Ch. 15

Identify a true statement about Chapter 13 bankruptcy. A plan for reorganization requires that all the assets held by the entrepreneur be sold to pay off any debts of the company. The turnaround plan requires the entrepreneur to liquidate, voluntarily, all nonexempt assets of the business. A court-appointed trustee receives money from the debtor and is liable for making scheduled payments to all creditors. The turnaround plan is approved only by the creditors and not the court.

A court-appointed trustee receives money from the debtor and is liable for making scheduled payments to all creditors.

Which of the following is a true statement about the process in Chapter 11 bankruptcy? Only a major creditor or a single party who has an interest in the business will usually present the case to the court. The turnaround plan combines the debt and ownership interests. A plan for reorganization is prepared to show how the business will be turned around. Chapter 11 bankruptcies are not handled by the U.S. Bankruptcy Court.

A plan for reorganization is prepared to show how the business will be turned around.

When transferring a business to family members, list the critical factors that an effective succession plan needs to consider.

A. The role of the owner in the transition stage: Will he or she continue to work full time? Part time? Or will the owner retire?B. Family dynamics: Are some family members unable to work together?C. Income for working family members and shareholders.D. The current business environment during the transition.E. Treatment of loyal employees.F. Tax consequences.

In the context of succession planning in nonfamily business situations, which of the following issues should be considered in a succession plan when there are only a small number of shareholders? (Check all that apply.) All employees should be welcomed to participate in the transition process. The succession process needs to be a closed one. It is important to have undefined job descriptions and ambiguous job roles. Senior management of the company must be committed to any succession plan.

All employees should be welcomed to participate in the transition process. Senior management of the company must be committed to any succession plan.

The early signs of bankruptcy include all of the following except: All of these are early signs of bankruptcy. payroll taxes are not paid. key personnel leave the company. suppliers demand payment in cash.

All of these are early signs of bankruptcy.

_____ has become a more common and frequently used exit strategy in the current economic environment.

An entrepreneur selling out to a larger company

The _____ (with amendments added in 1984 and 2005) was devised to ensure a fair distribution of assets to creditors, to safeguard debtors from unfair depletion of assets, and to safeguard debtors from unfair demands by creditors.

Bankruptcy Act of 1978

Identify the lessons that can be learned from entrepreneurs who have experienced bankruptcy. (Check all that apply.) Bankruptcy protects entrepreneurs only from competitors. Entrepreneurs should focus on both known and unknown markets. Bankruptcy safeguards entrepreneurs only from creditors. Entrepreneurs should file early when they consider that their business is going to fail.

Bankruptcy safeguards entrepreneurs only from creditors. Entrepreneurs should file early when they consider that their business is going to fail.

Which of the following is a stress point that an entrepreneur should be aware of when managing a venture in its early stages? Registration of the venture as a company Creation of the first marketing plan of the venture Change in the size of the venture Beginning of operations for the venture

Change in the size of the venture

Bankruptcy may not always mean the termination of a business as it can offer an entrepreneur an option to reorganize under _____ or merge with another company.

Chapter 11

_____ provides the option to an entrepreneur to reorganize and make a venture more solvent.

Chapter 11 bankruptcy

Identify and define the three major types of bankruptcy.

Chapter 11 bankruptcy Provides the opportunity to reorganize and make the venture more solvent Chapter 13 bankruptcy Voluntarily allows individuals with regular income the opportunity to make extended time payments Chapter 7 bankruptcy Requires the venture to liquidate, either voluntarily or involuntarily

Which of the following are alternative provisions provided by the Bankruptcy Act of 1978 for protecting a firm near or at a position of insolvency? (Check all that apply.) Chapter 9 bankruptcy Chapter 15 bankruptcy Chapter 13 bankruptcy Chapter 11 bankruptcy Chapter 7 bankruptcy

Chapter 13 bankruptcy Chapter 11 bankruptcy Chapter 7 bankruptcy

The most common type of business bankruptcy is _____, which accounted for about two-thirds of the total in 2014.

Chapter 7

_____ necessitates a venture to liquidate, either voluntarily or involuntarily.

Chapter 7 bankruptcy

The most severe form of bankruptcy is:

Chapter 7.

Which of the following is a requirement for keeping a new venture afloat? Increase initial capitalization. Promote excess optimism when the business appears to be successful. Avoid responding to changes in the marketplace. Create good marketing plans with clear objectives.

