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61) The median selling price of a private company is:
A) $75,000.
B) $125,000.
C) $275,000.
D) $420,000.
62) Which of the following is an exception among important factors that a potential buyer should
investigate?
A) Lease agreements
B) HR policy
C) Accounts receivable
D) Business records
63) Hiring the previous owner as a consultant for the first few months can be a valuable
investment.
64) When the location of the business is critical to its success, it may be wise to purchase a
business in another location.
65) One reason why an owner is selling the business is because the business location may have
become unsatisfactory.
66) It is important to develop a list of criteria that a potential business acquisition must meet.
67) A straight business sale may be worst for a seller who wants to step down and turn over the
reins of the company to someone else.
68) One of the biggest mistakes business buyers can make is entering negotiations with only a
vague notion of the strategies they will employ.
69) One of the "rules" of successful negotiations is "not everything is negotiable."
70) An important advantage of buying an existing business is the greater likelihood that it will
continue to survive and thrive in the marketplace.
71) With an existing business, the new owner can depend on employees to help him/her make
money while he/she is learning the business.
72) For a new owner of an existing business, physical facilities and equipment costs are very
similar to what would have been spent on a start-up with all new facilities and equipment.
73) While there are numerous advantages to buying an existing business, there are also some
disadvantages, like the previous owner having created ill will rather than goodwill with
customers and suppliers.
74) A new owner of an existing business can generally introduce change and innovation almost
as easily as if the company was a new business start-up.
75) Generally speaking, current employees will prove flexible and able to meet whatever
changes the new owner desires to make once the business is acquired.
76) A buyer should never trust the firm's balance sheet evaluation of inventory but should
conduct an independent assessment of inventory age and salability.
77) Accounts receivable are rarely worth face value, and should be "aged" when evaluating a
company's assets.
78) Failing to age accounts receivable could lead a buyer into paying more for a business than it
is worth.
79) The business acquisition process should begin with creating a list of criteria for selecting the
business to buy.
80) Part of a "self-audit" when buying a business is to ask yourself, "What do I expect to get out
of the business" and "How much can I put into the business?"
81) "Knocking on the doors" of businesses an entrepreneur would like to buy—although they are
not advertised "for sale"—is a waste of time.
82) In most business sales, the buyer bears the responsibility of determining whether or not the
business is a good value.
83) Traditional lenders of capital often shy away from deals involving the purchase of an
existing business.
84) A competent owner is a master of day-to-day operations of the business and can help a buyer
to make a smooth transition into business ownership.
85) The entrepreneur who buys an existing business must recognize that accounts receivable
rarely are worth their "face value."
86) Most business buyers can expect to find detailed, accurate, and audited financial records in
the companies they are looking at buying.
87) Before purchasing an existing business, an entrepreneur should analyze closely both direct
and indirect competitors.
88) Any liens against a business must be satisfied by the current owner before the sale can be
consummated.
89) If a banker requires the current loan on a business to be paid at the time of the sale to the new
owner, the banker will require a due-on-sale clause in the agreement.
90) Loan contracts sometimes prohibit assignments with due-on-sale clauses.
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.
92) If the corporation, rather than the business seller, signs a restrictive covenant, the seller may
not be bound by its terms.
93) When an entrepreneur purchases an existing business, he or she essentially is purchasing its
future profit potential.
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.
95) The best method for valuing a business is to use established rules of thumb.
96) Goodwill is the difference between an established, successful business and one that has yet to
prove itself.
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.
98) The adjusted balance sheet method of valuing a business changes the book value of net worth
to reflect actual market value.
99) Business evaluations based on balance sheet methods offer one key advantage: they consider
the future earning potential of the business.
100) Neither the balance sheet method nor the adjusted balance sheet method of valuing a
business considers the future earning power of the business.
101) In the excess-earnings approach to business valuation, the earnings of comparable
companies are needed to set the valuation of the company.
102) One advantage of the excess-earnings method is that it offers an estimate of goodwill.
103) Goodwill is a capital asset that the business buyer cannot depreciate or amortize for tax
purposes.
104) Under the capitalized earnings approach to business valuation, firms with lower risk factors
are more valuable than those with higher risk factors.
105) According to the discounted future earnings technique, a dollar earned in the future is worth
more than a dollar earned today.
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.
107) The market approach to company valuation evaluates goodwill, risk-of-return, and
estimated net earnings.
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.
109) A disadvantage of the market approach to valuing a business is finding similar companies
for comparison.
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.
111) The bargaining process may eventually lead both parties into the non-compete zone.
112) The bargaining zone is the area within which the buyer and the seller cannot reach an
agreement.
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.
114) The buyer of the business wants to minimize the cash up front and avoid enabling the seller
to open a competing business.
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.
116) One way to get a mutually satisfying deal when negotiating is to recognize and try to meet
the other party's need(s).
117) Convincing alienated customers to return can be an inexpensive process that doesn't take
long.
118) One of the disadvantages of buying an existing business is that customers may be loyal to
previous owners.
119) High inventory levels could cause a business to be profitable but not have adequate cash
flow.
120) Briefly describe the advantages and disadvantages of buying an existing business.
121) Outline the logical approach one should take in the search stage of buying a business.
122) What key questions need to be answered in the process of due diligence?
123) What questions should the buyer ask in determining the value of the seller's assets?
124) What are the sources of potential legal liabilities the purchase might expose?
125) Review the key legal issues an entrepreneur needs to consider when evaluating an existing
business.
126) What financial records should be examined when determining the financial soundness of a
company and what should the entrepreneur look for in each?
127) What guidelines should be kept in mind when deciding how to value a company?
128) How does one value a company using the balance sheet method? Why would an
entrepreneur choose this method of valuation?
129) Describe the earnings approach for valuing a company, outlining the calculation and the
strengths and weaknesses of this technique.
130) Explain the market approach to valuing a business.
