41) The mechanics of most small business sales involve:
A) a cash buyout with no financing.
B) a down payment with a note carried by the seller.
C) no down payment with a note carried by the seller.
D) an exchange of one company’s stock for another, and stock options for senior managers.
Topic: Negotiating the Deal
AACSB: Analytic Skills
42) Both buyers and sellers must recognize that no one benefits without a(n):
A) low price.
B) high price.
C) agreement.
D) product.
Topic: The Structure of the Deal
AACSB: Analytic Skills
43) The ________ is the area within which the two parties can reach an agreement.
A) bargaining zone
B) market
C) selling zone
D) buying zone
Topic: The Structure of the Deal
AACSB: Analytic Skills
44) In a business sale, the seller is looking to:
A) negotiate favorable payment terms, preferably over time.
B) minimize the amount of cash paid up front.
C) maximize the cash he/she gets from the sale.
D) get the business at the lowest price possible.
Topic: The Structure of the Deal
AACSB: Analytic Skills
11
45) In a business sale, the buyer seeks to:
A) get the business at the lowest price possible.
B) negotiate favorable payment terms, preferably over time.
C) minimize the amount of cash paid up front.
D) All of the above
Topic: Negotiating the Deal
AACSB: Analytic Skills
46) To avoid a stalled deal, both seller and buyer should go into the negotiation process with:
A) income tax returns of past three to five years.
B) records of accounts payable.
C) list of objectives ranked in order of priority.
D) an optimistic attitude.
Topic: Negotiating the Deal
AACSB: Analytic Skills
47) Which one of the following is not a goal of a buyer?
A) Buying the business at the lowest price possible
B) Outsmarting the seller
C) Negotiating favorable payment terms
D) Minimizing the amount of cash paid out front
Topic: Negotiating the Deal
AACSB: Analytic Skills
48) The recommended step(s) when buying a business is (are):
A) investigate the potential acquisitions.
B) explore a variety of financing options.
C) analyze your skills and abilities.
D) All of the above
Topic: How to Buy a Business
AACSB: Analytic Skills
12
49) Business valuation is partly an art and partly:
A) a craft.
B) a science.
C) a sale.
D) a purchase.
Topic: Methods for Determining the Value of a Business
AACSB: Analytic Skills
50) One advantage of the excess-earnings method is that it:
A) offers an estimate of goodwill.
B) increases the profit.
C) increases the cash.
D) All of the above
Topic: Earnings Approach: Variation 1
AACSB: Analytic Skills
51) There are three components in the rate of return used to value a business. The component(s)
are:
A) risk-free return.
B) an inflation premium.
C) the risk allowance for investing in the particular business.
D) All of the above
Topic: Earnings Approach: Variation 1
AACSB: Analytic Skills
52) Using the discounted future earnings approach, the buyer estimates:
A) the company’s net income for the next six months.
B) the company’s net income for the several years.
C) the company’s net income for several years and then discounted back to the present value.
D) the company’s net asset for several years and then discounted back to the present value.
Topic: Earnings Approach: Variation 3
AACSB: Analytic Skills
13
53) In the market approach, the technique to calculate the value of a company is:
A) ROI.
B) P/E.
C) ROA.
D) P/A.
Topic: Market Approach
AACSB: Analytic Skills
54) To avoid a bumpy transition, a business buyer should do the following:
A) concentrate on communicating with employees.
B) be honest with employees.
C) devote time to selling your vision for the company to its key stakeholders.
D) All of the above
Topic: The Transition Stage
AACSB: Analytic Skills
55) The ________ is a firm commitment by both sides that they are ready to move toward
closing the sale of the business.
A) due diligence process
B) sale deed
C) loan covenant
D) letter of intent
Topic: Negotiating the Deal
AACSB: Analytic Skills
56) Which of the following is an intangible asset?
A) Building
B) Machinery
C) Vehicles
D) Trademark
Topic: The Due Diligence Process
AACSB: Analytic Skills
14
57) In general, in negotiations and acquisitions of a business, the buyer seeks to:
A) get the business at the lowest price possible.
B) negotiate favorable payment terms, preferably over time.
C) Both A and B
D) None of the above
Topic: Negotiating the Deal
AACSB: Analytic Skills
58) The bargaining zone is:
A) the area within the bargaining process in which an agreement can be reached.
B) where the buyer gets the best deal.
C) where the seller gets the best deal.
D) None of the above
Topic: The Art of the Deal
AACSB: Analytic Skills
59) In an asset sale, the seller keeps all:
A) liabilities.
B) cash.
C) current assets.
D) inventories.
Topic: Straight Business Sale
AACSB: Analytic Skills
60) The ________ method of valuation assumes that a dollar earned in the future will be worth
less than that same dollar today.
A) market approach
B) discounted future earnings approach
C) asset approach
D) None of the above
Topic: Methods for Determining the Value of a Business
AACSB: Analytic Skills
15
61) The median selling price of a private company is:
A) $75,000.
B) $125,000.
C) $275,000.
D) $420,000.
Topic: Methods for Determining the Value of a Business
AACSB: Analytic Skills
62) Which of the following is an exception among important factors that a potential buyer should
investigate?
