MGMT 3850 CHAPTER 7 ASSIGNMENT BUYING AN EXISTING BUSINES

MGMT 3850 CHAPTER 7 ASSIGNMENT BUYING AN EXISTING BUSINESS Essentials of Entrepreneurship & Small Business Mgmt., 7e (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 Answer: D Diff: 1 Page Ref: 231 AACSB: Analytic Skills Learning Obj.: 1 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. Answer: A Diff: 1 Page Ref: 231 AACSB: Analytic Skills Learning Obj.: 1 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. Answer: C Diff: 2 Page Ref: 231-233 AACSB: Reflective Thinking Learning Obj.: 1 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 Answer: D Diff: 1 Page Ref: 233-237 2 AACSB: Reflective Thinking Learning Obj.: 1 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. Answer: C Diff: 2 Page Ref: 235 AACSB: Analytic Skills Learning Obj.: 1 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 Answer: C Diff: 3 Page Ref: 235 AACSB: Analytic Skills Learning Obj.: 1 7) 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. Answer: C Diff: 2 Page Ref: 237 AACSB: Reflective Thinking Learning Obj.: 2 3 8) When acquiring a business, the buyer should: A) conduct a self-analysis of skills, abilities, and interests. B) prepare a list of potential candidates. C) investigate potential candidates and carefully evaluate them. D) All of the above Answer: D Diff: 1 Page Ref: 237 AACSB: Reflective Thinking Learning Obj.: 2 9) Which of the following statements concerning financing the purchase of an existing business is true? A) It is usually more difficult than securing financing for a start-up business. B) Usually, the business seller is not a good source of financing. C) The buyer should be able to make the payments on the loans out of the company's cash flow. D) All of the above Answer: C Diff: 2 Page Ref: 239 AACSB: Analytic Skills Learning Obj.: 2 10) Which of the following statements concerning financing the purchase of an existing business is not true? A) The business seller usually is a good candidate for a source of financing. B) The deal should allow the buyer to make the loan payment out of the company's cash flow. C) The buyer should wait until late in the purchase process to arrange financing to avoid processing fees in case the deal falls through. D) All of the above Answer: C Diff: 2 Page Ref: 239 AACSB: Reflective Thinking Learning Obj.: 2 11) Perhaps the ideal source of financing the purchase of an existing business is: A) a venture capitalist. B) the Small Business Administration. C) the seller of the business. D) an insurance company. Answer: C Diff: 2 Page Ref: 239-240 AACSB: Analytic Skills Learning Obj.: 2 4 12) To ensure a smooth transition when buying an existing business, a buyer should: A) communicate with employees to reduce their uncertainty and anxiety. B) be honest with existing employees about upcoming changes and plans for the company's future. C) consider asking the seller to stay on and serve as a consultant until the transition is complete. D) All of the above Answer: D Diff: 1 Page Ref: 240 AACSB: Communication Learning Obj.: 2 13) The most common reasons owners of small- and medium-sized businesses give for selling their businesses are: A) need for money and low return on investment. B) boredom and burnout. C) low return on investment and burnout. D) greater opportunities working for someone else and low return on investment. Answer: B Diff: 2 Page Ref: 242 AACSB: Analytic Skills Learning Obj.: 3 14) Important factors to investigate regarding the business to be purchased include: A) assessing the physical assets of the business. B) reviewing accounts receivable and business records. C) reviewing contractual arrangements and assessing intangible assets. D) All of the above Answer: D Diff: 1 Page Ref: 240-247 AACSB: Analytic Skills Learning Obj.: 3 15) Laurette has entered into a contract with Jackson to purchase his retail music shop. Jackson's lease on the existing building (which is in an excellent location) has five years remaining. If Laurette wants the lease to be part of the business sale: A) she should include a clause in the sales contract in which Jackson agrees to assign to her his rights and obligations under that lease. B) she should notify the landlord of Jackson's