Essentials of Entrepreneurship and Small Business Management, 9e (Scarborough)
Chapter 7 Buying an Existing Business
1) The due diligence process of analyzing and evaluating an existing business ________.
A) may be just as time consuming as the development of a comprehensive business plan for a
start-up
B) helps to determine if the company will generate sufficient cash to pay for itself and leave you
with a suitable rate of return on your investment
C) helps to determine what the company’s potential for success is
D) All of the above
2) When done correctly, the due diligence process will ________.
A) reveal both the positive and negative aspects of an existing business
B) be time consuming and expensive
C) most often result in the purchase of the business
D) rarely prove to be beneficial
3) Advantages to buying an existing business that you do not have with a startup include
________.
A) greater access to venture capital
B) the opportunity to participate in a national advertising campaign
C) inventory is in place and trade credit is established
D) easy implementation of innovations and changes from past policies
4) Which of the following is a potential disadvantage of purchasing an existing business?
A) The employees inherited with the business may not be suitable.
B) The previous owner may have created ill will among the company’s customers.
C) Equipment and facilities may be obsolete or inefficient.
D) All of the above
5) When evaluating the assets of an existing business, the inventory ________.
A) is always current and salable
B) usually appreciates over time, making the business a bargain
C) should be judged on the basis of its market value, not its book value
D) is usually stated honestly and does not need an independent audit
6) An entrepreneur who is considering purchasing a business is analyzing a company’s accounts
receivable. The following table summarizes her findings.
Age of Accounts Amount Probability of Collection
0 – 30 days $12,000 .96
31 – 60 days $ 4,000 .87
61 – 90 days $ 2,500 .71
91 – 120 days $ 1,400 .65
121+ days $ 800 .24
How much should this potential buyer be willing to pay for these accounts receivable?
A) Nothing; a buyer should never purchase existing accounts receivable.
B) $20,700
C) $17,877
D) Not enough information given to determine
7) The process of investigating the details of a company that is for sale to determine the
strengths, weaknesses, opportunities and threats facing it is known as the ________ process.
A) hidden market
B) due diligence
C) skimming
D) business assessment
8) According to Pepperdine University research, most small to medium business purchases take
less than 3 months to be completed.
9) In too many cases, the excitement of being able to implement a “fast entry” into the market
causes an entrepreneur to rush into a deal and make unnecessary mistakes in judgment.
10) The due diligence process that involves analyzing and evaluating an existing business for
possible purchase is much less time-consuming than the process of developing a comprehensive
business plan for a start-up.
11) The due diligence process in analyzing and evaluating an existing business can be just as
time consuming as the development of a comprehensive business plan for a start-up.
12) With an existing business, the new owner can depend on employees to help him make money
while he is learning the business.
13) For a new owner of an existing business, physical facilities and equipment costs are very
similar to what would have been spent on a startup with all new facilities and equipment.
14) When buying a business, an entrepreneur can usually purchase equipment and fixtures at
prices well below their book value.
15) A principal advantage of buying an existing business is the purchaser’s ability to rely on the
previous owner’s experience.
16) An entrepreneur should never purchase a business that is losing money.
17) A new owner of an existing business can generally introduce change and innovation almost
as easily as if the company were a new business because employees and customers expect
change in business practice when there is a change in ownership.
18) Accounts receivable are rarely worth face value and should be “aged” when evaluating a
company’s assets.
19) Briefly describe the advantages and the disadvantages of buying an existing business.
20) Your friend Susan is considering purchasing an existing business. How would you explain to
her what due diligence is, why it is important, and the critical areas of it?
21) Which of the following is not a stage in acquiring a business?
A) due diligence
B) negotiation
C) valuation
D) transition
22) The first stage in acquiring a business is ________.
A) search
B) due diligence
C) valuation
D) negotiation
23) Roughly ________ businesses change ownership each year.
A) 200,000
B) 300,000
C) 400,000
D) 500,000
24) Negotiation take place ________.
A) throughout the five stages in acquiring a business
B) in the due diligence stage
C) in the valuation stage
D) in the transition stage
25) The letter of intent is a ________ document.
A) binding
B) nonbinding
C) transferable
D) final
26) The letter of intent is a nonbinding document.
27) The nondisclosure agreement is a nonbinding document.
28) A typical letter of intent addresses terms such as price and terms of payment.
29) The last step in acquiring a business is closing the deal.
30) Transition is the final step in acquiring a business.
31) Paige Dominick is considering purchasing an existing business. She has asked you to advise
her on her purchase. How would you explain to her what a letter of intent is and why it is
important?
32) The first step an entrepreneur should take when buying an existing business is to ________.
A) explore financing options
B) prepare a list of potential candidates
C) analyze his or her skills, abilities, and interests in an honest self-audit
D) contact existing business owners in the area and ask if their companies are for sale
33) When acquiring a business, the buyer should ________.