A) Lease agreements
B) HR policy
C) Accounts receivable
D) Business records
Topic: The Due Diligence Process
AACSB: Analytic Skills
63) Hiring the previous owner as a consultant for the first few months can be a valuable
investment.
Topic: Buying an Existing Business
AACSB: Analytic Skills
64) When the location of the business is critical to its success, it may be wise to purchase a
business in another location.
Topic: Buying an Existing Business
AACSB: Analytic Skills
65) One reason why an owner is selling the business is because the business location may have
become unsatisfactory.
Topic: Buying an Existing Business
AACSB: Analytic Skills
66) It is important to develop a list of criteria that a potential business acquisition must meet.
Topic: Develop a List of Criteria
AACSB: Analytic Skills
16
67) A straight business sale may be worst for a seller who wants to step down and turn over the
reins of the company to someone else.
Topic: The Structure of the Deal
AACSB: Analytic Skills
68) One of the biggest mistakes business buyers can make is entering negotiations with only a
vague notion of the strategies they will employ.
Topic: The Structure of the Deal
AACSB: Analytic Skills
69) One of the “rules” of successful negotiations is “not everything is negotiable.”
Topic: Negotiating the Deal
AACSB: Analytic Skills
70) An important advantage of buying an existing business is the greater likelihood that it will
continue to survive and thrive in the marketplace.
Topic: Advantages of Buying an Existing Business
AACSB: Analytic Skills
71) With an existing business, the new owner can depend on employees to help him/her make
money while he/she is learning the business.
Topic: Advantages of Buying an Existing Business
AACSB: Analytic Skills
72) For a new owner of an existing business, physical facilities and equipment costs are very
similar to what would have been spent on a start-up with all new facilities and equipment.
Topic: Advantages of Buying an Existing Business
AACSB: Analytic Skills
17
73) While there are numerous advantages to buying an existing business, there are also some
disadvantages, like the previous owner having created ill will rather than goodwill with
customers and suppliers.
Topic: Disadvantages of Buying an Existing Business
AACSB: Analytic Skills
74) A new owner of an existing business can generally introduce change and innovation almost
as easily as if the company was a new business start-up.
Topic: Disadvantages of Buying an Existing Business
AACSB: Analytic Skills
75) Generally speaking, current employees will prove flexible and able to meet whatever
changes the new owner desires to make once the business is acquired.
Topic: Disadvantages of Buying an Existing Business
AACSB: Analytic Skills
76) A buyer should never trust the firm’s balance sheet evaluation of inventory but should
conduct an independent assessment of inventory age and salability.
Topic: Disadvantages of Buying an Existing Business
AACSB: Analytic Skills
77) Accounts receivable are rarely worth face value, and should be “aged” when evaluating a
company’s assets.
Topic: Disadvantages of Buying an Existing Business
AACSB: Analytic Skills
78) Failing to age accounts receivable could lead a buyer into paying more for a business than it
is worth.
Topic: Disadvantages of Buying an Existing Business
AACSB: Analytic Skills
18
79) The business acquisition process should begin with creating a list of criteria for selecting the
business to buy.
Topic: The Search Stage
AACSB: Analytic Skills
80) Part of a “self-audit” when buying a business is to ask yourself, “What do I expect to get out
of the business” and “How much can I put into the business?”
Topic: The Search Stage
AACSB: Analytic Skills
81) “Knocking on the doors” of businesses an entrepreneur would like to buy—although they are
not advertised “for sale”—is a waste of time.
Topic: The Search Stage
AACSB: Analytic Skills
82) In most business sales, the buyer bears the responsibility of determining whether or not the
business is a good value.
Topic: Negotiating the Deal
AACSB: Analytic Skills
83) Traditional lenders of capital often shy away from deals involving the purchase of an existing
business.
Topic: Negotiating the Deal
AACSB: Analytic Skills
84) A competent owner is a master of day-to-day operations of the business and can help a buyer
to make a smooth transition into business ownership.
Topic: Advantages of Buying an Existing Business
AACSB: Analytic Skills
19
85) The entrepreneur who buys an existing business must recognize that accounts receivable
rarely are worth their “face value.”
Topic: Disadvantages of Buying an Existing Business
AACSB: Analytic Skills
86) Most business buyers can expect to find detailed, accurate, and audited financial records in
the companies they are looking at buying.
Topic: The Due Diligence Process
AACSB: Analytic Skills
87) Before purchasing an existing business, an entrepreneur should analyze closely both direct
and indirect competitors.
Topic: The Due Diligence Process
AACSB: Analytic Skills
88) Any liens against a business must be satisfied by the current owner before the sale can be
consummated.
Topic: Liens
AACSB: Analytic Skills
89) If a banker requires the current loan on a business to be paid at the time of the sale to the new
owner, the banker will require a due-on-sale clause in the agreement.
Topic: Contract Assignments
AACSB: Analytic Skills
90) Loan contracts sometimes prohibit assignments with due-on-sale clauses.
Topic: Contract Assignments
AACSB: Analytic Skills
20