Harvesting The Business Ch.17 Verified Test Bank

Chapter 17- Harvesting the Business

True/False

1. All business exits are harvests, but all harvests are not exits

Response: See section 17.1

Level: Medium

Learning Objective: Distinguish between the various ways to harvest a successful business

1. Harvesting a business means to start a small business from scratch and to grow it successfully

Response: See section 17.1

Level: Easy

Learning Objective: Distinguish between the various ways to harvest a successful business

1. Harvesting a business is an emotional process

Response: See section 17.1.1

Level: Easy

Learning Objective: Distinguish between the various ways to harvest a successful business

1. A common harvest strategy for successful business owners is to sell the firm

Response: See section 17.1.1

Level: Easy

Learning Objective: Distinguish between the various ways to harvest a successful business

1. Business owners who harvest their business are perceived as not committed to their business

Response: See section 17.1.1

Level: Easy

Learning Objective: Distinguish between the various ways to harvest a successful business

1. Direct rivals are competitors who compete on some products or services, but not on the full line of products and services

Response: See section 17.1.2

Level: Easy

Learning Objective: Distinguish between the various ways to harvest a successful business

1. In an Employee stock ownership plan (ESOP), company contributions to the trust are tax-deductible, within certain limits

Response: See section 17.1.3

Level: Medium

Learning Objective: Distinguish between the various ways to harvest a successful business

1. In 1974, the Congress established the Employee stock ownership plan (ESOP)

Response: See section 17.1.3

Level: Easy

Learning Objective: Distinguish between the various ways to harvest a successful business

1. In an Employee Stock ownership plan, shares in the trust are allocated to a group of two or more employees’ accounts

Response: See section 17.1.3

Level: Easy

Learning Objective: Distinguish between the various ways to harvest a successful business

1. Employee Stock Ownership plan is almost in every industry in the U.S.

Response: See section 17.1.3

Level: Easy

Learning Objective: Distinguish between the various ways to harvest a successful business

1. Midwest has the highest proportion of Employee stock ownership plan (ESOP)

Response: See section 17.1.3

Level: Easy

Learning Objective: Distinguish between the various ways to harvest a successful business

1. The seller financing is beneficial for both buyers and sellers

Response: See section 17.1.4

Level: Easy

Learning Objective: Distinguish between the various ways to harvest a successful business

1. Berkshire Hathaway, the investment company, is an example of a strategic buyer

Response: See section 17.1.4

Level: Easy

Learning Objective: Distinguish between the various ways to harvest a successful business

1. In a leveraged buyout (LBO) buyers often borrow on the company’s assets

Response: See section 17.1.4

Level: Medium

Learning Objective: Distinguish between the various ways to harvest a successful business

1. The market is buyer-friendly during recessions and upturns

Response: See section 17.1.4

Level: Easy

Learning Objective: Distinguish between the various ways to harvest a successful business

1. The simplest approach to valuation is the book value of the firm

Response: See section 17.2

Level: Easy

Learning Objective: Outline the different approaches to value a firm

1. The time value of money concept suggests that money now is worth more than the identical sum in the future

Response: See section 17.2

Level: Easy

Learning Objective: Outline the different approaches to value a firm

1. Cash flow today is worth less than identical cash flow in the future

Response: See section 17.2

Level: Easy

Learning Objective: Outline the different approaches to value a firm

1. In adjusted tangible book value, the value of each asset reported on the balance sheet is adjusted only downward to reflect the fair market price for the asset

Response: See section 17.2

Level: Medium

Learning Objective: Outline the different approaches to value a firm

1. The discount rate is same for buyers and sellers

Response: See section 17.2

Level: Medium

Learning Objective: Outline the different approaches to value a firm

1. The discounted earnings method determines the firm’s value based on the past earnings of the firm

Response: See section 17.2

Level: Medium

Learning Objective: Outline the different approaches to value a firm

1. The return on investment is the ratio of cost of investment to net profit

Response: See section 17.2

Level: Easy

Learning Objective: Outline the different approaches to value a firm

1. Selling the business creates high uncertainty for employees

Response: See section 17.3.1

Level: Easy

Learning Objective: Identify the various challenges owners face in harvesting

1. Seller’s remorse is an emotional reaction which occurs when a seller is unable to find a buyer

Response: See section 17.3.2

Level: Easy

Learning Objective: Identify the various challenges owners face in harvesting

1. IPOs are not a good harvesting option for mom-and-pop shops

Response: See section 17.4

Level: Easy

Learning Objective: Explain harvesting by going public

Multiple Choice Questions

1. _______is a method to cash out of an ownership position in a company
2. Growing a business
3. Harvesting
4. Developing a business
5. None of the above

