7
25) One way to value a business is to ________. In general, the business should sell for 3 to 5
times its annual net earnings.
A) look at a multiple of its net earnings
B) look at a comparison with similar businesses
C) use an appropriate benchmark
D) look at a professional appraisal
Learning Object.: 14.4 Use methods of valuing a business.
AACSB Category: Analytical thinking
26) Ways to value a business include comparison to other firms, benchmarking, or looking at a
multiple of net earnings. Any of the methods is an attempt to arrive at a ________.
A) future value
B) net present value
C) fair market value
D) profit maximizing price
Learning Object.: 14.4 Use methods of valuing a business.
AACSB Category: Analytical thinking
27) In valuing a business, the methods that buyers and sellers can use include ________.
A) market-based value
B) book value
C) future earnings
D) Any of the above.
Learning Object.: 14.4 Use methods of valuing a business.
AACSB Category: Analytical thinking
28) One of the methods for computing a company’s valuation is called the market-based
technique. This means to look at a company as assets minus liabilities.
Learning Object.: 14.4 Use methods of valuing a business.
AACSB Category: Analytical thinking
8
29) Describe three simple methods that can be used to estimate a selling price for a business:
Answer:
1) Compare it to other businesses. If you are looking to sell your dry-cleaning business, for
example, check out how much other dry-cleaning businesses in your area are bringing in when
2) Look at benchmarks to see how the business is performing within its industry. In most
3) Look at a multiple of net earnings. One rule of thumb says a business can sell for around three
times its annual net earnings. If the business earns $100,000 net profit per year, for example, it
could be expected to sell for $300,000.
Learning Object.: 14.4 Use methods of valuing a business.
Learning Object.: 14.5 Compare five ways to harvest a business.
AACSB Category: Analytical thinking
31) This is an exit strategy when an entrepreneur sells his or her company to its managers.
A) a merger
B) a management buy-out
C) a management takeover
D) employee buy-out
Learning Object.: 14.5 Compare five ways to harvest a business.
AACSB Category: Analytical thinking
32) This harvest option has the advantage of financing growth that the company could not
achieve on its own.
A) increase the free cash flow
B) management buyout
C) employee stock ownership plan
D) merger or acquisition
Learning Object.: 14.5 Compare five ways to harvest a business.
AACSB Category: Analytical thinking
9
33) A disadvantage of harvesting cash over time as an exit strategy is that ________.
A) the managers find out what the company is really worth
B) the owner doesn’t have to look for a buyer
C) the owner will lose money
D) it can take a long time to complete
Learning Object.: 14.5 Compare five ways to harvest a business.
AACSB Category: Analytical thinking
34) One of the advantages of an Employee Stock Ownership Plan is that ________.
A) the owner will have to look for buyers in the general public
B) it will prevent employees from having control of the company
C) employees will likely quit and leave
D) ESOPs offer tax breaks to the company
Learning Object.: 14.5 Compare five ways to harvest a business.
AACSB Category: Analytical thinking
35) To take a business public means to sell its stock on the stock market. The acronym for the
first offering of a business’ stock is ________.
A) FIFO
B) ALPO
C) IPO
D) IMPO
Learning Object.: 14.5 Compare five ways to harvest a business.
AACSB Category: Analytical thinking
36) Harvesting options include ________.
A) an IPO
B) merging or being acquired
C) increasing cash flows and a management buy-out
D) All of the above.
Learning Object.: 14.5 Compare five ways to harvest a business.
AACSB Category: Analytical thinking
10
37) When one is merging or being acquired, ________.
A) it is typically a quick and emotionless process
B) it is typically concluded within a few weeks
C) it can be an emotionally draining experience and take over a year
D) None of the above.
Learning Object.: 14.5 Compare five ways to harvest a business.
AACSB Category: Analytical thinking
38) Three of the most common harvesting options include increasing the free cash flow,
management buyout, and management stock ownership plan.
Learning Object.: 14.5 Compare five ways to harvest a business.
AACSB Category: Analytical thinking
39) Why is it not a good idea to tell investors in your business plan that your exit strategy is
simply “to take the business public”?
Learning Object.: 14.5 Compare five ways to harvest a business.
AACSB Category: Analytical thinking
11
40) What are the four basic exit strategy possibilities? Describe them.
1) Acquisition – you create a business that someone will want to acquire at a future period. Your
strategy could be that you want to create a business that will be valuable for a current competitor
or a member of your distribution channel. The plan is that the purchase of your firm will pay you
and your investors more than you put into the business. A rule of thumb for a small business is
2) Earn out – with this strategy, you buy out your investors’ share of the business. You will need
projected cash flow statements that show the business will generate extremely strong positive
3) Debt – Equity Exchange – if investors are lending you money, you can decide to give them
equity in return for a reduction of debt. This will reduce interest expense also. With this type of
4) Merge – This strategy is similar to the first, but with a merger, two companies join to create an
entirely new venture. Companies do this to combine their strengths. For example, one has great
products but a weak distribution network, while the other firm has weaker products but an
excellent distribution net. These firms complement each other. With a merger (or acquisition),
money or shares will be paid to original investors upon completion of the merger.
Learning Object.: 14.5 Compare five ways to harvest a business.