Create good marketing plans with clear objectives.

Identify the warning signs of bankruptcy in a venture. (Check all that apply.) Customers are given huge discounts to improve payments because of poor cash flow. Suppliers demand payment in credit. Contracts are accepted at high amounts to generate cash. Materials to meet supply orders are scarce.

Customers are given huge discounts to improve payments because of poor cash flow. Materials to meet supply orders are scarce.

About one third of all new start-ups fail in their first years. T/F?

False

An ESOP is a five- to six-year plan to sell a business to its employees. T/F?

False

Entrepreneurs should plan an exit strategy at the expansion stage of their venture. T/F?

False

Management buyouts usually involve an indirect sale of the venture for a bid price. T/F?

False

More than 50 percent of firms filing for Chapter 11 bankruptcy emerge from the process. T/F?

False

The results of each bankruptcy filing is mostly similar. T/F?

False

When deciding to sell his or her business, an entrepreneur should project the business as having a smaller share in a large market than a larger share in a small market niche. T/F?

False

When seeking venture capital for a new company, investors only look at the business plan for that venture and previous business failures are irrelevant. T/F?

False

Which of the following are suggestions that can be followed for survival from bankruptcy? (Check all that apply.) File before the venture exhausts cash or has no incoming revenue. Ensure creditors examine financial transactions for only the last three months. Avoid using bankruptcy as a bargaining chip to restructure and reorganize a venture. Focus efforts on developing a reasonable financial reorganization plan.

File before the venture exhausts cash or has no incoming revenue. Focus efforts on developing a reasonable financial reorganization plan.

Identify a true statement about management buyout of a venture. Sale of the venture to key employees can only be for cash. A cash sale is likely if the value of the business is substantial. Financing the sale of the venture can be achieved through a bank, or the entrepreneur could also agree to carry the note. Use of equity stock as a method of business transfer by managers is not a feasible option.

Financing the sale of the venture can be achieved through a bank, or the entrepreneur could also agree to carry the note.

Identify the different reasons why companies do not successfully come out of Chapter 11 bankruptcy. (Check all that apply.) Stable local market conditions. Lack of competition in the market. Firms wait for too long before filing for bankruptcy. Unstable global economy.

Firms wait for too long before filing for bankruptcy. Unstable global economy.

Which of the following is not an exit strategy? Liquidation Franchising A private sale of stock An IPO

Franchising

Identify the strategies that an entrepreneur should follow when he or she has decided to sell the business but does not need to sell immediately. (Check all that apply.) Get nondisclosures from important employees. Avoid assessing the condition of capital equipment during the financial assessment for the sale. Ensure all financial statements are in order, including budgets and cash flow projections. Focus on ensuring lower margins and profits.

Get nondisclosures from important employees. Ensure all financial statements are in order, including budgets and cash flow projections.

Identify the suggestions that an entrepreneur should follow for surviving bankruptcy. (Check all that apply.) Have a clear understanding of how the protection against creditors works and what is necessary to keep it in place. Be ready to have creditors examine all financial transactions for the last 12 months. File for Chapter 11 protection even if the venture has no legitimate chance of recovery. Avoid transferring any existing litigation to the bankruptcy court.

Have a clear understanding of how the protection against creditors works and what is necessary to keep it in place. Be ready to have creditors examine all financial transactions for the last 12 months.

Identify the factors that can reduce the risk of business failure. (Check all that apply.) Ensure there is excess optimism among the employees. Identify stress points that can cause the business to be in danger. Ensure relatively accurate cash projections are made. Avoid having a single marketing plan with specific objectives.

Identify stress points that can cause the business to be in danger. Ensure relatively accurate cash projections are made.

What are the characteristics of an SUBSTITUTION decision made in a reorganization plan in Chapter 11 bankruptcy?

If the future potential of a venture looks encouraging, it may be possible to exchange stock or something else for the existing debt.

Which of the following are critical factors to be considered for an effective succession plan for a business when family members are involved? (Check all that apply.) Ratio of the number of family members to the number of employees. Income for working family members and shareholders. Role of the owner in the transition stage. Expectations of the family members of employees.

Income for working family members and shareholders. Role of the owner in the transition stage.

Identify the advantages of an employee stock option plan. (Check all that apply.) It guarantees a fixed rate of return on investment for the employees. It acts as a mechanism to pay back those employees who have been faithful to the venture. It offers a unique incentive to employees that can boost their motivation to put in extra time or effort. It allows the company to save up on payments to venture capitalists.