Response: See section 17.1

Level: Easy

Learning Objective: Distinguish between the various ways to harvest a successful business

1. George owns a car dealership business. After running it successfully for several years, he sells it for $500,000 to a large publicly-traded company. The practice of exiting a business by selling a successful business is
2. Harvest sale
3. Distress sale
4. Distress liquidation
5. Harvest liquidation

Response: See section 17.1

Level: Medium

Learning Objective: Distinguish between the various ways to harvest a successful business

1. Who cannot be a potential buyer of an existing business?
2. Suppliers
3. Small business administration
4. Competitors
5. Employees

Response: See section 17.1.1

Level: Easy

Learning Objective: Distinguish between the various ways to harvest a successful business

1. The ______________is a U.S.-based community of commercial brokers who help buy and sell businesses
2. Small Business of withdrawal administration
3. Chamber of Commerce
4. International Business Brokers Association
5. State Business exit association

Response: See section 17.1.1

Level: Easy

Learning Objective: Distinguish between the various ways to harvest a successful business

1. Why do companies buy a competitor business?
2. To increase market share
3. To acquire highly skilled and competent employees
4. To gain access to better facilities
5. All of the above

Response: See section 17.1.2

Level: Medium

Learning Objective: Distinguish between the various ways to harvest a successful business

1. When buying a business, a buyer must ask a seller to sign a _________
2. Non-compete clause
3. Exculpatory agreement
4. Interstate agreement
5. Compete clause

Response: See section 17.1.2

Level: Medium

Learning Objective: Distinguish between the various ways to harvest a successful business

1. Why is it uncommon for a business owner to exit a business by selling to employees?
2. Employees lack the capital to buy businesses
3. Employees are aware of weaknesses and dysfunctional aspects of the business
4. Employees may not be able to give a good price
5. All of the above

Response: See section 17.1.3

Level: Medium

Learning Objective: Distinguish between the various ways to harvest a successful business

1. Clark and Katie wanted to sell their high performing business. A large firm, XYZ, was interested in buying their business. However, the couple refused to sell their business to XYZ and sold the business to their employee, John. Which of the following STRENGTHENS the argument that the couple took the right decision?
2. A large firm, XYZ, offered to pay handsomely for their company
3. Clark knows John and his family personally and he is confident that John will take care of the business
4. Clark and Katie were happy the way negotiation process was going
5. All of the above

Response: See section 17.1.3

Level: Hard

Learning Objective: Distinguish between the various ways to harvest a successful business

1. In which of the following way a business is sold to employees?
2. Employee stock ownership plans (ESOP)
3. Leveraged buyout (LBO)
4. Investor-led buyout (ILBO)
5. Initial public offering (IPO)

Response: See section 17.1.3

Level: Medium

Learning Objective: Distinguish between the various ways to harvest a successful business

1. __________refers to the process in which as employees accumulate seniority with the company, they receive increasing right to the shares in their account
2. Employee stock
3. Employee stock ownership plan
4. Vesting
5. Seniority benefits

Response: See section 17.1.3

Level: Medium

Learning Objective: Distinguish between the various ways to harvest a successful business

1. In an Employee stock ownership plan, a company sets up a _____ into which it contributes new shares of its own stock or cash to buy existing shares
2. Trust fund
3. Benefits
4. Tax-benefit
5. Vesting

Response: See section 17.1.3

Level: Easy

Learning Objective: Distinguish between the various ways to harvest a successful business

