Quiz 6: Taking Over an Existing Business

Existing businesses do not have to be scrutinized carefully to determine whether they are a worthwhile investment of time and money.

The fact that a business's image is difficult to change is a distinct advantage when taking over an existing business.

Buying an existing business is becoming a more popular way to own a small business.

A major advantage of purchasing an existing business is that the customers are familiar with the location.

If an existing business is purchased, the buyer may be potentially liable for past business contracts.

Having an established supplier relationship is an advantage of buying an existing business.

When the owner of a business decides to sell, the reasons the owner tells prospective buyers may be somewhat different than the actual reasons.

Word-of-mouth information through friends and family may turn up business opportunities that do not appear through formal channels.

Real estate brokers may be a good source of potential businesses for sale since their listings may include business real estate.

Asking the owner of a business where you have been a regular customer whether the business is for sale may be one source of finding a potential new business.

You should never ask the owners of a business where you are a customer whether they are interested in selling their business.

Brokers take classes and pass examinations to become certified business intermediaries.

It is important not to let emotions cloud judgment when making business purchase decisions.

Due diligence is the process of fact finding to determine the total condition of a business being considered for purchase.

When discussing the purchase of an existing business, it is not necessary to get verbal understandings in writing from the seller.

When analyzing the financial statements of the business, it is important to rely most heavily on the most recent year of operation.

There are not as many factors that could contribute to the sale of a business as there are reasons for business liquidations.

Industry averages exist comparing expenses to sales for every size and type of business.

T F A key factor in business valuation is review of what other companies in the industry have sold for.

Determining the price offered for a business should begin by adding the value of the tangible and intangible assets with the sales potential of the business.

Goodwill is an example of a tangible asset.

Inventory is an example of a tangible asset.

When purchasing a business, the people working there can be disregarded since they will probably not stick around after the business is in new hands.

An income statement method of business valuation focuses more on cash flow than asset value.

Discounted cash-flow analysis consists of projecting future cash flows after debts are subtracted and before taxes are paid.

Goodwill is the term used to describe the difference between the purchase price of a company and the net value of the tangible assets.

The value of a business's intangible assets is easy to determine.

Tangible assets are the product of a firm's past earnings and the basis on which future earnings are projected.

The amount paid for goodwill should be small enough to be recovered with new profits in a reasonably short time period.

Family businesses make up 80 percent of all businesses in the United States and comprise nearly 50 percent of the nation's GNP.

When running a family business, there are four overlapping perspectives on its operations: family, management, ownership, and sales.

About half of all family businesses survive through the second generation.

When a family member enters the family business, he or she is immediately accepted by nonfamily employees due to his/her position.

For the Mount Waterman ski resort, the bottom line is that in order to be profitable, it was necessary to A) Bring in new ownership with fresh ideas B) Reduce congestion at the resort C) Invest in snowmaking equipment D) Go public

All of the following are options for getting started as a business owner except A) Managing a joint venture B) Inheriting a family business C) Buying an existing establishment D) Starting your own business

Buying an existing business looks appealing to the potential business owner for which of the following reasons? A) The existing firm is already functioning. B) The existing firm will always make a profit. C) The existing firm will have the best employees. D) The existing firm's owner will always provide financing.

A disadvantage to buying an existing business is which of the following? A) Image is difficult to change. B) Customers are familiar with the location. C) The employees are experienced. D) Inventory and equipment is in place.

An advantage in purchasing an existing business is which of the following? A) Image is difficult to change. B) There is an established customer base at the present location. C) Employees may be loyal only to previous management. D) The business location is unfamiliar.

Which of the following is not an advantage to buying an existing business? A) Image is difficult to change. B) Employees are experienced. C) The seller may be willing to provide some financing. D) Inventory and equipment are already in place.

