Entrepreneurship, 3e (Bamford)
Chapter 13 Exit/Harvest/Turnaround
1) Every small business owner will eventually need or want to exit his or her business.
2) A business is an investment of both time and money.
3) Developing an exit plan makes the family and investors uneasy about the new business.
4) When a small business owner is no longer interested in the company, it is time for an exit
strategy.
5) A small business person can effectively operate an existing company and pursue new
opportunities at the same time.
6) Harvesting encompasses more than just selling and leaving a business.
7) Public companies have an established market capitalization, which is the value of a business as
it exists at the present time.
8) A new business has creative company perquisites for the owners to minimize the tax owed by
the organization.
9) The true value of a business is the amount of money that a willing seller and buyer agree upon.
10) It should be clear that a single universal method of valuation is needed when considering the
purchase of a private company.
11) Estimating cash flows 10 years into the future and subtracting a salvage value for a firm is a
good ballpark floor valuation for a business.
12) If a business is performing poorly, there is virtually no goodwill value.
13) Asset valuation is typically the highest business valuation number that one calculates, unless
the business is asset-intensive.
14) An IPO (initial public offering) is the initial listing of a firm as a private entity in the public
equities market.
15) Most entrepreneurial businesses run lax operations where every individual has general
functions and there is plenty of slack available for cross-training.
16) Attempting a turnaround is the best effort to reverse the decline of a business.
17) It does not take much effort to turn around an entrepreneurial business successfully once it
starts into a decline.
18) When a small business is declining, the first step is to retrench.
19) Strategic solutions in a failing company rely on exiting those poor strategic choices that have
been made over the years.
20) When a business’s performance has declined, the owner may decide to either close it or reverse
the decline and conduct a “turnaround.”
21) Improving a business’s performance is very difficult once it starts into a decline.
22) For an entrepreneurial business, the retrenchment efforts should focus on the firm’s forfeiting
the control of its cash flow, regardless of the impact to the long-term effort.
23) In a declining business, an effective way to improve operations is to increase marketing to sell
more products.
24) In a declining small business, the owner and key managers should resign to improve the
chances that the business can turnaround successfully. New owners and managers will likely have
better ideas to improve performance.
25) Bankruptcy is an option for an entrepreneur if the turnaround effort does not succeed quickly
enough.
26) Chapter 17 bankruptcy allows a firm to be reorganized.
27) When filing Chapter 11 bankruptcy, a firm has 90 days to propose a reorganization plan.
28) In a Chapter 7 bankruptcy filing, selling a business consists of selling the assets of the
company.
29) Chapter 12 bankruptcy is used for the protection of family-owned business assets.
30) Chapter 7 bankruptcy is intended for entrepreneurial firms with limited debts and assets.
31) Chapter 13 bankruptcy is used for sole proprietorships.
32) In a Chapter 13 bankruptcy filing, the time to approval is typically slower than other
bankruptcy filings, and a creditor committee is required.
33) Since the processes and procedures for bankruptcy are easy and have a short-term impact on
the owner of a small business, it is a feasible alternative for a declining business.
34) In bankruptcy proceedings, creditors may be willing to take less than the full amount with the
hope that the strength of the distressed firm will return in the future; they will then be in a position
to receive more of their debt repayment.
35) In bankruptcy proceedings, a “haircut” refers to creditors receiving more than the full amount
of money that is due to them.
36) In bankruptcy proceedings, creditors who do not have collateral pledged behind their debt will
be paid only if there are funds remaining after other creditors have been paid.
37) If a small business that declares bankruptcy is a corporation or LLC, the owner’s personal
assets are not affected.
38) The time to begin to think of harvesting the business is
A) at the beginning.
B) after the first quarter of operations.
C) at the break-even part.
D) when there are no more alternatives.
39) A business is an investment of both ________ and ________.
A) time; labor
B) time; money
C) labor; money
D) work; time
40) A small business owner may want to exit the business because
A) the business has done very well but the future does not hold the same potential for similar
success.
B) all the assets are in the business.
C) other opportunities are available.
D) all of these.
41) The key starting point for any decision to exit or harvest a firm is
A) establishing the valuation of the firm.
B) devising plans for turnaround.
C) filing for Chapter 7 bankruptcy.
D) reaching a resolution with creditors to accept an amount less than the full payment.
42) Developing an accurate valuation helps
A) provide insight for the founders as to the amount of capital and labor that should be invested in
the effort.
B) convince outside equity investors of the potential long-term returns associated with the
harvesting of the business.
C) benchmark the growth of the firm by establishing a true starting point.
D) all of these.
43) Market capitalization is the value of a business as it exists
A) at the start of the business.
B) as of the first annual statement.
C) at present.
D) in the future.
44) Which of the following is a benefit paid for by the company, such as vacations, vehicles, gifts,
and loans?
A) Benefits plus
B) Perquisites
C) Exempt benefits
D) Bonuses
45) Rony is the managing director of a fabric manufacturing company. In order to limit the profit
of the company and, therefore, the taxes on the business, the management pays a hefty amount to
Rony as year-end bonuses. The company also pays for his family vacations and foreign trips. The
benefits enjoyed by Rony are called ________.
A) fiscal incidences
B) novated leases
C) swaps
D) perquisites
46) Valuing a business is as much ________ as it is ________.
A) monetary; assets
B) art; assets
C) art; science
D) monetary; science
47) Which of the following is a method to maximize the selling price?
A) Discounted future net cash flow
B) Asset-based valuation
C) Market estimation valuation
D) All of these
48) Which of the following valuation methods requires that the net cash flow be projected for some
period of time in the future?
A) Asset-based valuation
B) Price/earnings valuation
C) Discounted future net cash flow
D) Market estimation valuation
49) Which of the following statements is true of discounted future net cash flow?
A) It requires that difference in the cash inflows and outflows of a business be projected for some
period of subsequent time.
B) It involves accounting for all of the hard assets of an organization such as buildings, equipment,
cash, etc.
C) It is determined by the nature of business, including longevity, business risk, consistency of
earning, quality of management, and general economic conditions.
D) It involves taking the earnings of a business and multiplying that figure by the market premium
of companies in their industry.
50) Which of the following is a good ballpark floor valuation for a business?
A) Taking the earnings (net profit) of the organization and dividing that figure by a capitalization
rate
B) Estimating cash flows five years into the future and adding a salvage value for the firm
C) Locating the price/earnings (P/E) ratio for public companies in the same industry
D) Examining similar companies that have been acquired by looking at the percentage premium
being offered in general on all new public acquisitions