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Indicate whether the statement is true or false.
1. The opportunity to exit a business is triggered by an interested seller.
a. True
b. False
2. With a private equity placement, the firm’s equity is sold in public equity markets, but the transaction is handled by a
private investment banker.
a. True
b. False
3. Harvesting is the method entrepreneurs and investors use to grow their firms.
a. True
b. False
4. Many entrepreneurs successfully grow their firms, but fail to develop an effective exit plan.
a. True
b. False
5. Investors in a startup company are mainly interested in the new firm’s growth and are not particularly interested in an
exit plan.
a. True
b. False
6. While investors always think ahead about how to exit an enterprise, the entrepreneur should focus on daily operational
strategies more than the exit strategy.
a. True
b. False
7. A private placement sale can be more flexible in structure to meet an entrepreneur’s needs even though the entrepreneur
can not sell stock immediately.
a. True
b. False
8. The harvesting process encompasses more than just selling and leaving a business.
a. True
b. False
9. The boost to employee motivation and effort that results from an ESOP will vary significantly from firm to firm.
a. True
b. False
10. Entrepreneurs should think very carefully about their motives for exiting a business and what they plan to do after the
harvest.
a. True
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b. False
11. For the entrepreneur who is simply tired of the day–to-day operations of the business, slowly withdrawing cash flows
over time may require too much patience.
a. True
b. False
12. ESOPs may require educating the buyer about the company’s operations for continued company growth.
a. True
b. False
13. Many entrepreneurs, grateful for their past success, feel the need to give something back to society after selling their
company.
a. True
b. False
14. The sale of a firm is solely about determining the value of a company.
a. True
b. False
15. Entrepreneurs who accept stock in payment for the sale of their businesses are usually pleased with the results because
they escape a significant tax burden.
a. True
b. False
16. Entrepreneurs often do not make good employees at their former company.
a. True
b. False
17. One of the drawbacks of harvesting by withdrawing cash flows slowly is that the owner must seek out a buyer for the
eventual sale of the business.
a. True
b. False
18. A financial buyer of a small business is most interested in the firm as a stand-alone, cash-generating business.
a. True
b. False
19. For value-creating firms, owners who decide to harvest by withdrawing cash flows should accelerate the process as
much as possible for a company with growth needs.
a. True
b. False
20. A strategic buyer is most interested in the stand-alone, cash-generating potential of a business.
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a. True
b. False
21. Opportunity cost of funds is the rate of return that an investor can earn on another investment of similar risk.
a. True
b. False
22. Despite the dot.com bubble, in 2002 and 2003 the number of IPOs dropped slightly, but the total dollars raised
increased.
a. True
b. False
23. Owing to the formulas that guide practice, business valuation has become an exact science.
a. True
b. False
24. Entrepreneurs frequently do not appreciate the difficulty of selling or exiting a business.
a. True
b. False
25. Harvesting owners can be paid in cash or in stock of the acquiring firm, with stock generally being preferred over
cash.
a. True
b. False
26. A management buyout can contribute significantly to a firm’s operating performance.
a. True
b. False
27. More recently, the bust-up leveraged buyout was replaced with the build-up leveraged buyout.
a. True
b. False
28. The build-up leveraged buyout is typically used in industries that are dominated by large firms.
a. True
b. False
29. The harvesting of a business should cause the entrepreneur to ask for advice from the experts who helped build the
company.
a. True
b. False
Indicate the answer choice that best completes the statement or answers the question.
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30. Russell has sold his small variety store to a large retail chain but has agreed to stay on and manage the store. Russell
should expect
a. freedom from responsibility.
b. a feeling of elation with her new wealth.
c. greater independence.
d. culture conflict.
31. Post-harvest entrepreneurs may become disillusioned when they realize their sense of identity
a. was associated with the quest for wealth.
b. derived from interactions with employees.
c. was intertwined with their business.
d. does not return after joining in social or charitable work.
32. As Jacob considers exiting or harvesting, he is concerned with which of the following?
a. merely selling and leaving a business
b. the creation of future options
c. the establishment of a benchmark for firm risk
d. capturing future profitability
33. The availability of a company’s exit options is an important determinant of the appeal of the firm to
a. suppliers.
b. investors.
c. employees.
d. management.
34. Harvey has invested all of his money in his thriving business. He would like to recoup some of investment, but not
completely sell off his business. This might be a good time for him to consider selling stock to the public in a(n):
a. ESOP
b. IPO
c. MBO
d. LBO
35. Vasily is selling his business. As a harvesting owner we would expect him to prefer _____ over _____.
a. cash, stock
b. debt, equity
c. equity, debt
d. stock, cash
36. Sylvia, the owner of a clothing boutique, has agreed to sell her business to one of her buyers. This transaction would
likely be described as a sale to a(n) _____ buyer.
a. competing
b. employee
c. financial
d. strategic
37. Jack is a professional who assists in the buying and selling of businesses. Jack is:
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a. a stock broker.
b. an investment broker.
c. a real estate broker.
d. a business broker.