Of the 6 million U.S. businesses with 19 or fewer employees, at least _______ are for sale at any given time. A) 500,000 B) 1 million C) 2 million D) 4 million

Benjamin has recently received a large estate settlement, and he is eager to use the money towards the purchase of a successful business that is already in operation. Which of the following should be discouraged as a source for finding businesses for sale? A) Friends B) Business owners themselves C) Real estate brokers D) Phonebook

Within his profession, Alex Wilson serves as an intermediary that brings sellers of businesses together with potential buyers. Alex can best be described as a/an A) Real estate manager B) Financial broker C) Management broker D) Business broker

Many good business opportunities are never formally advertised. Instead, that information is found through which of the following? A) The local banker B) The local college C) Word of mouth D) The Small Business Administration (SBA)

Family, friends, the newspaper, the Small Business Administration (SBA), a local banker, and real estate brokers may all have information on A) Possible sources of funding B) Possible businesses for sale C) Possible businesses soon to be terminated D) Possible venture capitalists

A business that brings sellers of their businesses together with potential buyers is known as A) A real estate broker B) The Small Business Administration (SBA) C) A business broker D) The FTC

A list of liabilities of an existing business would include A) A list of accounts receivable B) An inventory of products and materials C) Liens by creditors against any assets D) A list of accounts payable

When gathering information about an existing business in order to evaluate its potential, all but which of the following questions should be asked? A) How many previous owners has the business had? B) What is the condition of the inventory? C) Is the equipment in good condition? D) Has the owner ever been convicted of a felony?

When gathering information about an existing business in order to evaluate its potential, all but which of the following questions should be asked? A) What is the profit record? B) Are there liens against any equipment? C) Can the lease be renewed? D) Did the previous owner pay bills on time?

If the business that is being purchased involves inventory, the bulk sales provisions of the ___________ need to be followed. A) FTC B) NAFTA C) UCC D) SBA

Tabitha is considering the purchase of a seemingly successful retail establishment, but first she would like to gain an understanding of why the business is being sold. With whom should she speak? A) The current owner only B) The current owner and customers only C) Customers and suppliers only D) The current owner, customers, and suppliers

To determine the financial condition of an existing business, it is necessary to compare _________ with _________ to identify where costs can be reduced or more money is needed. A) Operating ratios; fiscal averages B) Operating ratios; industry averages C) Expense ratios; fiscal averages D) Expense ratios; industry averages

What of these is used to indicate whether sales volume is increasing or decreasing? A) Financial records B) Independent audit C) Expense ratio D) Working capital statement

When analyzing financial statements, remember that profits can be increased and expenses can be decreased to make the records look better A) In the short run B) In the long run C) For tax purposes D) For bank audits

Before any serious discussion of purchasing a business occurs, a/an ______________ should be conducted. A) Financial ratio analysis B) Income statement analysis C) Independent audit D) IRS review

To ensure that all back taxes have been paid, a potential buyer should inspect A) Unaudited financial documents B) Income tax returns C) The seller's books D) Loan agreements

Financial information can be sensitive information. In order to allay the fears of the seller, a potential buyer could A) Not ask to see financial information B) Only show the information to an accountant C) Only show the information to a banker D) Write a letter of confidentiality

Industry-wide _________ ratios are calculated by most trade associations, many commercial banks, and accounting firms. A) Asset B) Expense C) Quality D) Stock

The income statement can provide access to ____________, a very important piece of information for a prospective buyer to use in determining net profit. A) Sales volume B) Net assets C) Gross assets D) Accounts payable

Industry averages for expense ratios comparing expenses to ________ exist for every size and type of business. A) Profits B) Assets C) Liabilities D) Sales

Expense ratios are useful because they are A) Standards or guides B) Absolute measures of profitability C) Significant in the number that is computed D) Error free

To effectively use operating ratios, a prospective buyer should A) Compare them to industry standards B) Use them to identify problems that exist and make changes C) Use them as a basis for valuing the business D) Compare them to the closest competitor

The prospective buyer should determine a price for the business by adding the value of tangible and intangible assets with the _____________ potential. A) Sales B) Expenses C) Income D) Profit

Assets that a business owns that can be seen and examined are known as A) Intangible assets B) Tangible assets C) Long-term equity D) Accounts payable

Inventory, equipment, and building are examples of what kinds of assets? A) Intangible assets B) Tangible assets C) Only current assets D) Only long-term assets

Trade names, customer lists, and goodwill are examples of which kinds of assets? A) Intangible assets B) Tangible assets C) Only current assets D) Only long-term assets

Of all the tangible assets of a business, _______ and _____ should be examined most closely because they may be worth less than the seller is asking. A) Inventories, equipment B) Receivables, inventory C) Equipment, receivables D) Inventories, receivables

