Deck 13: Planning for the Harvest

Question 1

A management buyout can contribute significantly to a firm's operating performance by increasing management's focus and intensity.

Answer 1

True

Question 2

For value-creating firms, owners who decide to harvest by withdrawing cash flows should accelerate the process as much as possible for a company with growth needs.

Answer 2

False

Question 3

Fewer dollars were raised for IPOs from 2008 to 2009, at the height of the Great Recession, and the average size of IPOs has decreased significantly over the past years, signifying that offerings by smaller firms are more prevalent.

Answer 3

False

Question 4

Opportunity cost of funds is the rate of return that an investor can earn on another investment of similar risk.

Question 5

Although advocates maintain that employee ownership improves motivation, the value of increased employee effort resulting from improved motivation varies significantly from firm to firm.

Question 6

Investors in a startup company are mainly interested in the new firm's growth and are not particularly interested in an exit plan.

Question 7

The sale of a firm is solely about determining the value of a company.

Question 8

Owing to the formulas for determining the price of a private company, business valuation has become an exact science.

Question 9

For the entrepreneur who is simply tired of the day-to-day operations of the business, siphoning off the cash flows over time may require too much patience.

Question 10

The build-up leveraged buyout is typically used in industries that are dominated by large firms.

Question 11

Harvesting is the method entrepreneurs and investors use to grow their firms.

Question 12

A private equity recapitalization can be more flexible in structure to meet an entrepreneur's needs even though the entrepreneur cannot sell stock immediately.

Question 13

With a private equity recapitalization, the firm's equity is sold in public equity markets, but the transaction is handled by a private investment banker.

Question 14

One of the drawbacks of harvesting by withdrawing cash flows slowly is that the owner must seek out a buyer for the eventual sale of the business.

Question 15

A strategic buyer is most interested in the stand-alone, cash-generating potential of a business.

Question 16

A financial buyer of a small business is most interested in the firm as a stand-alone, cash-generating business.

Question 17

More recently, the bust-up leveraged buyout has been replaced by the build-up leveraged buyout.

Question 18

The harvesting process encompasses more than just selling and leaving a business.

Question 19

Employee education is necessary if an ESOP is to be effective.

Question 20

Many entrepreneurs successfully grow their firms but fail to develop effective harvest plans.

Question 21

The opportunity to exit a business is always triggered by an interested seller.

Question 22

Julie is looking to sell her flower shop. She should hire a(n) _____ to help her find a buyer and negotiate the sale.

A) stock broker
B) investment broker
C) real estate broker
D) business broker

Question 23

A build-up leveraged buyout involves

A) developing the business to make it an attractive takeover target.
B) acquiring businesses that occupy a higher level in the market channel.
C) a longer time horizon than a bust-up leveraged buyout.
D) constructing a larger enterprise to be taken public via an IPO.

Question 24

Entrepreneurs frequently do not appreciate the difficulty of harvesting a company.

Question 25

Which of the following is one of the big financial questions associated with selling a business?

A) To whom should I sell the business?
B) How much should I ask for the business?
C) Should I offer the business to my employees?
D) Would it be better to liquidate the assets?

Question 26

Entrepreneurs often do not make good employees at their former company.

Question 27

Strategic buyers evaluate acquisition candidates according to the

A) stand-along, cash-generating potential of a target business.
B) synergies the buyer thinks the target business will create.
C) potential of the target business to preserve employment.
D) quality of the business strategy of the target firm.

Question 28

As Jacob considers exiting or harvesting, he is concerned with which of the following?

A) Merely selling and leaving a business
B) The creation of future options
C) The establishment of a benchmark for firm risk
D) Capturing future profitability

Question 29

Entrepreneurs should think very carefully about their motives for exiting a business and what they plan to do after the harvest.

Question 30

An entrepreneur can cash out immediately after the completion of an initial public offering (IPO).

Question 31

Harvesting owners can be paid in cash or in the stock of the acquiring firm, with stock generally being preferred over cash.

