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CHAPTER 4
BUYING AN EXISTING BUSINESS
TRUE/FALSE
4.1 One of the advantages of buying a business, as opposed to that of starting one, is there is more room for creativity. Answer: F 4.2 The possibility of buying a business at a bargain price is dependent, in part, on the owner’s reasons for selling. Answer: T 4.3 The best way to determine the value of a business is to base it on what similar businesses have sold for. Answer: F 4.4 Because entrepreneurs are self-reliant and energetic, they are usually the best ones to sell the business. Answer: F 4.5 The size of the market is one of the environmental problems a company can have. Answer: T 4.6 One of the results of new owners taking over a company is that the company’s history of labor-management relations is erased by the change in ownership. Answer: F 4.7 Businesses that are one-man shows often provide special difficulties for anyone who buys them. Answer: T 4.8 Many businesses that are for sale are handled by business brokers. Answer: T 4.9 Unless a business is listed in the classified ads of a newspaper or is in the hands of
a broker, the owner has no interest in selling it. Answer: F 4.10 The seller of a business sets the price; the market determines its value. Answer: T 4.11 The book value of a firm’s assets is what you would get for them if you were to sell them. Answer: F 4.12 The two basic considerations in determining the value of a business are goodwill and owner equity. Answer: F 4.13 Intangible assets are the legal obligations of a firm to its creditors. Answer: F 4.14 Perhaps the most important source of power during negotiations of any kind is information. Answer: T MULTIPLE CHOICE 4.15 Among the advantages of buying an existing business, over the option of starting one, are the following: a. there is less risk. b. less time and effort are required. c. the possibility of buying at a bargain price. d. all of the above. e. none of the above. Answer: d 4.16 One of the reasons why starting a new business can be risky is a. the stability of its work force. b. the perseverance of its founder. c. rising trends in employment levels. d. all of the above. e. none of the above.
c. the way in which the sale is handled. d. all of the above. e. none of the above Answer: d 4.22 In negotiating with an owner for the purchase of his or her business you should a. believe whatever you are told. b. listen to what the owner says but verify the information later and dig deeper. c. assume that all you are going to get from the owner is lies. d. none of the above. Answer: b 4.23 If the owner of a business decides what the selling price will be, that price a. may be too high or may be too low because the owner may not be aware of its real value. b. should be right because who would know better than the owner what the business is really worth. c. will be too high because the owner is bound to charge the highest price possible. d. none of the above. Answer: a 4.24 Owners of small businesses use various approaches to determine how much to ask for the business; among these approaches are the following: a. the I know what it cost me approach. b. the I know what I have to take out of here approach. c. the approach that is based on the price commanded by similar firms. d. all of the above. Answer: d 4.25 Buying a business from its founder a. can be a difficult experience when he or she has a sizeable emotional investment in it. b. almost always goes smoothly because the founder is glad to get out. c. usually is easy because the founder has probably done it before. d. none of the above. Answer: a 4.26 Buying a business from the family of a deceased founder a. is especially difficult because of the grief factor. b. provides excellent tax savings opportunities.
c. is often made easier because the family wants to sell it quickly. d. none of the above. Answer: c 4.27 The way in which the sale is made a. has no bearing on price. b. is determined by state legal requirements. c. does not vary from entrepreneur to entrepreneur. d. is specified by ancient custom. e. none of the above Answer: e 4.28 When it comes time to sell a business the owner a. often does so personally because that is in keeping with the self-reliance typical of entrepreneurs. b. almost never does so personally because entrepreneurs know turning to someone else is the best way to do it. c. are precluded by law from doing so. d. first usually makes an offer to suppliers. e. none of the above. Answer: a 4.29 Intermediaries are often used in selling a business; they are a. also called brokers. b. agents who arrange the sale. c. able to provide the business owner with important advantages. d. all of the above. e. none of the above. Answer: d 4.30 Among the advantages of using a broker to sell a business are the following: a. elimination of tax liabilities. b. elimination of sale-gain reporting requirements. c. establishment of a corporate liability shield. d. none of the above. Answer: d 4.31 The independence of spirit and action so characteristic of many entrepreneurs a. can betray the entrepreneur when it comes time to sell the business. b. is particularly troublesome when a business is started. c. is quite useful when it comes time to sell the business.
Answer: d 4.37 The reasons for selling a business a. may include the fact that it is struggling. b. are of little or no relevance to the buyer. c. have shown a dramatic shift over the years since the end of World War I. d. none of the above. Answer: a 4.38 The indirect approach to locating a business, for possible purchase, that is not on the market a. includes contacting lawyers, bankers, accountants, etc. b. is intended to uncover the names of prospects. c. does not include the use of brokers. d. all of the above. e. none of the above. Answer: d 4.39 The direct approach to locating a business that is not on the market a. puts the prospective buyer in contact with the business owner without the use of an intermediary. b. is outlawed in many southern states. c. is based on the philosophy of fishing around where you know nothing about the business but will learn later. d. none of the above. Answer: a 4.40 If a business being considered for purchase is experiencing slumping sales a. it could be in the down part of an industry cycle. b. it could be that the industry is undergoing a long-term downward movement. c. it could be caused by an internal problem in the firm. d. all of the above. Answer: d 4.41 The value of a business a. is determined when the owner first sets the price. b. is determined when the buyer and seller agree on a price. c. is the same thing as the asking price. d. is never the same thing as the asking price. e. none of the above.
Answer: b 4.42 Which of the following is an approach to determining the value of a firm’s assets? a. Replacement value b. Future earnings c. The straight-line system d. Discounted expenses flow e. All of the above Answer: a 4.43 The book value of a firm’s assets a. is one of four approaches to asset evaluation. b. reflects the original cost of the assets minus depreciation. c. seldom matches actual value. d. all of the above. e. none of the above. Answer: d 4.44 The two basic considerations that should be included in determining the price of a business include a. the value of the business’ assets and its future earnings. b. book value and liquidation value. c. taxing levels and start-up costs. d. entry costs and departure proceeds. e. none of the above. Answer: a 4.45 The liquidation value approach to determining the value of assets is a. highly conservative in that it minimizes the costs to the buyer should failure occur. b. based on what would be realized if assets had to be sold. c. the best approach only if the concern about possible financial loss is so strong that even a little risk is unacceptable. d. all of the above. e. none of the above. Answer: d 4.46 The various ways of computing the value of a company’s assets a. show remarkable consistency. b. have their respective origins in different industries. c. must be included in official sales documents. d. all of the above.
d. all of the above. e. none of the above. Answer: d 4.52 The seller’s dilemma is that a. she does not know the value of her business but must nonetheless set the price. b. he does not know who the real prospects for selling the business are. c. she must have a use for the proceeds of the sale before the sale is made. d. none of the above. Answer: a 4.53 The degree of satisfaction experienced by the buyer and seller a. depends solely on price. b. is inversely related, i.e., as the satisfaction of one individual increases, the satisfaction of the other must decrease. c. is affected by the process used during negotiations. d. none of the above. Answer: c 4.54 The following are sources of power of the parties involved in negotiations: a. information. b. time. c. alternatives. d. all of the above. e. none of the above. Answer: d 4.55 Which of the following is not a source of power of the parties in negotiations? a. Information b. Time c. Alternatives d. All of the above Answer: d