Along with purchasing a successful ice cream shop, Wilma acquired the building, as well as ice cream making equipment and enough inventories to operate for a month. These are best known as what type of assets? A) Short-term assets B) Tangible assets C) Long-term assets D) Intangible assets

Machinery that has no, or very little, value is referred to as A) Dead stock B) Long weight C) A payable D) A receivable

Aging accounts receivable refers to the process of A) Determining their present value B) Determining their effect on sales C) Determining how many are still collectible and discounting them accordingly D) Determining future customer lists

When evaluating the worth of the inventory for purchasing purposes, the primary concern should be A) Whether enough inventory is currently stocked B) Good supplier relationships C) No "dead stock" that is listed at its original value D) Fresh inventory

Which of the following by itself could be a reason a business owner wants to sell a business? A) Inventory that is fresh and balanced B) Accounts receivable that are 60 days old or older C) The outlived usefulness of equipment D) Accounts receivable that are 30 days old or older

Assets that have value to a business but are not visible are known as A) Intangible assets B) Tangible assets C) Long-term assets D) Current assets

The intangible asset that allows a business to earn a higher return than a comparable business might generate with the same tangible assets is known as A) Intangible assets B) Tangible assets C) Preferred merchandise lines D) Goodwill

Few businesses that are for sale have a high amount of _________ value. A) Current asset B) Long-term asset C) Goodwill D) Equipment

Intellectual property is a valuable __________. A) Intangible asset B) Tangible asset C) Goodwill asset D) Current asset

Patents, copyrights, and trademarks protect against unauthorized use or infringements for which of the following time periods? A) Indefinitely B) For an unknown time period C) Five to seven years D) For a definite time and usage period

A provision that restricts the seller from entering the same type of business within a specified area for a certain amount of time is known as A) Due disclosure B) A good cause clause C) A noncompetitive clause D) Just disclosure

Rob is selling a business with machinery that has been protected from unauthorized use or infringement for the next three years. What type of intangible asset does this involve? A) Goodwill B) Trademark C) Patent right D) Copyright

Samantha was in the final stages of selling her existing business, but she backed out of the deal at the last minute because the buyer asked her to sign a contract stating that she would not enter into a similar business within the state for at least 15 years. This is an example of A) A reasonable intellectual property contract B) An unreasonable intellectual property contract C) A reasonable noncompete clause D) An unreasonable noncompete clause

Any of the following may be included as an owner benefit of a small business except A) Pretax profit B) Employees' salary C) Ownner's salary D) Additional owner perks

Before buying a business, a thorough analysis of the ____________ will show whether the business earned an income in the last year. A) Income statement B) Balance sheet C) Cash flow statement D) Statement of retained earnings

All but which of the following are important considerations when determining how much should be paid for an existing business? A) Valuation of the firm's tangible net assets B) Expected future earnings C) Market demand for that type of business D) Emotional appeal of the business to the prospective buyer

A method of determining the value of a business based on the worth of its assets is called A) Balance sheet method of business valuation B) Asset method of business valuation C) Income statement method of valuation D) Cash-flow method of valuation

A method of determining the value of a business based on its profit potential is known as a(n) A) Balance sheet method of business valuation B) Asset method of business valuation C) Income statement method of valuation D) Cash-flow method of valuation

________ is a current value for a company's long-term future cash flows. A) Future value B) Dead value C) Discount value D) Terminal value

The worth of tangible assets is determined using which of the following methods? A) Balance sheet method of business valuation B) Asset method of business valuation C) Income statement method of valuation D) Cash-flow method of valuation

The overall value of tangible assets is determined through all of the following except A) Book value B) Replacement value C) Liquidation value D) Historical value

The most realistic approach for the buyer in determining the value of tangible assets is through A) Book value B) Replacement value C) Liquidation value D) Balance sheet valuation

The difference between the purchase price of a company and the net value of the tangible assets is called A) Asset value B) Profit C) Goodwill D) Liquidation value

Goodwill can be seen as compensation to the seller for which of the following? A) Beginner's mistakes that the new owner will not have to make B) Tangible assets C) Sales potential D) Customer lists

The capitalization rate when figuring goodwill should be a figure assigned to show A) Risk and expected growth rate of future earnings B) Risk and profit minus taxes C) Expected growth rate and profit D) Expected growth rate and the value of tangible assets

The most practical method of paying for a business is A) Paying a lump sum B) Paying in installments C) A loan from the bank D) A loan from the Small Business Administration (SBA)