Question 32

Entrepreneurs who accept stock in payment for the sale of their businesses are usually pleased with the results because they escape a significant tax burden.

Question 33

Many entrepreneurs, grateful for their past success, feel the need to give something back to society after selling their company.

Question 34

Jacob has worked for the past five years to build his business but wants to travel more, so he is thinking it is time to harvest. Harvesting refers to

A) starting a business.
B) managing the growth of a business.
C) exiting a business.
D) diversifying a business.

Question 35

As a financial buyer, Ted is likely to evaluate acquisition candidates according to

A) their stand-alone, cash-generating potential.
B) synergies he thinks they will create.
C) their potential to preserve employment.
D) the level of debt they have accumulated.

Question 36

A potential buyer for Teresa's business has mentioned a leveraged buyout, which involves a high level of _____ financing.

A) debt
B) equity
C) strategic
D) unsecured

Question 37

In earlier years, leveraged buyouts became synonymous with the _____ LBO.

A) bust-up
B) build-up
C) owner-financed
D) publicly funded

Question 38

The harvesting of a business should cause the entrepreneur to ask for advice from the experts who helped build the company.

Question 39

The availability of a company's harvest options is an important determinant of the firm's appeal to

A) suppliers.
B) investors.
C) employees.
D) management.

Question 40

Sylvia, the owner of a clothing boutique, has agreed to sell her business to one of her buyers. This transaction would likely be described as a sale to a(n) _____ buyer.

A) competing
B) employee
C) financial
D) strategic

Question 41

An IPO occurs when a company offers its stock to

A) investment practitioner organizations.
B) family.
C) intrastate private investors.
D) the general public.

Question 42

Charles and Nancy have decided to sell their family business and would like to transfer ownership to the next generation. Which of the following harvesting forms would be best?

A) Cash flow distribution
B) Initial public offering
C) Private equity recapitalization
D) Selling to a strategic buyer

Question 43

Marvin is planning to sell his company to his management team. Marvin will be financing part of the purchase. This type of arrangement is a form of

A) ESOP.
B) IPO.
C) PPO.
D) LBO.

Question 44

The mere fact that a firm is earning high rates of return on its asset indicates that

A) the firm is worth more as a going concern than as a dead one.
B) downsizing is likely to be an economically sound option for the business.
C) it is time to start growing the business again.
D) it might be wise to further limit the cash flows returned to investors.

Question 45

Whatever the negotiating skills of the respective parties, harvesting a company requires a

A) business broker.
B) promise of positive cash flows.
C) precise valuation formula.
D) willing buyer.

Question 46

An employee stock ownership plan represents a(n)

A) good way for a business founder to build his or her position in the company.
B) opportunity for employees to acquire an ownership interest in their company.
C) harvest method of choice.
D) effort to ease investor concerns.

Question 47

Leonard wants to sell his business, but the bank will not lend the buyer enough money. Between personal savings and the bank loan, the buyer has about 70 percent of the asking price. Which of the following options would be best for Leonard in this situation?

A) Look for a different buyer
B) Lower the asking price
C) Retain a 30 percent ownership in the business and a seat on the advisory board
D) Offer to finance the remaining 30 percent, accepting payments over the next few years

Question 48

Nettie's Knits, Inc., paid taxes on its net income and then distributed part of the earnings as dividends to investors. These investors paid tax on the dividends they received. This practice is known as

A) initial public offering.
B) double taxation.
C) twice taxation.
D) harvesting taxation.

Question 49

Paul is approaching retirement and has decided to siphon off funds from his company rather than sell it. From his perspective, the advantage of systematically withdrawing cash from the firm is

A) retaining control.
B) preserving cash for later reinvestment.
C) greater latitude in seeking out a buyer for the firm.
D) increasing long-term returns from the business.

Question 50

Harvey has invested all of his money in his thriving business. He would like to recoup some of his investment but not completely sell off his business. This might be a good time for him to consider selling stock to the public in a(n)

A) ESOP.
B) IPO.
C) MBO.
D) LBO.