1. A _______buyer is interested in evaluating the business primarily based on the return, ______buyer is primarily looking at the synergy that will be created by combining the acquired firm with their existing business
2. Supplier, customers
3. Financial, strategic
4. Strategic, financial
5. Customer, supplier

Response: See section 17.1.3

Level: Medium

Learning Objective: Distinguish between the various ways to harvest a successful business

1. ________occurs when one buys a company using debt
2. Through an employee stock ownership plans (ESOP)
3. Investor-led buyout (ILBO)
4. Leveraged buyout (LBO)
5. Initial public offering (IPO)

Response: See section 17.1.4

Level: Medium

Learning Objective: Distinguish between the various ways to harvest a successful business

1. What is true about entrepreneurial leveraged buyouts (ELBO)?
2. 10 percent of equity in the company is owned by single individuals
3. At least two-thirds of the purchase price is generated from borrowed funds
4. Employees are given shares of a company
5. Only all-cash deal is accepted

Response: See section 17.1.4

Level: Medium

Learning Objective: Distinguish between the various ways to harvest a successful business

1. How can buyers purchase a company?
2. An all-cash deal
3. A combination of cash and stock
4. By taking on debt
5. All of the above

Response: See section 17.1.4

Level: Easy

Learning Objective: Distinguish between the various ways to harvest a successful business

1. Which of the following affects the prospects for selling a business?
2. Market condition
3. Financial recession
4. Willingness of a buyer
5. All of the above

Response: See section 17.1.4

Level: Easy

Learning Objective: Distinguish between the various ways to harvest a successful business

1. Lots of successful businesses are available for sale at an attractive price
2. The pool of firms for sale in the market is small
3. The pool of buyers is large
4. Sellers can get good prices for their business

Response: See section 17.1.4

Level: Medium

Learning Objective: Distinguish between the various ways to harvest a successful business

1. A shoe manufacturer has $204,100 in total assets and $40,050 in total liabilities. The book value of this company is:
2. $244,150
3. $164,050
4. $64,50
5. $255,50

Response: See section 17.2

Level: Medium

Learning Objective: Outline the different approaches to value a firm

1. The________ rate is used to estimate future cash flows to the present value
2. Sub-prime interest
3. Prime interest
4. Discount Factor
5. None of the above

Response: See section 17.2

Level: Medium

Learning Objective: Outline the different approaches to value a firm

1. If an investor’s cost of investment is $500,000 and net profit is $50,000 that year, the return on investment is:
2. 10%
3. 1%
4. 100%
5. 5%

Response: See section 17.2

Level: Easy

Learning Objective: Outline the different approaches to value a firm

1. What can business owners do to increase the chances of a successful harvest?
2. Anticipate the harvest
3. Run the business as if a buyer may walk in any day
4. Document every financial transaction in the business
5. All of the above

Response: See section 17.3

Level: Medium

Learning Objective: Identify the various challenges owners face in harvesting

1. Why is it not recommended for owners to share with employees about the selling of a business until the deal is completed?
2. Employees may become anxious about the prospects of a new owner
3. Employees may fear about losing a job
4. Employees morale may go down
5. All of the above

Response: See section 17.3.1

Level: Easy

Learning Objective: Identify the various challenges owners face in harvesting

1. ________is an emotional reaction which happens when a seller thinks he made a wrong and unnecessary decision
2. Valuation
3. Vesting
4. Seller’s remorse
5. Buyer’s grief

Response: See section 17.3.2

Level: Easy

Learning Objective: Identify the various challenges owners face in harvesting

1. Which of the following is a drawback to harvesting the firm through an IPO?
2. Complying with SEC regulations for IPOs can be costly and time consuming
3. Large sums of capital in a short period of time
4. Liquidity
5. Owners are able to better understand how much their firm is worth

Response: See section 17.4

Level: Medium

Learning Objective: Explain harvesting by going public

1. The first time a company’s equity is offered for sale on the public market is referred to as________
2. Investor-led buyout (ILBO)
3. Leveraged buyout (LBO)
4. Initial public offering (IPO)
5. Entrepreneurial Leveraged buyout (ELBO)

Response: See section 17.4

Level: Easy

Learning Objective: Explain harvesting by going public