It acts as a mechanism to pay back those employees who have been faithful to the venture. It offers a unique incentive to employees that can boost their motivation to put in extra time or effort.

Which of the following is a disadvantage of the employee stock option plan (ESOP)? It includes a direct buyout by key employees of the venture. It does not allow the transfer of business under a written agreement. It does not allow the company to reap the advantages of deducting contributions. It requires a total valuation of the venture to estimate the amount of the ESOP package.

It requires a total valuation of the venture to estimate the amount of the ESOP package.

Identify a feature of an effective succession plan for a business. It should avoid mention of any possible successors. It should be clearly communicated to all employees. It should estimate a firm's value based on the investment made by venture capitalists. It should be communicated specifically to a few key employees.

It should be clearly communicated to all employees.

What are some of the warning signs of bankruptcy?

Management of finances becomes lax, so no one can explain how money is being spent. Directors cannot document or explain major transactions. Customers are given large discounts to enhance payments because of poor cash flow. Contracts are accepted below standard amounts to generate cash. Bank requests subordination of its loans. Key personnel leave the company. Materials to meet orders are lacking. Payroll taxes are not paid. Suppliers demand payment in cash. Customers' complaints regarding service and product quality increase.

Identify a true statement about Chapter 11 bankruptcy. This is the most severe alternative to bankruptcy. The entrepreneur in this situation feels that the business cannot meet its debt requirements. This situation begins before creditors pressure the firm with lawsuits. The courts try to give the venture in this situation time to pay its debts.

The courts try to give the venture in this situation time to pay its debts.

What are the characteristics of an COMPOSITION SETTLEMENT decision made in a reorganization plan in Chapter 11 bankruptcy?

The debt is prorated to the creditors as a settlement for any debt.

An entrepreneur decides to transfer his business to his family member. How can the family member who is a successor and is in the transition stage be helped in making business decisions?

The entrepreneur can act as an advisor for the successor during the transition stage.

Which of the following should an entrepreneur do when managing a venture in its early stages? The entrepreneur should set sales values that may represent key decision marks in terms of major capital investment. The entrepreneur should double the inventory to offset shrinking margins. The entrepreneur should increase capital investments as soon as there are early rapid rises in sales. The entrepreneur should rapidly increase prices to offset lower sales.

The entrepreneur should set sales values that may represent key decision marks in terms of major capital investment.

Identify the internal problems that are created when a business is transferred to a family member who has not been involved in the business. (Check all that apply.) The family member may be entrusted with the responsibility of running the business without adequate training. The family member may have been exposed to different roles rather than a single role in the operation of the business. Employees in some departments may not know who the successor is. Employees who have been with the firm since startup may resent the younger family member's assuming control of the venture.

The family member may be entrusted with the responsibility of running the business without adequate training. Employees who have been with the firm since startup may resent the younger family member's assuming control of the venture.

Identify a feature of the succession process in nonfamily business situations. The process may be precisely defined in a partnership agreement and could involve a predetermined choice. The successors should be considered only from external sources. The process usually requires double the transition time as compared to succession in family business situations. The successors should be considered only from internal sources.

The process may be precisely defined in a partnership agreement and could involve a predetermined choice.

Identify the true statements about the reforms in the Bankruptcy Code that were signed into law in April 2005. (Check all that apply.) The reforms made it more challenging to walk away from all debt by filing for Chapter 7 bankruptcy. The reforms are based on the argument that a person should not be obligated to repay his or her debt. Under the law, individuals have to necessarily obtain credit counseling within six months of filing. Under the law, the income statement is required to ascertain if an entrepreneur is eligible for either Chapter 7 or Chapter 13 bankruptcy.

The reforms made it more challenging to walk away from all debt by filing for Chapter 7 bankruptcy. Under the law, individuals have to necessarily obtain credit counseling within six months of filing.

Identify a true statement about the third and the last step, or principle, in a business turnaround process. The step involves consulting a CPA or an attorney. The step involves communication with creditors. The step involves aggressive corrective action. The step involves identifying the warning signs of bankruptcy.

The step involves aggressive corrective action.

