEY: Learning Objective: 6.2: Propose ways of locating a suitable business for sale.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.2: How Do You Find a Business For Sale?

Difficulty Level: Easy

TOP: AACSB Standard: Reflective thinking

7. 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)

KEY: Learning Objective: 6.2: Propose ways of locating a suitable business for sale.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.2: How Do You Find a Business For Sale?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

8. 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

KEY: Learning Objective: 6.2: Propose ways of locating a suitable business for sale.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.2: How Do You Find a Business For Sale?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

9. 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

KEY: Learning Objective: 6.2: Propose ways of locating a suitable business for sale.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.2: How Do You Find a Business For Sale?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

10. 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

KEY: Learning Objective: 6.3: Explain how to measure the condition of a business and determine why it might be offered for sale.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.3: What Do You Look for in a Business?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

11. 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

KEY: Learning Objective: 6.3: Explain how to measure the condition of a business and determine why it might be offered for sale.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.3: What Do You Look for in a Business?

Difficulty Level: Easy

TOP: AACSB Standard: Reflective thinking

12. 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

KEY: Learning Objective: 6.3: Explain how to measure the condition of a business and determine why it might be offered for sale.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.3: What Do You Look for in a Business?

Difficulty Level: Medium

TOP: AACSB Standard: Analytical thinking

13. 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

KEY: Learning Objective: 6.3: Explain how to measure the condition of a business and determine why it might be offered for sale.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.3: What Do You Look for in a Business?

Difficulty Level: Medium

TOP: AACSB Standard: Analytical thinking

14. 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

KEY: Learning Objective: 6.3: Explain how to measure the condition of a business and determine why it might be offered for sale.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.3: What Do You Look for in a Business?

Difficulty Level: Medium

TOP: AACSB Standard: Analytical thinking

15. 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

KEY: Learning Objective: 6.3: Explain how to measure the condition of a business and determine why it might be offered for sale.

REF: Cognitive Domain: Comprehension

Answer Location: Concept Module 6.3: What Do You Look for in a Business?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

16. 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

KEY: Learning Objective: 6.3: Explain how to measure the condition of a business and determine why it might be offered for sale.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.3: What Do You Look for in a Business?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

17. 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

KEY: Learning Objective: 6.3: Explain how to measure the condition of a business and determine why it might be offered for sale.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.3: What Do You Look for in a Business?

Difficulty Level: Medium

TOP: AACSB Standard: Analytical thinking

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

a. asset

b. expense

c. quality

d. stock

KEY: Learning Objective: 6.3: Explain how to measure the condition of a business and determine why it might be offered for sale.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.3: What Do You Look for in a Business?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

19. 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

KEY: Learning Objective: 6.3: Explain how to measure the condition of a business and determine why it might be offered for sale.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.3: What Do You Look for in a Business?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

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

a. profits

b. assets

c. liabilities

d. sales

KEY: Learning Objective: 6.3: Explain how to measure the condition of a business and determine why it might be offered for sale.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.3: What Do You Look for in a Business?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

21. 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

KEY: Learning Objective: 6.3: Explain how to measure the condition of a business and determine why it might be offered for sale.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.3: What Do You Look for in a Business?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

22. 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

KEY: Learning Objective: 6.3: Explain how to measure the condition of a business and determine why it might be offered for sale.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.3: What Do You Look for in a Business?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

23. 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

KEY: Learning Objective: 6.4: Differentiate between tangible and intangible assets, and assess the value of each.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.4: What Are You Buying?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

24. 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

KEY: Learning Objective: 6.4: Differentiate between tangible and intangible assets, and assess the value of each.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.4: What Are You Buying?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

25. 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

KEY: Learning Objective: 6.4: Differentiate between tangible and intangible assets, and assess the value of each.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.4: What Are You Buying?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

26. 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

KEY: Learning Objective: 6.4: Differentiate between tangible and intangible assets, and assess the value of each.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.4: What Are You Buying?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

27. 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

KEY: Learning Objective: 6.4: Differentiate between tangible and intangible assets, and assess the value of each.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.4: What Are You Buying?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

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

KEY: Learning Objective: 6.4: Differentiate between tangible and intangible assets, and assess the value of each.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.4: What Are You Buying?

Difficulty Level: Easy

TOP: AACSB Standard: Reflective thinking

29. 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

KEY: Learning Objective: 6.4: Differentiate between tangible and intangible assets, and assess the value of each.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.4: What Are You Buying?

