978-1259912191 Chapter 13 Solutions Manual Part 2

Chapter Thirteen: Exit/Harvest/Turnaround

Critical Thinking Exercises

Critical Thinking Exercise 13.1: Defining Valuation Techniques

(LO 13-2)

The authors in the text discussed that small firms are private and, therefore, they do not

report their earnings to the public. The new business owner maximizes the value or

selling price of the firm. Define the five methods of valuation, describe how to calculate

each formula, and discuss when each is a viable method to use in the business.

1. Discounted future net cash flow:

2. Price/earnings valuation:

3. Asset-based valuation:

4. Capitalization of earnings valuation:

5. Market estimation valuation:

Critical Thinking Exercise 13.1: Defining Valuation Techniques – Notes

1. Discounted future net cash flow: The most widely accepted method of

2. Price/earnings valuation: Also known as the P/E ratio. The price earnings

3. Asset-based valuation: The asset-based valuation involves accounting for all of

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Chapter Thirteen: Exit/Harvest/Turnaround

4. Capitalization of earnings valuation: The capitalization of earnings valuation is

5. Market estimation valuation: The market estimation valuation is a method of

Note: One popular method is to take the EBITDA (earnings before interest,

Critical Thinking Exercise 13.2: Selling the Business

(LO 13-2)

As we learned in this chapter, when a business owner decides to sell or harvest the

business, there is a series of steps that the business owner completes. In certain cases,

a small business owner elects to initiate an initial public offering (IPO) to sell a business.

1. What are the three steps associated with the sale of the business.

2. What is an initial public offering (IPO)? What are the characteristics of a

business that seeks to conduct an IPO?

3. How can a business owner advertise to sell the business? Which method

do you prefer? Why?

Critical Thinking Exercise 13.2: Selling the Business – Notes

1. What are the three steps associated with the sale or harvest of the

business.

The three steps associated with the sale of the business include:

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Chapter Thirteen: Exit/Harvest/Turnaround

2. What is an initial public offering (IPO)? What are the characteristics of a

business that seek to conduct an IPO?

3. How can a business owner advertise to sell the business? Which sales

method do you prefer? Why?

1. Hire a business broker who will market the business for a percentage of

the sales price.

Critical Thinking Exercise 13.3: Closing te Business

(LO 13-4)

As a last resort, the small business owner may have to file for bankruptcy protection in

order to close the business. Consider that you are a sole proprietor and you need to file

for bankruptcy.

1. Which type of bankruptcy protection should you choose? Why?

2. Who absorbs the debt in this type of bankruptcy?

3. How does the bankruptcy process for a sole proprietorship differ from that of an

incorporated business? Who is liable for the debt?

4. What is the difference between a Chapter 11 bankruptcy and a Chapter 13

bankruptcy?

Critical Thinking Exercise 13.3: Closing the Business – Notes

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Chapter Thirteen: Exit/Harvest/Turnaround

1. Which type of bankruptcy protection should you choose? Why?

2. Who absorbs the debt in this type of bankruptcy?

3. How does the bankruptcy process for a sole proprietorship differ from that

of an incorporated business? Who is liable for the debt?

4. What is the difference between a Chapter 11 bankruptcy and a Chapter 13

bankruptcy?

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Chapter Thirteen: Exit/Harvest/Turnaround

Bonus Cases

Bonus Case 13.1: Reputation and the Small Business Owner

(LO 13-2)

An entrepreneur establishes a business idea and develops a business that contributes

to the community. Its goals are to implement positive social change. A business owner

establishes and maintains a positive public image. The strategies that pertain to

establishing and maintaining a good reputation are important to consider when a

business owner decides to sell or harvest a business. The owner’s goals include

establishing and maintaining a good reputation with all business acquaintances.

In society today, the online community is a world of networking that includes extensive

social interaction with a large number of individuals and groups. A business owner

establishes a good reputation when developing the exit strategy for the business. Who

would want to purchase the business if the owner is not reputable? A business owner

develops online skills that include “monitoring online conversation and engaging with

customers and the tech-savvy to promote yourself in the best channels (Pattison)i.”

1. What would potential investors do if it was discovered that the business owner of

the firm they want to purchase had a reputation of harassing online clients? What

type of image would this project about the business?

2. What will you do as a small business owner to ensure that you develop and

maintain a positive reputation in your community? Why?

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Chapter Thirteen: Exit/Harvest/Turnaround

3. What is your opinion of online networking for a small business? Do you believe it

is a reputable mode of communication? Why or why not?

Bonus Case 13.2: Designs Exchanged for Sales and Profits

(LO 13-3)

The authors in the text discussed that the turnaround strategy is an effort to reverse the

decline of a business. Many small business owners consider turnaround because they

want to save the business or the reputation associated with the business owner or a

brand image.

Consider the resources of a large firm, Liz Claiborne for example. They recently

developed a strategy after the company experienced a period of decline. What was their

strategy? They have a new business arrangement with J.C. Penney. “In exchange for its

design work, Liz Claiborne will receive a percentage of net sales and a share of the

profit. More important to the company, the new licensing agreement between Liz

Claiborne and J. C. Penney means that Liz Claiborne’s fixed costs will be minimal

(Rosenbloom, 2009)ii.”

1. Do you believe that this is a form of a turnaround strategy? Why or why not?

2. What are the advantages of a turnaround strategy?

3. What is your opinion of the new arrangement between J.C. Penney’s and Liz

Claiborne?

4. Explain the advantages to each company as a result of this new business

arrangement?

Bonus Case 13.3: Industry Indicators and Business Opportunities

(LO 13-1)

The authors in the text discussed that an entrepreneur evaluates the market to

understand the industry. The economy is one important indicator of markets. Intelligent

entrepreneurs evaluate the market and they understand what occurs in the economy as

it relates to a specific industry.

According to recent reports from the United States Bureau of Labor Statistics, “Three

industry sectors have accounted for nearly two-thirds of total job losses in the current

recession: construction, manufacturing, and administrative support services (United

States Bureau of Labor Statistics, 2014)iii.”

Discussion Questions

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Chapter Thirteen: Exit/Harvest/Turnaround

1. Why is this statistical data important to an entrepreneur?

2. Do you think the industry sectors that are in distress have a significant amount of

business closures? Why or why not?

3. What do you think about a scenario where an entrepreneur evaluates a potential

business purchase in one of the industries that has excessive job losses? Do you

think that this is a good business strategy for the entrepreneur?

Bonus Case 13.3: Industry Indicators and Business Opportunities

(LO 13-1) – Notes

1. Why is this statistical data important to an entrepreneur? The entrepreneur

2. Do you think the industry sectors that are in distress have a significant

amount of business closures? Why or why not? It depends on the industry

3. What do you think about a scenario where an entrepreneur evaluates a

potential business purchase in one of the industries that has excessive job

losses? Do you think that this is a good business strategy for the

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i Pattison, K. (July 29, 2009). Managing an online reputation

iiRosenbloom, S. (October 8, 2009). Liz claiborne to be sold only at j. c. penney stores.

http://www.nytimes.com/2009/10/09/business/09liz.html?_r= Retrieved on February 20, 2015.

iiiAn occupational analysis of industries with the most job losses. Bureau of Labor Statistics.

(November 2014). http://www.bls.gov/oes/home.htm. Retrieved on February 2, 2015