Entrepreneurship and Small Business Management, 2e (Mariotti)
Chapter 3 Finding Opportunity in an Existing Business
1) It is ________ to buy a going concern for less than it would cost to start a similar company.
A) Possible
B) Impossible
C) Likely
D) Improbable
E) Definite
Learning Obj.: LO 1
AACSB: Analytical thinking
2) With a family business, much like the acquisition of any going concern, there is a chance to
build upon its ________ and to turn around ________ aspects.
A) Strengths, problematic
B) Strengths, awkward
C) Gifts, problematic
D) Strengths, tricky
E) None of the above
Learning Obj.: LO 6
AACSB: Analytical thinking
3) All of the following can help reduce your learning curve except ________.
A) Having transferrable skills from prior experience that fit the business
B) Seeking out employment in the type of company you want to purchase
C) Volunteer activities
D) Read books about the industry
E) All of the above can reduce your learning curve.
Learning Obj.: LO 1
AACSB: Reflective thinking
4) Due diligence can be defined as ________.
A) The exercise of reasonable care in the evaluation of a business opportunity
B) The exercise of sensible care in the evaluation of a business opportunity
C) The exercise of rational care in the evaluation of a business opportunity
D) The exercise of judicious care in the evaluation of a business opportunity
E) The exercise of equitable care in the evaluation of a business opportunity
Learning Obj.: LO 3
AACSB: Analytical thinking
1
5) A legal document enumerating the type of information that is to remain confidential is called a
________.
A) Nondisclosure agreement
B) Disclosure agreement
C) Nondisclosure letter
D) Noncompete agreement
E) None of the above
Learning Obj.: LO 3
AACSB: Analytical thinking
6) Cash flow valuation uses projected future cash flows and the ________ to arrive at a figure.
A) Time value of money
B) Nominal value of money
C) Value of investment
D) Future customer demand
E) All of the above
Learning Obj.: LO 4
AACSB: Analytical thinking
7) ________ is/are a source for leads regarding businesses for sale.
A) Your current employer
B) Customers
C) Suppliers
D) Competitors
E) All of the above
Learning Obj.: LO 3
AACSB: Analytical thinking
8) Which of the following is not a method to determine the value of a business?
A) Worth of stockholders’ equity
B) Asset valuation
C) Earnings valuation
D) Cash flow valuation
E) Sentimental valuation
Learning Obj.: LO 4
AACSB: Analytical thinking
2
9) Discovery of potential problems when buying a business is the responsibility of the ________.
A) Buyer
B) Seller
C) Legal authorities
D) Employees
E) Customers
Learning Obj.: LO 1
AACSB: Reflective thinking
10) In a whole business sale, the buyer acquires ________ of the company, known or unknown.
A) All assets and liabilities
B) Only the assets
C) None of the liabilities
D) The building
E) The customers
Learning Obj.: LO 5
AACSB: Analytical thinking
11) Records of information that a buyer should request and review during due diligence include
all of the following except ________.
A) Tax returns for the previous three to five years
B) Bank deposit tickets for the past two years
C) Employee records and turnover history for five years
D) Supplier lists and references
E) Personal correspondence
Learning Obj.: LO 3
AACSB: Application of knowledge
12) Which of the following is a way of looking at earnings valuation?
A) Future earnings under new ownership
B) Future earnings under current ownership
C) Past earnings under new ownership
D) All of the above
E) None of the above
Learning Obj.: LO 4
AACSB: Analytical thinking
3
13) A common undisclosed reason to sell a business is not ________.
A) Lack of sufficient cash flow
B) Unprofitability
C) Entrance of new competitors
D) Pending or active litigation
E) Wanting to retire
Learning Obj.: LO 3
AACSB: Analytical thinking
14) The majority of small businesses that change owners are still in business five years later,
about ________ the rate of start-up survival.
A) Double
B) Triple
C) Four times
D) Fifty times
E) None of the above
Learning Obj.: LO 1
AACSB: Application of knowledge
15) Two primary risks start-ups face are ________.
A) Not finding a sufficient supplier and not being able to operate profitably
B) Not finding a sufficient market and not being able to operate profitably
C) Not finding a sufficient market and not being able to do accounting profitably
D) Not finding sufficient advertising opportunities and not being able to operate profitably
E) Not finding a sufficient market and not being able to price profitably
Learning Obj.: LO 1
AACSB: Analytical thinking
16) Becoming a successful entrepreneur is a process that can be ________ and ________ by
purchasing an operating business.
A) Simplified, accelerated
B) Simplified, stunted
C) Complicated, accelerated
D) Convoluted, accelerated
E) Simplified, enhanced
Learning Obj.: LO 1
AACSB: Analytical thinking
4
17) It is appropriate to interview all of the following except ________.
A) Former suppliers
B) Customers
C) Employees
D) Family members
E) All of the above are appropriate to interview.
Learning Obj.: LO 3
AACSB: Analytical thinking
18) Examples of poor fit include ________.
A) Personality
B) Lifestyle
C) Work environment
D) All of the above
E) None of the above
Learning Obj.: LO 2
AACSB: Analytical thinking
19) Buying a successful business can help an entrepreneur in all of the following ways except
________.
A) Reducing risk
B) Issues of location
C) Customer development
D) Product or service delivery
E) All of the above are helpful.
Learning Obj.: LO 1
AACSB: Analytical thinking
20) Decision-making criteria and priorities when searching for an existing business include
________.
A) Industry
B) Geography
C) Size
D) Life cycle
E) All of the above
Learning Obj.: LO 3
AACSB: Analytical thinking
5
21) As the buyer in a negotiation, you are working to do all of the following except ________.
A) Secure the best price
B) Reduce your initial investment capital costs
C) Maximize returns
D) Give the buyer the most you can afford
E) None of the above
Learning Obj.: LO 5
AACSB: Analytical thinking
22) Typically, you will have to secure more capital to buy a business than to start one up because
you are paying for the ________.
A) Established customer base
B) Supplier relationships
C) Skilled employees
D) All of the above
E) None of the above
Learning Obj.: LO 2
AACSB: Analytical thinking
23) Nonfinancial variables to consider in valuation include ________.
A) Market space
B) Competitive environment
C) Legal and regulatory status of the firm
D) Customer goodwill
E) All of the above
Learning Obj.: LO 4
AACSB: Analytical thinking
24) Which of the following may not be an undisclosed issue when buying a business?
A) The current owner is in poor health.
B) Dissatisfied customers
C) Failure to keep up with market trends
D) Patents are no longer valid.
E) Equipment is obsolete.
Learning Obj.: LO 2
AACSB: Analytical thinking
6