Difficulty Level: Medium

TOP: AACSB Standard: Analytical thinking

30. 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

KEY: Learning Objective: 6.4: Differentiate between tangible and intangible assets, and assess the value of each.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.4: What Are You Buying?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

31. 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

KEY: Learning Objective: 6.3: Explain how to measure the condition of a business and determine why it might be offered for sale.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.3: What Do You Look for in a Business?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

32. 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

KEY: Learning Objective: 6.4: Differentiate between tangible and intangible assets, and assess the value of each.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.4: What Are You Buying?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

33. 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

KEY: Learning Objective: 6.4: Differentiate between tangible and intangible assets, and assess the value of each.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.4: What Are You Buying?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

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

a. current asset

b. long-term asset

c. goodwill

d. equipment

KEY: Learning Objective: 6.4: Differentiate between tangible and intangible assets, and assess the value of each.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.4: What Are You Buying?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

35. Intellectual property is a valuable ______.

a. intangible asset

b. tangible asset

c. goodwill asset

d. current asset

KEY: Learning Objective: 6.4: Differentiate between tangible and intangible assets, and assess the value of each.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.4: What Are You Buying?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

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

KEY: Learning Objective: 6.4: Differentiate between tangible and intangible assets, and assess the value of each.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.4: What Are You Buying?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

37. 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

KEY: Learning Objective: 6.4: Differentiate between tangible and intangible assets, and assess the value of each.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.4: What Are You Buying?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

38. 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

KEY: Learning Objective: 6.4: Differentiate between tangible and intangible assets, and assess the value of each.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.4: What Are You Buying?

Difficulty Level: Easy

TOP: AACSB Standard: Reflective thinking

39. 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

KEY: Learning Objective: 6.4: Differentiate between tangible and intangible assets, and assess the value of each.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.4: What Are You Buying?

Difficulty Level: Easy

TOP: AACSB Standard: Reflective thinking

40. 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

KEY: Learning Objective: 6.5: Calculate the price to pay for a business.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.5: How Much Should You Pay?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

41. 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

KEY: Learning Objective: 6.5: Calculate the price to pay for a business.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.5: How Much Should You Pay?

Difficulty Level: Medium

TOP: AACSB Standard: Analytical thinking

42. ______ 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

KEY: Learning Objective: 6.5: Calculate the price to pay for a business.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.5: How Much Should You Pay?

Difficulty Level: Medium

TOP: AACSB Standard: Analytical thinking

43. 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

KEY: Learning Objective: 6.5: Calculate the price to pay for a business.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.5: How Much Should You Pay?

Difficulty Level: Medium

TOP: AACSB Standard: Analytical thinking

44. 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

KEY: Learning Objective: 6.5: Calculate the price to pay for a business.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.5: How Much Should You Pay?

Difficulty Level: Medium

TOP: AACSB Standard: Analytical thinking

45. 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

KEY: Learning Objective: 6.4: Differentiate between tangible and intangible assets, and assess the value of each.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.4: What Are You Buying?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

46. 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

KEY: Learning Objective: 6.5: Calculate the price to pay for a business.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.5: How Much Should You Pay?

Difficulty Level: Medium

TOP: AACSB Standard: Analytical thinking

47. 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

KEY: Learning Objective: 6.5: Calculate the price to pay for a business.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.5: How Much Should You Pay?

Difficulty Level: Medium

TOP: AACSB Standard: Analytical thinking

48. 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)

KEY: Learning Objective: 6.6: Discuss factors that are important when finalizing the purchase of a business.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.6: Buying the Business

Difficulty Level: Medium

TOP: AACSB Standard: Analytical thinking

49. 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

KEY: Learning Objective: 6.6: Discuss factors that are important when finalizing the purchase of a business.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.6: Buying the Business

Difficulty Level: Medium

TOP: AACSB Standard: Analytical thinking

50. 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

KEY: Learning Objective: 6.6: Discuss factors that are important when finalizing the purchase of a business.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.6: Buying the Business

Difficulty Level: Medium

TOP: AACSB Standard: Analytical thinking

51. 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

KEY: Learning Objective: 6.6: Discuss factors that are important when finalizing the purchase of a business.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.6: Buying the Business

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

52. 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

KEY: Learning Objective: 6.6: Discuss factors that are important when finalizing the purchase of a business.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.6: Buying the Business

Difficulty Level: Easy

TOP: AACSB Standard: Reflective thinking

53. 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

KEY: Learning Objective: 6.6: Discuss factors that are important when finalizing the purchase of a business.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.6: Buying the Business

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

54. 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

KEY: Learning Objective: 6.7: Describe what makes a family business different from other types of businesses.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.7: Taking Over a Family Business

Difficulty Level: Easy

TOP: AACSB Standard: Reflective thinking

55. 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

KEY: Learning Objective: 6.7: Describe what makes a family business different from other types of businesses.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.7: Taking Over a Family Business

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

56. 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

KEY: Learning Objective: 6.7: Describe what makes a family business different from other types of businesses.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.7: Taking Over a Family Business

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

57. 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

KEY: Learning Objective: 6.7: Describe what makes a family business different from other types of businesses.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.7: Taking Over a Family Business

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

58. 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

KEY: Learning Objective: 6.3: Explain how to measure the condition of a business and determine why it might be offered for sale.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.3: What Do You Look for in a Business?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

NARRBEGIN: 6-1

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.