38. Eleanor has money to invest and is considering buying a company. When comparing her alternatives, her ________
on any investment is the rate of return that she could earn on a similar investment
a. projected future value
b. sunk cost
c. present value
d. opportunity cost
39. Uncertainties accompanying an impending sale of a business often
a. lead to lower employee morale.
b. attract the attention of the Securities and Exchange Commission.
c. cause the deal to fall through.
d. increase costs from added legal services.
40. After harvesting, many entrepreneurs who remain with their firm as an employee experience _________ conflicts.
a. financial
b. practical
c. cultural
d. tactical
41. Pat, owner of Pat’s Welding, LLC, would like to let someone else run the day to day operations while he continues to
draw an income from the business. Because the business is an LLC, Pat will not have to be concerned about:
a. a reduction in the value of the company.
b. seller financing.
c. paying a brokerage fee.
d. double taxation on his income.
42. Two years ago, Harold inherited $30,000 and decided to open a coffee shop in his hometown instead of buying stock
in Ford Motor Company. The rate of return he could have earned on his investment in Ford stock represents his
a. lost profit.
b. opportunity cost of funds.
c. investment opportunity.
d. potential profit.
43. An employee stock ownership plan represents
a. a good way for a business founder to build his/her position in the company.
b. an opportunity for employees to acquire an ownership interest in their company.
c. a harvest method of choice.
d. an effort to ease investor concerns.
44. The effects of the harvesting process include
a. a reduction in time and energy.
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b. an increased managerial focus.
c. an increase in momentum.
d. poor performance.
45. When is the right time to begin thinking about an exit strategy?
a. When the owner wants to retire
b. When a willing buyer expresses an interest
c. When declining health forces the owner to leave active management
d. When the money is first investedint he business
46. Having publicly traded stock can be beneficial to owners in that a public market offers
a. greater liquidity.
b. protection against an unwanted harvest.
c. insight into how to improve the performance of the firm.
d. a justification for refusing requests for ESOP options.
47. The value of a business is determined by
a. what the owner believes the business is worth.
b. what a valuation formula determines its worth is to the owner.
c. what a valuation formula determines its worth is to the buyer.
d. what a buyer with the cash is prepared to pay.
48. A potential buyer for Teresa’s business has mentioned a leveraged buyout, which involves a high level of _____
financing.
a. debt
b. equity
c. strategic
d. unsecured
49. The mere fact that a firm is earning high rates of return on the firm’s asset indicates that
a. the firm is worth more as a going concern than as a dead one.
b. downsizing is likely to be an economically sound option for the business.
c. it is time to start growing the business again.
d. it might be wise to further limit the cash flows returned to investors.
50. Marvin is planning to sell his company to his management team. Marvin will be financing part of the purchase. This
type of arrangement is a form of:
a. ESOP
b. IPO
c. PPO
d. LBO
51. A build-up leveraged buyout involves
a. developing the business to make it an attractive takeover target.
b. acquiring businesses that occupy a higher level in the market channel.
c. a longer time horizon than a bust-up leveraged buyout.
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d. constructing a larger enterprise to be taken public via an IPO.
52. Paul is approaching retirement and has decided to siphon off funds from his company rather than sell it. From his
perspective, the advantage of systematically withdrawing cash from the firm is:
a. retaining control
b. preserving cash for later reinvestment
c. greater latitude in seeking out a buyer for the firm
d. increasing long-term returns from the business
53. Going public can be beneficial to a firm by helping it
a. create a liquid currency to fund future acquisitions.
b. avoid becoming a takeover target in the future.
c. erect a shield against the fluctuations of the stock market.
d. offer better compensation packages to attract superior management talent.
54. Which statement best characterizes business valuation?
a. Valuation is almost a perfect science.
b. Since there are so many intangibles, valuation is mostly an art.
c. The buyer determines the value of a business.
d. Negotiation skills play an important part in valuation.
55. Charles and Nancy have decided to sell their family business and would like to transfer ownership to the next
generation. Which harvesting form would be best?
a. cash flow distribution
b. initial public offering
c. private placement
d. selling to a strategic buyer
56. As a financial buyer, Ted is likely to evaluate acquisition candidates according to their:
a. stand-alone, cash generating potential of a target business.
b. synergies they think the target business will create.
c. potential of the target business to preserve employment.
d. level of debt the target business has accumulated.
57. Strategic buyers evaluate acquisition candidates according to the
a. stand-along, cash-generating potential of a target business.
b. synergies they think the target business will create.
c. potential of the target business to preserve employment.
d. quality of the business strategy of the target firm.
58. Matt owns a car dealership that is very profitable. Since he plans to retire in 5-10 years, Matt has decided to retain
ownership for now, but without continuing to grow the business. This change would also allow him to invest for
retirement some of the cash that the business is now generating. Which harvesting method does this example illustrate?
a. A delayed sellout
b. A strategy to release the firm’s free cash flows to the owners
c. Offering stock to the public through an IPO
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d. Issuing a private placement of stock
59. In a harvest situation, the exiting owners are usually paid in cash or
a. tangible assets.
b. imputed goodwill.
c. favorable publicity.
d. stock.
