Chapter 15

Identify the factors that can reduce the risk of business failure. (Check all that apply.)

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

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

Involuntary Bankruptcy

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.)

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

Identify a true statement about the third and the last step, or principle, in a business turnaround process.

The step involves aggressive corrective action.

During the reorganization period, the entrepreneur can speed up the process by ___

taking the initiative in creating a plan

Which of the following is a true statement about the process in Chapter 11 bankruptcy?

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

Identify the suggestions that an entrepreneur should follow for surviving bankruptcy. (Check all that apply.)

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

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

Chapter 11 bankruptcy

___ is the most extreme case of bankruptcy and is in the best interests of the entrepreneur if there is no hope of recovery.

Chapter 7 bankruptcy

___ necessitates a venture to liquidate, either voluntarily or involutarily.

Chapter 7 bankruptcy

Which of the following is a requirement for keeping a new venture afloat?

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. Materials to meet supply orders are scarce.

___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

Match the decisions made in a reorganization plan in Chapter 11 bankruptcy (in the left column) with their characteristics (in the right column).

Extension - This happens when two or more of the largest creditors agree to postpone any claims. Substitution - If the future potential of a venture looks encouraging, it may be possible to exchange stock or something else for the existing debt. Composition Settlement - The debt is prorated to the creditors as a settlement for any debt.

True or false: Entrepreneurs should plan an exit strategy at the expansion stage of their venture.

False

True or false: Management buyouts usually involve an indirect sale of the venture for a bid price.

False

True or 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.

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. Focus efforts on developing a reasonable financial reorganization plan.

Identify a true statement about management buyout of a venture.

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

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 Ensure all financial statements are in order, including budgets and cash flow projections

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.)

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

Identify a feature of an effective succession plan for a business.

It should be clearly communicated to all employees.

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.

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. Under the law, individuals have to necessarily obtain credit counseling within six months of filing.

Identify a true statement about employee stock option plans.

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

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 faced with the prospect of failure, the entrepreneur should first ___

consult with his or her family

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

employee stock option plan

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

The key to enhancing the bankruptcy process is ___

keeping creditors informed of how the business is doing

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

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