NARREND

59. 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

KEY: Learning Objective: 6.2: Propose ways of locating a suitable business for sale.

REF: Cognitive Domain: Comprehension

Answer Location: Concept Module 6.2: How Do You Find a Business For Sale?

Difficulty Level: Easy

TOP: AACSB Standard: Reflective thinking

NAR: 6-1

60. 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

KEY: Learning Objective: 6.3: Explain how to measure the condition of a business and determine why it might be offered for sale.

REF: Cognitive Domain: Comprehension

Answer Location: Concept Module 6.3: What Do You Look for in a Business?

Difficulty Level: Easy

TOP: AACSB Standard: Reflective thinking

NAR: 6-1

True/False

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

KEY: Learning Objective: 6.1: Compare the advantages and disadvantages of buying an existing business.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.1: Business-Buyout Alternative

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

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

KEY: Learning Objective: 6.1: Compare the advantages and disadvantages of buying an existing business.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.1: Business-Buyout Alternative

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

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

KEY: Learning Objective: 6.1: Compare the advantages and disadvantages of buying an existing business.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.1: Business-Buyout Alternative

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

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

KEY: Learning Objective: 6.1: Compare the advantages and disadvantages of buying an existing business.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.1: Business-Buyout Alternative

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

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

KEY: Learning Objective: 6.1: Compare the advantages and disadvantages of buying an existing business.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.1: Business-Buyout Alternative

Difficulty Level: Medium

TOP: AACSB Standard: Analytical thinking

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

KEY: Learning Objective: 6.1: Compare the advantages and disadvantages of buying an existing business.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.1: Business-Buyout Alternative

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

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

KEY: Learning Objective: 6.1: Compare the advantages and disadvantages of buying an existing business.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.1: Business-Buyout Alternative

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

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

KEY: Learning Objective: 6.2: Propose ways of locating a suitable business for sale.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.2: How Do You Find a Business For Sale?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

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

KEY: Learning Objective: 6.2: Propose ways of locating a suitable business for sale.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.2: How Do You Find a Business For Sale?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

10. 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.

KEY: Learning Objective: 6.2: Propose ways of locating a suitable business for sale.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.2: How Do You Find a Business For Sale?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

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

KEY: Learning Objective: 6.2: Propose ways of locating a suitable business for sale.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.2: How Do You Find a Business For Sale?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

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

KEY: Learning Objective: 6.2: Propose ways of locating a suitable business for sale.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.2: How Do You Find a Business For Sale?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

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

KEY: Learning Objective: 6.1: Compare the advantages and disadvantages of buying an existing business.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.1: Business-Buyout Alternative

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

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

KEY: Learning Objective: 6.3: Explain how to measure the condition of a business and determine why it might be offered for sale.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.3: What Do You Look for in a Business?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

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

KEY: Learning Objective: 6.3: Explain how to measure the condition of a business and determine why it might be offered for sale.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.3: What Do You Look for in a Business?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

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

KEY: Learning Objective: 6.3: Explain how to measure the condition of a business and determine why it might be offered for sale.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.3: What Do You Look for in a Business?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

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

KEY: Learning Objective: 6.3: Explain how to measure the condition of a business and determine why it might be offered for sale.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.3: What Do You Look for in a Business?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

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

KEY: Learning Objective: 6.3: Explain how to measure the condition of a business and determine why it might be offered for sale.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.3: What Do You Look for in a Business?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

19. 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.

KEY: Learning Objective: 6.4: Differentiate between tangible and intangible assets, and assess the value of each.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.4: What Are You Buying?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

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

KEY: Learning Objective: 6.5: Calculate the price to pay for a business.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.5: How Much Should You Pay?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

21. Goodwill is an example of a tangible asset.

KEY: Learning Objective: 6.4: Differentiate between tangible and intangible assets, and assess the value of each.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.4: What Are You Buying?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

22. Inventory is an example of a tangible asset.

KEY: Learning Objective: 6.4: Differentiate between tangible and intangible assets, and assess the value of each.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.4: What Are You Buying?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

23. When purchasing a business, the people working there can be disregarded since they will probably not stick around after the business is in new hands.