Using installment payments to finance a new business ensures that the business is paid for through A) A loan B) Sales C) Earnings D) The valuation of tangible assets

When the buyer and the seller have agreed on the terms of the sale, the closing can be handled by A) An accountant B) The buyer and seller themselves C) Escrow settlement D) A nonpartial third party

A settlement attorney during a closing represents A) The buyer B) The seller C) The buyer and the seller D) Neither-the lawyer is a neutral third party

In purchasing an existing business, Alice has decided to lease the equipments and fixtures from the original owner rather than purchasing it outright to save money initially. This is an example of A) Holdback money B) Thinning the assets C) Escrow settlement D) Goodwill

To protect yourself from unknown tax liabilities when buying the stock of a business, it makes sense to place part of the purchase price in an escrow account that is earmarked to pay for any corporate liabilities. This is referred to as A) Holdback money B) Thinning the assets C) Escrow settlement D) Goodwill

Stan owns a body shop, and his cousin recently came to him desperate to get a job. Stan, who is not currently looking to hire anyone, is concerned about the effect of a new hire on profits. This concern stems from which family business perspective? A) Family B) Ownership C) Marketing D) External

Which of the following types of business are characterized by two or more members of the same family who control or are directly involved in and own a majority of the business? A) Sole proprietorships B) Partnerships C) Corporations D) Family-owned businesses

A unique factor in a family business that makes it different from all other businesses is A) The profit margin B) The asset ownership C) The sales potential D) The intricate succession planning needed

Everyone involved in a family business has a different perspective. These perspectives include all but which of the following? A) Family B) Management C) Ownership D) Historical events

Which of the following is a guideline that should be followed in a family business? A) To be hired, family members must meet more stringent criteria than nonfamily members B) Family members should be supervised by older family members whenever possible C) Family members should stay in entry-level positions indefinitely D) Family members must meet the same standards as nonfamily members in performance reviews

All but which of the following policies can help prevent problems in employment policies when discussing family businesses? A) Family members must meet the same performance standards as nonfamily employees. B) Family members should be supervised by nonfamily employees. C) Family members do not have to meet the same criteria as nonfamily employees. D) Family members should not receive higher compensation than nonfamily employees for the same positions.

As seen in the Entrepreneurial Snapshot, what year was the oldest family business in the United States founded? A) 1492 B) 1623 C) 1774 D) 1802

What web site was discussed for buying and selling a business that offers a database of thousands of businesses? A) http://www.fsbo.com/ B) http://www.onmyown.org/ C) http://www.bizbuysell.com/ D) http://www.duediligence.com/

The longer it takes someone to pay their account receivable, the less likely they are to A) Ever pay the account B) Make repeat purchases C) Make a profit D) Become a bad debt expense

In the Entrepreneurial Snapshot, what product has the Zildjian family been making since 1623? A) Rice and beans B) Cymbals C) Beer D) Blue jeans

Use the following to answer questions: Scenario 6-1. Jerry Jones is a young entrepreneur straight out of college. After taking a course in Small Business Management, Jerry has decided that he would like to purchase an existing business and hopefully avoid some beginner's errors. He spends some time looking and finally finds a business that appeals to him, a small sporting goods store. Jerry loves to fish and hunt. The store currently has a huge inventory in place. Jerry decides to pursue purchasing the business further. -In Scenario 6-1 above, all but which of the following are places Jerry could have started looking for businesses that were for sale? A) Newspapers B) Place of current employment C) Businesses being sold due to bankruptcy D) Business brokers

Use the following to answer questions: Scenario 6-1. Jerry Jones is a young entrepreneur straight out of college. After taking a course in Small Business Management, Jerry has decided that he would like to purchase an existing business and hopefully avoid some beginner's errors. He spends some time looking and finally finds a business that appeals to him, a small sporting goods store. Jerry loves to fish and hunt. The store currently has a huge inventory in place. Jerry decides to pursue purchasing the business further. -In Scenario 6-1 above, which of the following would have been a good source of information on current businesses that are for sale that is often overlooked? A) Newspapers B) Place of current employment C) Word of mouth through family, friends, and current business acquaintances D) Business brokers

