Quiz 15: Harvesting Entrepreneurial Ventures

A buy/sell agreement can be used to make certain that funds are available to purchase the ownership interest.

An exit strategy is defined as that component of the business plan where an entrepreneur describes a method by which investors can realize a tangible return on their investment.

The steps in developing a succession strategy are understanding the contextual aspects, identifying successor qualities, and developing a written succession plan.

Only 3 out of 10 privately held firms survive into a second generation.

Family members who do not play an active role in the business may still want to inherit part of the business.

The forcing events that require an entrepreneur to step aside and let someone direct the operation are usually unforeseen and create major problems for the business.

A managerial successor provides the critical ideas for new-product development and future ventures.

Depending on the situation, some qualities or characteristics a successor should possess are more important than others.

The liquidity event can be achieved through an initial public offering (IPO) or complete sale of the venture.

The harvest decision may come when the venture has grown to a stage where an initial public offering (IPO) is a possibility.

Sometimes a successor is needed because the business environment changes and a parallel change is needed at the top.

Timing considerations generally do not impact decisions to sell a business because triggering events are unanticipated.

When looking ahead in choosing a successor from inside the organization, the founder often trains a team of executive managers consisting of both family and nonfamily members.

Nonfamily employees sometimes put pressure on the owner/manager in an effort to protect their personal interests.

The prospectus for an initial public offering (IPO) must disclose fully all pertinent information about a company and must present a fair representation of the firm's true prospects.

Only 10 percent of all privately held enterprises make it to a third generation.

The basic rule for privately held businesses is this: The owner should develop a succession plan.

It is not necessary for the entrepreneur to seek professional advice and legal counsel when liquidating the firm.

The Oakland Scavenger Company case may have a major effect on the management succession plans of family business.

Nepotism policies are lawful unless they have an "adverse impact" on women or minority groups (as in the Oakland Scavenger Company case).

There are two types of succession pressures: family members and nonfamily employees.

External environmental factors do not have any effect on the succession issue.

Once an entrepreneur decides to "harvest" the business, their challenges and responsibilities are over.

Harvest strategies rarely involve the complete sale of a business.

A harvest plan defines how and when owners and investors will realize an actual cash return on their investment.

Some entrepreneurs are easy to replace, and some cannot be replaced.

The liquidity event stands for positioning the venture for the realization of a cash return for the owners and investors.

Loss of ownership control is often attributable to one of the "Four Ds": disability, death, dissolution, and debtorship.

The extent of overlap between the family and business systems does not vary from family business to family business.

An important issue in the Oakland Scavenger Company case was that of whether nonfamily members should be allowed to be successors in family businesses.

Which of the following statements regarding communication after the sale is true? A)Communication should end at least 10 days prior to signing a buy agreement. B)Communication is a key step between the seller and the buyer and between the buyer and the current management personnel. C)Continued communication through the transition to new ownership is not critical. D)Communication should end at the time the buy agreement is signed.

Which of the following is an influencing factor in succession? A)family and business cultural issues B)government regulation C)current economic conditions D)the competition

Which of the following steps should be carried out third when deciding to sell a business? A)Publicize the offer to sell. B)Value the business. C)Finalize the prospective buyers. D)Time the sale appropriately.

A type of successor who is high in ingenuity, creativity, and drive would be considered a(n) _____ successor. A)managerial B)entrepreneurial C)opportunistic D)innovative

Which of the following steps should be carried out second when deciding to sell a business? A)Publicize the offer to sell. B)Finalize the prospective buyers. C)Segregate the assets. D)Value the business.

"Harvest" does not mean that A)family members agree about the business. B)all the profits have been reaped. C)the firm continues to exist. D)the challenges and responsibilities of the entrepreneur are over.

The Oakland Scavenger Company case is profound to owners of family businesses in that A)conceivably, the owner can be sued for not giving equal treatment to a son as to a daughter. B)conceivably, the owner can be sued by an employee of a different ethnic origin based upon not being accorded the same treatment as a son or daughter. C)conceivably, the owner can be sued for not declaring a family member his or her successor. D)the owner can be fined for not declaring his or her first son the heir to the business.

Happenings that cause the replacement of the owner/manager of a family business are called A)abrupt happenings. B)forcing events. C)legal events. D)unforeseen difficulties.

In the initial public offering (IPO) process, which of the following discloses all of the company's pertinent information and presents a fair representation of the firm's true prospects? A)prospectus B)audits C)proposal D)underwriting arrangement

When considering financial difficulties, which of the following statements constitutes a forcing event? A)The business has a loss for one quarter. B)A lender demands the removal of an owner/manager before lending the necessary funds. C)The business does not make a substantial profit for the first year of business. D)The business has record losses over a holiday season.

Which of the following would not be a participant at a due diligence meeting? A)management representatives B)company counsel C)SEC staff D)underwriters

The Oakland Scavenger Company case resulted in a(n) A)favorable ruling by the court for the plaintiffs. B)favorable ruling by the court for the defendants. C)out-of-court settlement. D)appeal to the U.S.Supreme Court.

Research on family firms demonstrates which of the following facts? A)Only 16 percent make it to a third generation. B)Many family firms cease to exist after one month. C)Only 9 out of 10 make it to a second generation. D)Only 3 percent make it to the next generation.

The managerial successor typically is not interested in A)efficiency. B)internal control. C)effective use of resources. D)creativity.

Which of the following is an event that would require an entrepreneur to step aside and let someone else direct the operation? A)nonterminal physical incapacitation B)divorce C)age D)disagreements with children or business partners

A key aspect to be considered in an effective succession is the A)entrepreneur's vision. B)family's wants and needs. C)profitability of the venture. D)marital status of the replacement.

The first source for succession often is A)nonfamily outsiders. B)professional managers. C)family and in-house personnel. D)friends of the family.

