50) What types of financing requirement dramatically reduces the number of potential buyers?
A) 80% financing, 20 % cash
B) 100% cash only
C) 100% financing by the seller
D) All of the above
51) In ________, managers or employees, or both, borrow money from a financial institution and
pay the owner the total agreed-upon price at closing; then they use the cash generated from the
company’s operations to pay off the debt.
A) a leveraged sellout
B) a leveraged buyout
C) owner financing
D) 100% bank financing
52) When selling a business to insiders, available options are:
A) leveraged buyout.
B) sale for cash plus a note.
C) an employee stock ownership plan.
D) All of the above
53) Employees contribute a portion of their earnings over time toward purchasing shares of the
company’s stock from the founder until they own the company outright. This is a characteristic
of a(n):
A) leveraged buyout.
B) sale for cash plus a note.
C) ESOP.
D) ESPO.
54) ________ refers to coping with financial realities of estate and gift taxes.
A) Stage 2
B) Stage 3
C) Stage 4
D) Stage 5
55) A ________ is a special type of irrevocable trust and has become one of the most popular
tools for entrepreneurs to transfer ownership of a business while maintaining control over it and
minimizing estate taxes.
A) grantor retained leverage trust
B) grantor retained annuity trust
C) guarantee retained annuity trust
D) grantor retained life insurance
56) Under GRAT, the beneficiaries are required:
A) to pay $11,000 gift tax.
B) to deduct the gift tax.
C) to pay gift tax on the value of the assets placed in the GRAT.
D) Beneficiaries are not required to pay any gift tax.
57) One-third of the Fortune 500 companies are family businesses.
58) The majority of first-generation family businesses do not survive into the second generation.
59) Most business founders intend to pass their companies on to their children, and have a formal
management succession plan for doing so.
60) Key to a successful family business is shared values.
61) The nice thing about a family business is that there is always a guaranteed successor within
the family whenever the owner decides to step down.
62) It may be valuable for family members to work outside of the business for the purpose of
learning how others conduct business.
63) The concept of shared power in the family business means that family members allow those
with the greatest expertise in a particular area of the business to make decisions for that area.
64) Tradition, while important, is not essential to a successful family business.
65) A willingness to learn is not as important to a family business as a nonfamily business
because the variety of talents and personalities within the family minimize the importance of new
ideas and techniques from the outside.
66) “Playing together” at leisure activities makes it easier for family members to cooperate at
work activities in the family business.
67) Playing together is so important to the success of a family business that family members
should be forced to play together even when they don’t want to.
68) A straight sale of the family business to outsiders is best for the founder because it is quick,
easy, and has minimal tax consequences to the owner.
69) ESOPs are simply another version of LBOs, used to buy companies from their owners.
70) Experts estimate that $10.4 trillion dollars in wealth will be transferred from one generation
to another by 2040.
71) One barrier to management succession planning is that the founder often becomes so
identified with the business it is difficult for him/her to let go.
72) It is important to remember that the succession planning process inevitably creates tension
and distrust as family members envy the “chosen one.”
73) Succession planning should begin when the children reach college age.
74) At Stage II, when the successor graduates from college, real decision-making authority
begins to grow rapidly.
75) The successor to the business owner needs to have both technical ability—knowledge of the
business and financial ability—and understanding of the financial aspects of the business for the
transition to succeed.
76) Whenever a business has shared leadership, such as co-presidents, it is critical that the board
of advisers have members on it from outside the family.
77) It is generally safe for the small business owner to assume that his/her children will succeed
him/her into the business.
78) You should never keep your decision as to your successor a secret.
79) The preparation of a successor is a two-way process, showing the direction of the business
and what led to its success, but also learning and listening.
80) Even though the owner has stepped aside, he/she should always jump back in to fix problems
as they occur.
81) The process of transferring power should be quick and absolute.
82) Nearly all business owners think that their heirs will need to sell part or all of the business to
satisfy estate taxes.
83) A buy/sell agreement often also uses life and disability insurance to ensure the surviving co-
owners have the means to buy the business.
84) A bypass trust allows the business owner to keep life insurance proceeds out of his/her estate
as long as the owner doesn’t die within three years of establishing the trust.
85) An irrevocable asset trust is designated to pass insurance proceeds on to the small business
owner’s heirs without them having to pass through probate or be subject to estate taxes.
86) A trust is a contract between a grantor and a trustee which shields all assets from any federal
tax and permits the small business owner to pass on his/her business without tax loss.
87) An estate freeze minimizes estate taxes by creating two classes of stock, preferred and
nonvoting common stock, and only allowing the preferred stock, which the owner holds, to
appreciate.
88) Small businesses can lower their insurance premiums by banding together to purchase
coverage.
89) Risk management is deciding what type of insurance or other precautions need to be
implemented to decrease a business’s exposure to loss.
90) Anti-theft and anti-shoplifting equipment are risk avoidance devices.
91) Part of risk-reducing strategies is taking steps to build some safety into a situation.
92) Credit checking customers is an example of a risk reduction strategy.
93) Installing a sprinkler system to minimize the threat of fire would be a risk reduction strategy.
94) Risk anticipation strategies promote self-insurance.
95) Self-insurance is entirely a large business phenomenon.
96) A small business establishing a self-insurance fund is following a risk transferring strategy.
97) The risk behind self-insurance is that if there aren’t sufficient funds set aside, the business
will suffer losses.
98) Insurance coverage is an example of risk transfer.
99) Every risk can be insured.
100) Identify and explain the essential qualities to a successful family business.
101) Describe the exit strategies available to the founder of the small business; if he/she wants to
sell the company to insiders, and if he/she is willing to sell it to outsiders.
102) Why should the small business owner have a succession plan? Identify the five stages the
owner needs to take his/her successor through in preparation for the succession.
103) Discuss the five steps involved in developing a management succession plan.
104) A friend wants to ensure that his succession plan succeeds. Explain how a “survival kit” can
help the management plan succeed.
105) Name and outline the characteristics of five strategies for reducing estate taxes in a family
business.
106) Differentiate among the three risk management strategies: risk avoidance, risk anticipation,
and risk transfer. Offer an example of each.
107) Explain the nature and purpose of insurance in relationship to the small business.
108) Outline the major types of insurance protection the typical small business needs.
109) What can a small business owner do to keep insurance costs under control?