60. An IPO occurs when a company offers its stock to
a. investment practitioner organizations.
b. family.
c. intrastate private investors.
d. the general public.
61. One of the big financial questions associated with selling a business is:
a. To whom should I sell the business?
b. How much should I ask for the business?
c. Should I offer the business to my employees?
d. Would it be better to liquidate the assets?
62. Which group is always concerned about how to exit a business?
a. Investors
b. Entrepreneurs
c. Employees of the firm
d. Investment bankers
63. Leonard wants to sell his business but the bank will not lend the buyer enough money. Between personal savings and
the bank loan, the buyer has about 70% of the asking price. Which of the following options would be best for Steve in
this situation?
a. Look for a different buyer.
b. Lower the asking price.
c. Retain a 30% ownership in the business and a seat on the advisory board.
d. Offer to finance the remaining 30%, accepting payments over the next few years.
64. Valerie is beginning to think of harvesting her company. Which question should be asked first?
a. Why does she want to harvest?
b. What is the value of her firm?
c. Does the firm have a leadership succession plan in the event that the firm sells?
d. What will be the method of payment?
65. Jill is purchasing a web design company that has patented a new form of technology. Which purchase would be best
for her in relation to the web design company’s liabilities?
a. Buy the firm’s assets.
b. Buy the firm’s stock.
c. Merge the company with her present company.
d. Any of the above three would be acceptable.
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66. Jacob has worked for the past five years to build his business but wants to travel more, so he is thinking it is time to
harvest. Harvesting refers to
a. starting a business.
b. managing the growth of a business.
c. exiting a business.
d. diversifying a business.
67. Arthur’s company is doing well but he has grown a bit tired of the daily grind. The idea of selling is appealing to
him. What would you recommend Arthur do next?
a. Ask his advisory board for their opinions.
b. Ask a business broker what his business is worth.
c. Go public.
d. Get advice from someone who has sold a business.
68. Nettie’s Knits, Inc. paid taxes on its net income then distributed part of the earnings as dividends to investors. These
investors paid tax on the dividends they received. This practice is know as:
a. initial public offering.
b. double taxation.
c. twice taxation.
d. harvesting taxation.
69. In earlier years, leveraged buyouts became synonymous with the ____ LBO.
a. bust-up
b. build-up
c. owner-financed
d. publicly funded
70. Before he executes his exit strategy, Arthur should:
a. understand why he wants out.
b. make sure his heirs approve his exit strategy.
c. find a hobby to occupy his time.
d. plan his budget based on the sudden inflow of cash.
Match the term with its definition.
a. Build–up LBO
b. Business broker
c. Bust-up LBO
d. Double taxation
e. Employee Stock Ownership Plan
f. Harvesting
g. Initial public offering
h. Leveraged buyout
i. Management buyout
j. Opportunity cost of funds
k. Private equity recapitalization
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l. Seller financing
71. Taxation of income that occurs twice—first as corporate earnings and then as stockholder dividends
72. An infusion of equity from private investors that allows an entrepreneur to cash out a portion of his investment while
possibly continuing to operate the business
73. A leveraged buy out involving the purchase of a group of similar companies with the intent of making the firms into
one larger company for eventual sale
74. The rate of return that could be earned on another investment of similar risk
75. The process used by entrepreneurs and investors to reap the value of a business when they leave it
76. A leveraged buyout involving the purchase of a company with the intent of selling off its assets
77. Financing in which the seller accepts a note from the buyer in lieu of cash in partial payment for a business
78. A leveraged buyout in which the firm’s top managers become significant shareholders in the acquired firm
79. A professional who assists in the buying and selling of a business
80. The first sale of shares of a company’s stock to the public
81. A method by which a firm is sold either in part or in total to its employees
82. John is developing a harvest plan and figuring the value of his art gallery. What two issues are of importance?
83. Paul and Vivian have decided to create a harvest plan for their landscaping business. They recognize selling the
company will affect them since they won’t be going to work every day but have asked you for advice on what to expect as
to the impact and how to best proceed. What will you say to them?
84. Name four benefits of using an IPO as a harvesting method..
85. What are professional and personal issues an entrepreneur may face in the period of time from when the harvest is
announced and it is completed?
86. Todd’s small company, Nimbus, developed a video game called Combat Skill that took off among gamers. Farbase
EAD is a large video game developer with its own gaming system that has offered to buy Nimbus. Explain this type of
harvest transaction and what motivations Farbase EAD may have for purchasing Nimbus.
87. List and briefly explain the four basic harvest strategies for the small business.
88. Ellen is a dentist and has decided to develop a harvest plan. She wants her efforts to be successful and effective.
Discuss suggestions for crafting an effective exit strategy.
89. List and describe three types of LBO sales to financial buyers.
90. List the three basic types of acquisitions and identify the purpose of each type.
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Answer Key
1. False
2. False
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52. a
53. a
54. d
55. c
56. a
57. b
58. b
59. d
60. d
61. b
62. a
63. d
64. b
65. a
66. c
67. d
68. b
69. a
70. a
71. d
72. k
73. a
74. j
75. f
76. c
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