Use the following to answer questions: Scenario 6-1. Jerry Jones is a young entrepreneur straight out of college. After taking a course in Small Business Management, Jerry has decided that he would like to purchase an existing business and hopefully avoid some beginner's errors. He spends some time looking and finally finds a business that appeals to him, a small sporting goods store. Jerry loves to fish and hunt. The store currently has a huge inventory in place. Jerry decides to pursue purchasing the business further. -In Scenario 6-1 above, all but which of the following factors should be considered by Jerry in his analysis of an existing business for sale? A) Length of time the business has existed B) Emotional appeal C) Profit record D) Inventory and equipment condition

Use the following to answer questions: Scenario 6-1. Jerry Jones is a young entrepreneur straight out of college. After taking a course in Small Business Management, Jerry has decided that he would like to purchase an existing business and hopefully avoid some beginner's errors. He spends some time looking and finally finds a business that appeals to him, a small sporting goods store. Jerry loves to fish and hunt. The store currently has a huge inventory in place. Jerry decides to pursue purchasing the business further. -In Reference 6-1 above, since the sporting goods store has a huge inventory, Jerry needs to be familiar with which of the following codes? A) Code of ethics B) Code of inventory purchasing C) Uniform Commercial Code D) Inventory Commercial Code

Use the following to answer questions: Scenario 6-2. Sally Jo is considering purchasing the small craft store that is currently located in the local mall. She loves to do crafts and is quite talented in this area. Her family and friends have all received many gifts over the years that she has created for them. Sally Jo has no business background and no experience in the area of business. Since you are the local Small Business Association (SBA) representative, she comes to you for advice. -In Scenario 6-2 above, in order to analyze the financial condition of the business, Sally Jo should consider all but which of the following? A) An independent audit B) The profit trend C) The emotional appeal of the business D) Expense ratios

Use the following to answer questions: Scenario 6-2. Sally Jo is considering purchasing the small craft store that is currently located in the local mall. She loves to do crafts and is quite talented in this area. Her family and friends have all received many gifts over the years that she has created for them. Sally Jo has no business background and no experience in the area of business. Since you are the local Small Business Association (SBA) representative, she comes to you for advice. -In Scenario 6-2 above, the value of the craft store comes from all but which of the following? A) The assets of the business B) The negative cash flow of the business C) The value of intangible assets D) The profit potential

Use the following to answer questions: Scenario 6-2. Sally Jo is considering purchasing the small craft store that is currently located in the local mall. She loves to do crafts and is quite talented in this area. Her family and friends have all received many gifts over the years that she has created for them. Sally Jo has no business background and no experience in the area of business. Since you are the local Small Business Association (SBA) representative, she comes to you for advice. -In Scenario 6-2 above, the tangible assets of the business would include all but which of the following? A) Inventory B) Cash registers and shelving C) Goodwill D) Cash registers and the computer system

Use the following to answer questions: Scenario 6-2. Sally Jo is considering purchasing the small craft store that is currently located in the local mall. She loves to do crafts and is quite talented in this area. Her family and friends have all received many gifts over the years that she has created for them. Sally Jo has no business background and no experience in the area of business. Since you are the local Small Business Association (SBA) representative, she comes to you for advice. -In Scenario 6-2 above, the intangible assets of the business would include all but which of the following? A) Goodwill B) Inventory C) Preferred merchandise lines D) The favorable lease conditions

Use the following to answer questions: Scenario 6-2. Sally Jo is considering purchasing the small craft store that is currently located in the local mall. She loves to do crafts and is quite talented in this area. Her family and friends have all received many gifts over the years that she has created for them. Sally Jo has no business background and no experience in the area of business. Since you are the local Small Business Association (SBA) representative, she comes to you for advice. -In Scenario 6-2 above, when considering how much she should pay, Sally Jo should consider all but which of the following? A) Valuation of the firm's tangible net assets B) Valuation of the firm's intangible assets C) Expected future earnings D) The emotional appeal of purchasing a business that she would enjoy

List and describe two advantages and two disadvantages of buying an existing business.

Describe three places a potential small business owner might go when looking for a business for sale.

Analyze three areas that should be researched when deciding whether or not to purchase an existing business.

Discuss three major considerations when looking at the financial condition of an existing business.

Compare and contrast tangible assets and intangible assets.

Before serious bargaining can begin, it is necessary to determine the value of several key physical assets. List at least three of these assets.

List at least three guidelines that should be followed in a family business.