Question 51

Pat, owner of Pat's Welding, LLC, would like to let someone else run the day-to-day operations while he continues to draw an income from the business. Because the business is an LLC, Pat will not have to be concerned about

A) a reduction in the value of the company.
B) seller financing.
C) paying a brokerage fee.
D) double taxation on his income.

Question 52

Which of the following statements best characterizes business valuation?

A) Valuation is almost a perfect science.
B) Because there are so many intangibles, valuation is mostly an art.
C) The buyer determines the value of a business.
D) Negotiation skills play an important part in valuation.

Question 53

Two years ago, Harold inherited $30,000 and decided to open a coffee shop in his hometown instead of buying stock in Ford Motor Company. The rate of return he could have earned on his investment in Ford stock represents his

A) lost profit.
B) opportunity cost of funds.
C) investment opportunity.
D) potential profit.

Question 54

Matt owns a car dealership that is very profitable. Because he plans to retire in 5 to 10 years, Matt has decided to retain ownership for now, but without continuing to grow the business. This change would also allow him to invest for retirement some of the cash that the business is now generating. Which of the following harvesting methods does this example illustrate?

A) Sell the firm
B) Distribute the cash flows generated by the business to its owners
C) Offer stock to the public through an IPO
D) Use a private equity recapitalization

Question 55

Valerie is beginning to think of harvesting her company. Which of the following questions should be asked first?

A) Why does she want to harvest?
B) What is the value of her firm?
C) Does the firm have a leadership succession plan in the event that the firm sells?
D) What will be the method of payment?

Question 56

Eleanor has money to invest and is considering buying a company. When comparing her alternatives, her _____ on any investment is the rate of return that she could earn on a similar investment.

A) projected future value
B) sunk cost
C) present value
D) opportunity cost

Question 57

Going public can be beneficial to a firm by helping it

A) create a liquid currency to fund future acquisitions.
B) avoid becoming a takeover target in the future.
C) erect a shield against the fluctuations of the stock market.
D) offer better compensation packages to attract superior management talent.

Question 58

Jill is purchasing a web design company that has patented a new form of technology. Which of the following options would be best for her in relation to the web design company's liabilities?

A) Buy the firm's assets
B) Buy the firm's stock
C) Merge the company with her present company
D) Any of the three would be acceptable.

Question 59

Vasily is selling his business. As a harvesting owner, we would expect him to prefer _____ over _____.

A) cash; stock
B) debt; equity
C) equity; debt
D) stock; cash

Question 60

Having publicly traded stock can be beneficial to owners in that a public market offers

A) greater liquidity.
B) protection against an unwanted harvest.
C) insight into how to improve the performance of the firm.
D) a justification for refusing requests for ESOP options.

Question 61

Match the term with its definition.
a.build-up LBO
b.business broker
c.bust-up LBO
d.double taxation
e.employee stock ownership plan (ESOP)
f.harvesting (exiting)
g.initial public offering (IPO)
h.leveraged buyout (LBO)
i.management buyout (MBO)
j.opportunity cost of funds
k.private equity recapitalization
l.seller financing
The rate of return that could be earned on another investment of similar risk

Question 62

After harvesting, many entrepreneurs who remain with their firm as an employee experience _____ conflicts.

A) financial
B) practical
C) cultural
D) tactical

Question 63

Match the term with its definition.
a.build-up LBO
b.business broker
c.bust-up LBO
d.double taxation
e.employee stock ownership plan (ESOP)
f.harvesting (exiting)
g.initial public offering (IPO)
h.leveraged buyout (LBO)
i.management buyout (MBO)
j.opportunity cost of funds
k.private equity recapitalization
l.seller financing
Provision of debt and equity by private equity investors that allows an entrepreneur to cash out part of his or her investment

Question 64

Russell sold his small variety store to a large retail chain but has agreed to stay on and manage the store. Russell should expect

A) freedom from responsibility.
B) a feeling of elation with his new wealth.
C) greater independence.
D) cultural conflict.