assignment of the lease agreement to her. C) A and B are correct. D) None of the above. Because Jackson does not actually own the building, he can transfer no rights to it to Laurette. Answer: C Diff: 3 Page Ref: 244 AACSB: Reflective Thinking Learning Obj.: 3 5 16) Generally, a seller of an existing business can assign any contractual right to the buyer unless: A) the contract specifically prohibits the assignment. B) the contract is personal in nature. C) A and B are correct. D) None of the above. Business sellers typically cannot assign any contractual rights to buyers. Answer: C Diff: 2 Page Ref: 244 AACSB: Analytic Skills Learning Obj.: 3 17) During the acquisition process, the potential buyer usually must sign a ________, which is an agreement to keep all conversations and information secret and legally binds the buyer from telling anyone any information the seller shares with her. A) covenant not to compete B) nondisclosure document C) letter of intent D) purchase agreement Answer: A Diff: 2 Page Ref: 244-245 AACSB: Analytic Skills Learning Obj.: 3 18) Which of the following is required for the covenant not to compete to be enforceable? A) Part of a business sale and reasonable in scope B) Approved by a court of law and reasonable in scope C) The assistance of an attorney and approved by a court of law D) The registration of the due-on-sale agreement Answer: A Diff: 3 Page Ref: 244-245 AACSB: Analytic Skills Learning Obj.: 3 19) Sources of potential legal liabilities for the buyer of an existing business include all but which of the following? A) Problems with the physical premises, such as hazardous materials B) Product liability claims C) Labor problems and disputes D) Errors and omissions Answer: D Diff: 2 Page Ref: 238-239 AACSB: Analytic Skills Learning Obj.: 2 6 20) A toy manufacturer is sued based on the claim of injuries caused by a product it makes. This is an example of a: A) product liability lawsuit. B) promissory estoppel lawsuit. C) restrictive covenant lawsuit. D) contingent liability lawsuit. Answer: A Diff: 1 Page Ref: 244 AACSB: Reflective Thinking Learning Obj.: 3 21) When evaluating the financial position of a business he or she is considering buying, an entrepreneur should examine: A) its income statements and balance sheets from the past three to five years. B) its income tax returns for the past three to five years. C) the owner's compensation and that of relatives. D) All of the above Answer: D Diff: 2 Page Ref: 245-247 AACSB: Analytic Skills Learning Obj.: 3 22) In a business sale, a letter of intent: A) states that the buyer and the seller have reached a sufficient meeting of the minds to justify the time and expense of negotiating a final agreement. B) should contain a clause calling for "good faith negotiations" between the parties. C) addresses such issues as price, payment terms, a deadline for closing the deal, and others. D) All of the above Answer: D Diff: 1 Page Ref: 247, Figure 7.2 AACSB: Analytic Skills Learning Obj.: 3 23) During the acquisition process, the buyer and the seller sign a ________, which spells out the parties' final deal and represents the details of the agreement that are the result of the negotiation process. A) covenant not to compete B) nondisclosure document C) letter of intent D) purchase agreement Answer: D Diff: 1 Page Ref: 247, Figure 7.2 AACSB: Analytic Skills Learning Obj.: 3 7 24) Which of the following statements about valuing a business is true? A) The balance sheet technique is the best way to value a business. B) Business valuation is partly art and partly science. C) Buyers should rely on the seller's industry expertise and years of experience to determine what his company is worth. D) Business valuation processes are consistently misleading regarding the future earning potential of a business. Answer: B Diff: 2 Page Ref: 249 AACSB: Reflective Thinking Learning Obj.: 4 25) The main reason a buyer purchases an existing business is for: A) its future income and profits for earning potential. B) its customer base and access to those customers. C) its tangible assets and the ability to liquidate those assets. D) its goodwill. Answer: A Diff: 2 Page Ref: 250 AACSB: Reflective Thinking Learning Obj.: 4