91) Ralph buys a software business from Waldo in Columbus, Ohio. As part of the deal, Waldo
signs a covenant not to compete by opening another software business anywhere in Ohio for the
rest of his life. Such a covenant would be enforceable.
Topic: The Due Diligence Process
AACSB: Analytic Skills
92) If the corporation, rather than the business seller, signs a restrictive covenant, the seller may
not be bound by its terms.
Topic: The Due Diligence Process
AACSB: Analytic Skills
93) When an entrepreneur purchases an existing business, he or she essentially is purchasing its
future profit potential.
Topic: The Due Diligence Process
AACSB: Analytic Skills
94) A business owner who buys a company whose financial statements show a pattern of short-
term profitability is guaranteed of getting a good deal.
Topic: The Due Diligence Process
AACSB: Analytic Skills
95) The best method for valuing a business is to use established rules of thumb.
Topic: Methods for Determining the Value of a Business
AACSB: Analytic Skills
96) Goodwill is the difference between an established, successful business and one that has yet to
prove itself.
Topic: Methods for Determining the Value of a Business, Balance Sheet
AACSB: Reflective Thinking
21
97) The balance sheet technique of determining a business’s value uses the company’s net worth
or owner’s equity as the firm’s value, but it oversimplifies the valuation process.
Topic: Methods for Determining the Value of a Business, Balance Sheet
AACSB: Analytic Skills
98) The adjusted balance sheet method of valuing a business changes the book value of net worth
to reflect actual market value.
Topic: Methods for Determining the Value of a Business, Balance Sheet
AACSB: Analytic Skills
99) Business evaluations based on balance sheet methods offer one key advantage: they consider
the future earning potential of the business.
Topic: Methods for Determining the Value of a Business, Balance Sheet
AACSB: Analytic Skills
100) Neither the balance sheet method nor the adjusted balance sheet method of valuing a
business considers the future earning power of the business.
Topic: Methods for Determining the Value of a Business, Balance Sheet
AACSB: Analytic Skills
101) In the excess-earnings approach to business valuation, the earnings of comparable
companies are needed to set the valuation of the company.
Topic: Methods for Determining the Value of a Business, Earnings Approach
AACSB: Analytic Skills
102) One advantage of the excess-earnings method is that it offers an estimate of goodwill.
Topic: Methods for Determining the Value of a Business, Earnings Approach
AACSB: Analytic Skills
103) Goodwill is a capital asset that the business buyer cannot depreciate or amortize for tax
purposes.
Topic: Methods for Determining the Value of a Business, Earnings Approach
AACSB: Analytic Skills
22
104) Under the capitalized earnings approach to business valuation, firms with lower risk factors
are more valuable than those with higher risk factors.
Topic: Methods for Determining the Value of a Business, Earnings Approach
AACSB: Analytic Skills
105) According to the discounted future earnings technique, a dollar earned in the future is worth
more than a dollar earned today.
Topic: Methods for Determining the Value of a Business, Earnings Approach
AACSB: Analytic Skills
106) The reliability of the discounted future earnings approach to valuing a business depends on
making realistic forecasts of future earnings and on choosing the proper present value rate.
Topic: Methods for Determining the Value of a Business, Earnings Approach
AACSB: Analytic Skills
107) The market approach to company valuation evaluates goodwill, risk-of-return, and
estimated net earnings.
Topic: Methods for Determining the Value of a Business, Market Approach
AACSB: Analytic Skills
108) The market approach to valuing a company relies primarily on the price/earnings ratio of
the company in comparison to the average P/E of similar companies.
Topic: Methods for Determining the Value of a Business, Market Approach
AACSB: Analytic Skills
109) A disadvantage of the market approach to valuing a business is finding similar companies
for comparison.
Topic: Methods for Determining the Value of a Business, Market Approach
AACSB: Analytic Skills
23
110) Owners who do not want to sell a business outright, but want to either stay around for a
while or surrender control gradually can use a restructuring strategy.
Topic: Negotiating the Deal
AACSB: Analytic Skills
111) The bargaining process may eventually lead both parties into the non-compete zone.
Topic: Negotiating the Deal
AACSB: Analytic Skills
112) The bargaining zone is the area within which the buyer and the seller cannot reach an
agreement.
Topic: Negotiating the Deal
AACSB: Analytic Skills
113) When negotiating the deal, it is important to remember that the seller is looking for the best
terms and to maintain some contact with the company, at least for a while.
Topic: Negotiating the Deal
AACSB: Analytic Skills
114) The buyer of the business wants to minimize the cash up front and avoid enabling the seller
to open a competing business.
Topic: Negotiating the Deal
AACSB: Analytic Skills
115) It is important that both the buyer and seller have their objectives thought out, written
down, and prioritized when they go into the negotiation.
Topic: Negotiating the Deal
AACSB: Analytic Skills
116) One way to get a mutually satisfying deal when negotiating is to recognize and try to meet
the other party’s need(s).
Topic: Negotiating the Deal
AACSB: Analytic Skills
24
117) Convincing alienated customers to return can be an inexpensive process that doesn’t take
long.
Topic: Disadvantages of Buying an Existing Business
AACSB: Analytic Skills
118) One of the disadvantages of buying an existing business is that customers may be loyal to
previous owners.
Topic: Disadvantages of Buying an Existing Business
AACSB: Analytic Skills
119) High inventory levels could cause a business to be profitable but not have adequate cash
flow.
Topic: Disadvantages of Buying an Existing Business
AACSB: Analytic Skills
120) Briefly describe the advantages and disadvantages of buying an existing business.
Topic: Advantages/Disadvantages of Buying an Existing Business
AACSB: Analytic Skills
25
121) Outline the logical approach one should take in the search stage of buying a business.
Topic: Search Stage
AACSB: Analytic Skills
122) What key questions need to be answered in the process of due diligence?
Topic: The Due Diligence Process
AACSB: Analytic Skills
123) What questions should the buyer ask in determining the value of the seller’s assets?
Topic: The Due Diligence Process
AACSB: Reflective Thinking
124) What are the sources of potential legal liabilities the purchase might expose?
Topic: The Due Diligence Process
AACSB: Analytic Skills
26
125) Review the key legal issues an entrepreneur needs to consider when evaluating an existing
business.
Topic: The Due Diligence Process
126) What financial records should be examined when determining the financial soundness of a
company and what should the entrepreneur look for in each?
Topic: The Due Diligence Process
127) What guidelines should be kept in mind when deciding how to value a company?
Topic: Methods for Determining the Value of a Business
AACSB: Analytic Skills
27
128) How does one value a company using the balance sheet method? Why would an
entrepreneur choose this method of valuation?
Topic: Methods for Determining the Value of a Business, Balance Sheet Method
AACSB: Analytic Skills
129) Describe the earnings approach for valuing a company, outlining the calculation and the
strengths and weaknesses of this technique.
Topic: Methods for Determining the Value of a Business, Earnings Approach
AACSB: Analytic Skills
28
130) Explain the market approach to valuing a business.
Topic: The Market Approach
AACSB: Analytic Skills
29