KEY: Learning Objective: 6.4: Differentiate between tangible and intangible assets, and assess the value of each.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.4: What Are You Buying?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

24. An income statement method of business valuation focuses more on cash flow than asset value.

KEY: Learning Objective: 6.5: Calculate the price to pay for a business.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.5: How Much Should You Pay?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

25. Discounted cash-flow analysis consists of projecting future cash flows after debts are subtracted and before taxes are paid.

KEY: Learning Objective: 6.5: Calculate the price to pay for a business.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.5: How Much Should You Pay?

Difficulty Level: Medium

TOP: AACSB Standard: Analytical thinking

26. Goodwill is the term used to describe the difference between the purchase price of a company and the net value of the tangible assets.

KEY: Learning Objective: 6.5: Calculate the price to pay for a business.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.5: How Much Should You Pay?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

27. The value of a business’s intangible assets is easy to determine.

KEY: Learning Objective: 6.4: Differentiate between tangible and intangible assets, and assess the value of each.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.4: What Are You Buying?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

28. Tangible assets are the product of a firm’s past earnings and the basis on which future earnings are projected.

KEY: Learning Objective: 6.4: Differentiate between tangible and intangible assets, and assess the value of each.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.4: What Are You Buying?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

29. Family businesses make up 70 percent of all businesses in the United States and comprise nearly 50 percent of the nation’s GDP.

KEY: Learning Objective: 6.7: Describe what makes a family business different from other types of businesses.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.7: Taking Over a Family Business

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

30. The amount paid for goodwill should be small enough to be recovered with new profits in a reasonably short time period.

KEY: Learning Objective: 6.5: Calculate the price to pay for a business.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.5: How Much Should You Pay?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

31. When running a family business, there are four overlapping perspectives on its operations: family, management, ownership, and sales.

KEY: Learning Objective: 6.7: Describe what makes a family business different from other types of businesses.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.7: Taking Over a Family Business

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

32. About half of all family businesses survive through the second generation.

KEY: Learning Objective: 6.7: Describe what makes a family business different from other types of businesses.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.7: Taking Over a Family Business

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

33. When a family member enters the family business, he or she is immediately accepted by nonfamily employees due to his/her position.

KEY: Learning Objective: 6.7: Describe what makes a family business different from other types of businesses.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 6.7: Taking Over a Family Business

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

Short Answer

1. List and describe two advantages and two disadvantages of buying an existing business.

KEY: Learning Objective: 6.1: Compare the advantages and disadvantages of buying an existing business.

REF: Cognitive Domain: Comprehension

Answer Location: Concept Module 6.1: Business-Buyout Alternative

Difficulty Level: Medium

TOP: AACSB Standard: Analytical thinking

2. Describe three places a potential small business owner might go when looking for a business for sale.

KEY: Learning Objective: 6.2: Propose ways of locating a suitable business for sale.

REF: Cognitive Domain: Comprehension

Answer Location: Concept Module 6.2: How Do You Find a Business For Sale?

Difficulty Level: Medium

TOP: AACSB Standard: Analytical thinking

3. Analyze three areas that should be researched when deciding whether or not to purchase an existing business.

KEY: Learning Objective: 6.3: Explain how to measure the condition of a business and determine why it might be offered for sale.

REF: Cognitive Domain: Comprehension

Answer Location: Concept Module 6.3: What Do You Look for in a Business?

Difficulty Level: Medium

TOP: AACSB Standard: Analytical thinking

4. Discuss three major considerations when looking at the financial condition of an existing business.

KEY: Learning Objective: 6.3: Explain how to measure the condition of a business and determine why it might be offered for sale.

REF: Cognitive Domain: Comprehension

Answer Location:

Difficulty Level: Medium

TOP: AACSB Standard: Analytical thinking

5. Compare and contrast tangible assets and intangible assets.

KEY: Learning Objective: 6.4: Differentiate between tangible and intangible assets, and assess the value of each.

REF: Cognitive Domain: Comprehension

Answer Location: Concept Module 6.4: What Are You Buying?

Difficulty Level: Medium

TOP: AACSB Standard: Analytical thinking

6. Before serious bargaining can begin, it is necessary to determine the value of several key physical assets. List at least three of these assets.

KEY: Learning Objective: 6.5: Calculate the price to pay for a business.

REF: Cognitive Domain: Comprehension

Answer Location: Concept Module 6.5: How Much Should You Pay?

Difficulty Level: Medium

TOP: AACSB Standard: Analytical thinking

7. List at least three guidelines that should be followed in a family business.

KEY: Learning Objective: 6.7: Describe what makes a family business different from other types of businesses.

REF: Cognitive Domain: Comprehension

Answer Location: Concept Module 6.7: Taking Over a Family Business

Difficulty Level:

TOP: AACSB Standard: Analytical thinking