entra man Ch. 14
What is the means of acquisition for a bootstrap purchase of a firm's assets?
An entrepreneur acquires a small amount of the firm for cash and then purchases the remainder of the company with a long-term note that is paid off over time out of the acquired company's earnings.
What is the means of acquisition for a direct purchase of firm's entire stock or assets?
An entrepreneur often obtains funds for the purchase from an outside lender or the seller of the company being purchased.
Identify the advantages of franchising to franchisors. (Check all that apply.) It allows them to hire more employees than a nonfranchised business. It helps the venture to grow quickly using little capital. It helps them achieve economies of scale by buying supplies in large quantities. It ensures that they need to commit only a smaller sum of money to advertising.
It helps the venture to grow quickly using little capital. It helps them achieve economies of scale by buying supplies in large quantities.
A proven franchise is characterized by...
It offers lower risk to the franchisee but requires more financial investment.
Identify a true statement about joint ventures. They are a newly conceptualized organizational form. They have recently been used as a means of expansion by entrepreneurial firms. They have occurred between rival companies. They cannot be used to penetrate the international market.
They have occurred between rival companies.
HYA Mobiles Inc. is a multinational manufacturer of smartphones and tablets. It starts franchises in several cities around the world. These franchises act as retail stores for the manufacturer. Identify a true statement about the franchise. This type of franchise requires the franchisee to provide funds for the entire advertising budget. This type of franchise requires the franchisor to maintain big payrolls. This is a type of franchise that offers services. This is a type of dealership franchise.
This is a type of dealership franchise.
A common procedure for determining a merger's value is to estimate the present value of discounted cash flows and the expected after-tax earnings attributable to the merger. T/F?
True
A franchise provides an opportunity to establish a new venture with up-front support that could save the entrepreneur significant time and capital. T/F?
True
A key concern in any merger or acquisition is the legality of the purchase. T/F?
True
An acquisition is the purchase of a company, or part of a company, in which the acquired company ceases to exist independently. T/F?
True
Franchising allows the franchisor to benefit from economies of scale in purchasing. T/F?
True
In evaluating an LBO's asking price, an entrepreneur can use subjective measures such as evaluating the abilities of key personnel remaining with the firm. T/F?
True
One advantage to an acquisition is that there is an established customer base. T/F?
True
Regardless of the mode used for the growth of a firm, entrepreneurs need to be good negotiators. T/F?
True
The U.S. Department of Justice frequently issues guidelines for different types of mergers. T/F?
True
The bargaining zone is the range of outcomes between the entrepreneur's reservation price and the reservation price of the other party. T/F?
True
To be successful the partners in a joint venture should have symmetry. T/F?
True
In order to further investigate a franchise opportunity an entrepreneur can request a franchise package from the franchisor, which:
costs between $400 and $600 and is usually refundable.
The type of franchise where manufacturers use franchises to distribute their product lines is referred to as __________.
dealership
In the context of primary tasks for an entrepreneur negotiating with another party for access to an external growth mechanism, the __________ __________ refers to negotiating how the benefits of a business relationship will be allocated between the parties.
distribution task
A ________ occurs when an entrepreneur or an employee group uses borrowed funds to purchase an existing venture for cash.
leveraged buyout
In a leveraged buyout, capital is acquired in the form of _____.
long-term debt financing
The __________ __________ is the price (the bundle of resources from an agreement) at which an entrepreneur is indifferent about whether to accept the agreement or choose an alternative.
reservation price
Recognizing the relative importance of the issues during a negotiation allows an entrepreneur to _____.
sacrifice equity but obtain control
One of the types of franchise offers _____, which include personnel agencies, income tax preparation companies, and real estate agencies.
services
In the context of negotiation, if the information about the issues important to each party is known to both parties and they use it, then it is likely that _____.
the outcome will be mutually beneficial
What are the four major factors in joint venture success?