A) conduct a self-analysis of skills, abilities, and interests
B) develop a list of criteria that define the “ideal business” for the buyer
C) prepare a list of potential candidates that meet the criteria
D) All of the above
34) Which of the following is not a source for the hidden market?
A) Networking
B) Business brokers
C) Industry contacts
D) All of the above are sources for the hidden market
35) Bizbuysell.com and Bizquest are examples of Internet sites that provide access to ________.
A) business brokers
B) franchises available for sale
C) the hidden market of companies for sale
D) All of the above
36) The ________ market consists of low-profile companies that might be for sale but are not
advertised as such.
A) venture capitalist
B) franchise
C) hidden
D) broker
37) Which of the following is typically not a question to ask in conducting a self-inventory?
A) What business activities do you enjoy least?
B) What kind of business do you not want to avoid?
C) Which industries interest you most?
D) What do you expect to get out of the business?
38) The first step in buying a business is not searching out potential acquisition candidates.
39) The business acquisition process should begin with the search for potential companies to
acquire.
40) The primary focus of the self-audit is to identify the type of business that you will be
happiest and most successful owning.
41) What is the “hidden market?”
42) ________ involves the process of studying, reviewing, and verifying all the relevant
information concerning an acquisition.
A) Negotiation
B) Due diligence
C) Valuation
D) Opportunity identification
43) The goal of the due diligence process is to discover exactly what the buyer is purchasing and
avoid any unpleasant surprises ________ the deal is closed.
A) before
B) after
C) during
D) while
44) The due diligence process involves investigating four critical areas of the business, which are
________, asset valuation, legal issues, and financial condition.
A) negotiation
B) business valuation
C) motivation
D) planning
45) You can look at investing in the due diligence process as choosing to pay now or pay later.
46) “Why do you want to buy the business,” is one of the four important areas to investigate in
the due diligence process.
47) The most common reason for an owner to sell his or her business is planned retirement.
48) A prospective buyer should evaluate the business’s assets to determine their true value.
49) Book value is the same as market value.
50) Value is determined in the market, not on a balance sheet.
51) Asset valuation is an important part of the due diligence process. Why?
52) The ________ method establishes the value of a company by computing the book value of its
net worth, or owner’s equity.
A) earnings
B) market
C) balance sheet
D) multiples
53) The ________ method considers the future income potential of the business.
A) earnings
B) market
C) balance sheet
D) fixed price
54) ________ is the difference between an established, successful business and one that has yet
to prove itself.
A) Net worth
B) Equity
C) Multiple
D) Goodwill
55) Goodwill is the difference between an established, successful business and one that has yet to
prove itself.
56) Opportunity cost is the cost of exploiting a choice.
57) Opportunity cost is the cost of the next best alternative.
58) The market approach uses the price/earnings ratios of similarly traded businesses to estimate
the value of a company.
59) The market approach is the most common business valuation method.
60) Discounted future earnings is the most common business valuation method.
61) What is the market approach to business valuation?
62) The ________ of the deal is more important than the price the seller agrees to pay.
A) structure
B) art
C) value
D) speed
63) The structure of the deal refers to the ________.
A) price paid
B) method of payment
C) terms and conditions of payment
D) legality of the process
64) ________ is what a business is actually worth.
A) Price
B) Goodwill
C) Equity
D) Value
65) Value is what a business is actually worth.
66) The negotiation zone is the area within which the two parties can reach agreement.
67) Earn-out is when the seller agrees to accept a percentage of the sales price and stays on to
manage the business for a few more years under the new owner.
68) A letter of intent is a firm commitment by both sides that they are ready to move toward
closing the sale of the business.
69) The majority of the deals make it from the letter of intent stage to the final closing.
70) The old saying “the devil is in the details” holds true when buying a business.
71) What is an ESOP?
72) Which of the following is not a document required to close the deal?
A) Letter of intent
B) Bill of sale
C) Asset purchase agreement
D) Non-compete agreement
73) Which of the following should a business owner do to avoid a bumpy transition?
A) Concentrate on communicating with employees.
B) Devote time to selling the vision for the company to its key stakeholders.
C) Consider asking the seller to serve as a consultant until the transition is complete.
D) All of the above.
74) Closing the sale of a business is a complex legal process.
75) One of the closing documents required is the non-disclosure agreement (NDA).
76) Once the deal stage is complete, the transition stage begins with the actual closing of the
purchase.
77) A non-compete is usually one of the documents required for closing.
78) To avoid a bumpy transition, it is important to not ask the seller to remain as a consultant.
79) Communicating with employees helps smoothen the transition.
80) What should the new owner do to avoid a bumpy transition?