Question 65

Which of the following groups is always concerned about how to exit a business?

A) Investors
B) Entrepreneurs
C) Employees of the firm
D) Investment bankers

Question 66

When is the best time to begin thinking about an exit strategy?

A) When the owner wants to retire
B) When a willing buyer expresses an interest
C) When declining health forces the owner to leave active management
D) When money is first invested in the business

Question 67

What are the potential upsides and downsides of an employee stock ownership plan (ESOP) to both the owner and employees of a company?

Question 68

Match the term with its definition.
a.build-up LBO
b.business broker
c.bust-up LBO
d.double taxation
e.employee stock ownership plan (ESOP)
f.harvesting (exiting)
g.initial public offering (IPO)
h.leveraged buyout (LBO)
i.management buyout (MBO)
j.opportunity cost of funds
k.private equity recapitalization
l.seller financing
The process used by entrepreneurs and investors to reap the value of their investment in a business when they leave it

Question 69

Post-harvest entrepreneurs may become disillusioned when they realize their sense of identity

A) was associated with the quest for wealth.
B) derived from interactions with employees.
C) was intertwined with their business.
D) does not return after joining in social or charitable work.

Question 70

Discuss the importance of having a harvest plan.

Question 71

Match the term with its definition.
a.build-up LBO
b.business broker
c.bust-up LBO
d.double taxation
e.employee stock ownership plan (ESOP)
f.harvesting (exiting)
g.initial public offering (IPO)
h.leveraged buyout (LBO)
i.management buyout (MBO)
j.opportunity cost of funds
k.private equity recapitalization
l.seller financing
A leveraged buyout involving the purchase of a group of similar companies with the intent of making the firms into one larger company for eventual sale or to be taken public

Question 72

The effects of the harvesting process often include

A) a reduction in time and energy.
B) an increased managerial focus.
C) an increase in momentum.
D) poor performance.

Question 73

What are professional and personal issues an entrepreneur may face in the period of time from when the harvest is announced and it is completed?

Question 74

Match the term with its definition.
a.build-up LBO
b.business broker
c.bust-up LBO
d.double taxation
e.employee stock ownership plan (ESOP)
f.harvesting (exiting)
g.initial public offering (IPO)
h.leveraged buyout (LBO)
i.management buyout (MBO)
j.opportunity cost of funds
k.private equity recapitalization
l.seller financing
Taxation of income that occurs twice-first as corporate earnings and then as stockholder dividends

Question 75

In a harvest situation, the exiting owners are usually paid in cash or

A) tangible assets.
B) imputed goodwill.
C) favorable publicity.
D) stock.

Question 76

Arthur's company is doing well, but he has grown a bit tired of the daily grind. The idea of selling is appealing to him. Which of the following would you recommend that Arthur do next?

A) Ask his advisory board for their opinions.
B) Ask a business broker what his business is worth.
C) Go public.
D) Get advice from someone who has sold a business.

Question 77

Uncertainties accompanying an impending sale of a business often

A) lead to lower employee morale.
B) attract the attention of the Securities and Exchange Commission.
C) cause the deal to fall through.
D) increase costs from added legal services.

Question 78

Ellen is a dentist and has decided to develop a harvest plan. She wants her efforts to be successful and effective. Discuss suggestions for crafting an effective exit strategy.

Question 79

Before he executes his exit strategy, Arthur should

A) understand why he wants out.
B) make sure his heirs approve his exit strategy.
C) find a hobby to occupy his time.
D) plan his budget based on the sudden inflow of cash.

Question 80

Todd's small company, Nimbus, developed a video game called Combat Skill that took off among gamers. Farbase EAD is a large video game developer with its own gaming system that has offered to buy Nimbus. Explain this type of harvest transaction and what motivations Farbase EAD may have for purchasing Nimbus.