Shoptop Retail Inc. is a new retail corporation that has established retail stores in different cities in the United States. The company has completed six months. Which of the following would most likely be a warning sign of bankruptcy for the company? The company accepting contracts above the standard amount The stores giving large discounts to customers to increase cash flow The company paying all suppliers in cash The stores increasing the inventory stocks to meet rising demand

The stores giving large discounts to customers to increase cash flow

Identify a true statement about employee stock option plans. They usually result in significant losses for employees. They do not establish any new legal entity. They do not have an obligation to repay the loan plus interest out of the cash flow of the business. They are a way to award employees and clarify the succession process.

They are a way to award employees and clarify the succession process.

What are the characteristics of an EXTENSION decision made in a reorganization plan in Chapter 11 bankruptcy?

This happens when two or more of the largest creditors agree to postpone any claims.

An employee stock option plan establishes a new legal entity. T/F?

True

Bankruptcy can be used as a bargaining chip with creditors to allow the venture to voluntarily reorganize. T/F?

True

Bankruptcy should be shared with employees and everybody else involved in an organization. T/F?

True

Chapter 7 is the most severe alternative in bankruptcy. T/F?

True

If an entrepreneur recognizes the warning signs of bankruptcy early, he or she may be able to prevent it from occurring. T/F?

True

Suppliers demanding payment in cash and materials to meet orders is lacking are two warning signs of bankruptcy. T/F?

True

Under Chapter 13, the key to enhancing the bankruptcy process is by stressing the significance of the creditors' support during the process. T/F?

True

When a venture is in trouble and facing bankruptcy, the entrepreneur should first sit down with his or her spouse and explain what is happening. T/F?

True

When business failure looks probable, the entrepreneur should seek outside advice. T/F?

True

The final consideration when an entrepreneur is faced by the prospect of failure of a venture is to _____.

avoid hanging on to a venture that will continually drain resources

When the debt is prorated to the creditors as a settlement in Chapter 11 this is called:

composition settlement

When faced with the prospect of failure, the entrepreneur should first _____.

consult with his or her family

Under Chapter 13 bankruptcy, the individual who has filed for bankruptcy _____.

creates a five-year repayment plan under court supervision

Management buyouts usually involve a ________ of the venture for some predetermined price.

direct sale

The most common method of harvesting a venture is through:

direct sale of the business.

Given the cultural climate of the United States, business failure and bankruptcy: do not have to be the end for the entrepreneur. mean the entrepreneur can never hope to start over. carry such a stigma that the entrepreneur is disgraced and ostracized. means that there would be a change in the outlook of the people.

do not have to be the end for the entrepreneur.

A(n) _____ refers to a two- to three-year plan to sell the business to employees.

employee stock option plan

_____ involve an initial public offering, private sale of stock, succession by a family member or a nonfamily member, merger with another company, or liquidation of a company.

exit strategies

The second principle in any successful business turnaround is that the management must _____.

have a turnaround plan created using the questions required to be addressed in a planning process

Health Kure Pharma Inc. is a pharmaceutical company that filed for Chapter 11 bankruptcy. However, even after reemergence, the company fails to achieve considerable sales because of the availability of cheaper drugs in the market from generic drug manufacturers. Due to consistent losses, the company faces bankruptcy. Which of the following reasons is responsible for the company not being able to successfully come out of Chapter 11 bankruptcy?

intense competition

__________ __________ refers to a petition of bankruptcy filed by creditors without consent of entrepreneur.

involuntary bankruptcy

The key to enhancing the bankruptcy process is _____.

keeping creditors informed of how the business is doing

Stress points are a result of all of the following except: lack of time. sales. major capital investment. the need for new key personnel.

lack of time.

When an entrepreneur notices any of the warning signs of bankruptcy in his or her venture, he or she should immediately _____.

look for advice from a CPA or an attorney

The key issue in passing the business on to an employee is

ownership

Entrepreneurs who usually build a business, sell it or go public, and then move on to a different idea or venture are referred to as _____.

serial entrepreneurs

During the reorganization period, the entrepreneur can speed up the process by _____.

taking the initiative in creating a plan

According to the reforms in the Bankruptcy Code that were signed into law in April 2005, the means test used to ascertain eligibility for Chapter 7 or Chapter 13 states that individuals may not file for Chapter 7 bankruptcy if _____.

their income is at or above the state income median level

If an entrepreneur files a __________ __________ petition under Chapter 7, it constitutes a determination that his or her venture is bankrupt.

voluntary bankruptcy

A common reason why companies do not come out successfully from a Chapter 11 bankruptcy is because they

wait too long to file for protection