A typical example of a forcing event is a(n) A)mental breakdown. B)natural disaster. C)IRS audit. D)slow business year.

One advantage of the delayed entry strategy for the younger generation succeeding the older generation of a family business is that A)a successor's skills are judged with greater objectivity. B)strong relationships are readily established. C)normal mistakes are viewed as incompetence. D)knowledge of the environment is limited.

When selling a business, which of the following is not good advice? A)Sell when the timing is right. B)Sell when sales are peaking. C)Sell when profits are low. D)Sell when inventory is high.

Promotion from within is A)seldom effective. B)usually a bad idea. C)a morale-building philosophy. D)a sure way to measure profitability.

Which of the following is a source of pressure outside the family that could prove troublesome? A)tax rate B)nepotism C)death D)illness

The idea of "selling out" should be viewed in a _____ sense. A)destructive B)negative C)positive D)last resort

Research shows that many privately held firms go out of business within _____ year(s). A)1 B)25 C)2 D)10

Which of the following is not an example of pressures or interests from within a firm that affect succession issues? A)rivalry among various branches of the family B)pressure from a family member to start his or her own business C)employee wanting a percentage of the business in the owner's will D)pressure on the owner/manager to designate an heir

A type of successor who is interested in efficiency, internal control, and effective use of resources would be considered a(n) _____ successor. A)managerial B)entrepreneurial C)opportunistic D)family

One of the most recent legal challenges to management succession came from the _____ case. A)Anderson Manufacturing Corporation B)Johnson Brothers C)Oakland Scavenger Company D)Willy & Willy Inc.

The entrepreneur who has to choose a successor with potential to develop the attributes necessary to run the business should consider which of the following aspects of the potential successor over the others? A)drive and resourcefulness B)age C)education D)gender

Outside help in succession planning should be considered when A)the entrepreneur's ego gets in the way of a succession plan. B)the family doesn't want the business. C)the government requires it. D)market competition is heating up.

Which of the following is not a suggestion a tax accountant or lawyer might make concerning tax reduction? A)Place real estate in a separate corporation. B)Increase management's salaries and fringe benefits. C)Establish a leasing subsidiary. D)Give some or all of the owner's shares to heirs.

A written succession strategy A)is part of an entrepreneur's will. B)prepares the entrepreneur for developing a management continuity strategy and policy. C)must be reviewed by the government. D)must be reviewed by the family.

Besides the eight steps in the harvest strategy, what other implications should the entrepreneur be aware of when selling out? A)tax implications B)interest implications C)security interests D)home improvement implications

Which of the following is not considered a step in the harvest strategy? A)Look for a new venture to start up. B)Publicize the offer to sell. C)Value the business. D)Segregate the assets.

Under U.S. law, which of the following is the first step in the initial public offering (IPO) process? A)Present the proposal to the board. B)Select a financial printer. C)Draft a prospectus. D)Perform a road show.

In a survey of 1,000 business owners, which of the following was a motivation for an entrepreneur to sell a venture? A)too many heirs within the company B)the company getting too big C)a desire for liquidity D)legal advice received

An entrepreneurial successor is someone who A)is ingenious, creative, and driven. B)is loyal. C)has a profit orientation. D)has an administrative orientation.

Which of the following statements about seeking legal advice with respect to succession planning is true? A)Legal advice is seldom beneficial. B)Legal advice from an advisor who understands succession issues is always crucial. C)Legal advice is not critical, but beneficial. D)The more you pay, the better the advice.

Which of the following is not one of the four strategies that can be used in preparing a management succession policy? A)The owner's family controls the management continuity strategy entirely. B)The owner controls the management continuity strategy entirely. C)The owner works with a professional advisor on the management continuity strategy. D)The owner works with his or her family on the management continuity strategy.

Segregating the assets is the _____ step in selling a business. A)sixth B)fifth C)eighth D)second

One advantage of an early entry strategy for the younger generation succeeding the older generation of a family business is that A)normal mistakes are viewed as incompetence. B)the perspective of the environment is broadened. C)the successor's skills are judged with more objectivity. D)the skills specifically required by the business are developed.

The average life expectancy of a privately held business is _____ years. A)24 B)10 C)an indefinite number of D)50

Which of the following is not a contextual aspect to be considered in an effective succession plan? A)time B)managerial ability C)entrepreneurial vision D)cost

Which of the following is not a step in developing a succession strategy? A)Identify successor qualities. B)Develop a written succession plan. C)Undertaking forcing events. D)Understand contextual aspects.

Most privately held firms A)lack a succession plan. B)pass the firm to a child. C)don't view succession as a major issue. D)leave the succession decision to the executor of the owner's will.

Barriers to successful succession planning, discussed in the text, include which of the following? A)nobody wanting to own the firm B)lack of a final will C)death anxiety D)lack of profits

Which of the following statements about the characteristics that successors should possess is true? A)There are only a few characteristics needed. B)Situation does not matter. C)Knowledge of the firm is not a desirable characteristic or quality. D)Some characteristics will be more important than others, depending on the situation.

A harvest plan A)is similar to a will. B)defines when and how owners and investors will realize an actual cash return on their investment. C)leaves the business to the next generation. D)is simple to implement.

Succession pressure inside the firm exists A)when the founder wants to give up authority. B)if family members want to keep and manage the business themselves. C)if nonfamily employees don't want the business. D)if competition is hurting the business.

Bill and James Raymond have worked for their father's company for 15 years. Their father, who is president and now plans to retire, wants his sons jointly to take over the company. Bill and James have never agreed on anything. Should their father try another succession plan?

What are the three critical steps in developing a succession strategy in a family business?

Describe the legal concerns over family business succession, citing the Oakland Scavenger Company case.