1. The accurate assessment of the parties involved to best manage the new entity in light of the ensuing relationships. The joint venture will be more effective if the managers can work well together. Without this chemistry, the joint venture has a low likelihood of success and may even fail. 2. The degree of symmetry between the partners. This symmetry goes beyond chemistry to objectives and resource capabilities. When one partner feels that he or she is bringing more to the table, or when one partner wants profits and the other desires product outlet, problems arise. Good relationships must be nurtured between the managers in the joint venture and those in each parent company. 3. The expectations of the results of the joint venture must be reasonable. 4. The timing must be right. With environments constantly changing, industrial conditions being modified, and markets evolving, a particular joint venture could be a success one year and a failure the next. Intense competition leads to a hostile environment and increases the risks of establishing a joint venture. Some environments are just not conducive to success.
Which of the following is an example of a franchise that offers services? A franchisee that acts as a retailer for automobiles. A franchisee that provides fast food services under a renowned brand. A franchisee that offers accounting and help for income tax preparation. A franchisee that acts as a retailer for an apparel brand.
A franchisee that offers accounting and help for income tax preparation.
Which of the following is true about franchising? A franchisee is responsible for all spending related to advertising for the product or service of the franchise. A franchisee uses the brand name of the franchise that is well established. A franchisee spends resources to establish the credibility of the business. A franchise's credibility is more if the franchise is a newly established firm.
A franchisee uses the brand name of the franchise that is well established.
An unproven franchise is characterized by...
A franchisor likely to make mistakes as the business expands.
Identify a true statement about acquisitions. Acquisitions are of the same form, regardless of the amount of money involved and the type of companies involved. Acquisitions can take many forms based on the goals and position of the parties involved in the transaction. Acquisitions fail to provide the means of entering new markets. Acquisitions fail to provide the means of expanding a business.
Acquisitions can take many forms based on the goals and position of the parties involved in the transaction.
Which of the following are the most active providers of the debt needed in leveraged buyouts? (Check all that apply.) Family and friends Franchisees Banks Insurance companies Venture capitalists
Banks Insurance companies Venture capitalists
Which of the following statements about locating acquisition candidates is not true? Accountants, attorneys, or bankers may know of good acquisition candidates. Entrepreneurs may find acquisition candidates in the classified sections of the newspaper. Entrepreneurs can acquire another business through a broker. Brokers represent the acquisition buyer or the seller.
Brokers represent the acquisition buyer or the seller.
Identify the drawbacks to establishing an international joint venture. (Check all that apply.) Cultural differences in each company can lead to managerial issues in the new joint venture. The business objectives of the joint venture partners can be quite distinct. Such ventures can only be formed for the purpose of conducting research and require the involvement of a university. The partners in such ventures do not have proprietary rights.
Cultural differences in each company can lead to managerial issues in the new joint venture. The business objectives of the joint venture partners can be quite distinct.
Which of the following are the major problems that have kept industry-university joint ventures from proliferating at a fast pace? (Check all that apply.) Demands of universities to have a share in the financial returns from patents Demands of industry partners to be given total control over the partnership Demands of industry partners to have all proprietary rights Demands of universities to be given tax breaks on forming such joint ventures
Demands of universities to have a share in the financial returns from patents. Demands of industry partners to be given total control over the partnership. Demands of industry partners to have all proprietary rights
_____ is an arrangement whereby the manufacturer or sole distributor of a trademarked product or service gives exclusive rights of local distribution to independent retailers in return for their payment of royalties and conformance to standardized operating procedures.
Franchising
Identify the disadvantages of acquisition for an entrepreneur. (Check all that apply.) The acquired business typically does not have a sales structure. The entrepreneur may have overconfidence in his or her ability. The actual cost of acquiring the business is more than any other means of expansion. The key employees of the acquired company may often leave when the business changes hands.
The entrepreneur may have overconfidence in his or her ability. The key employees of the acquired company may often leave when the business changes hands.
Which of the following are true about joint venture arrangements between two or more private-sector companies? (Check all that apply.) The private-sector companies in these agreements can only function in a regional or national market. The joint venture can be formed to perform cooperative research. These agreements restrict the companies from raising capital and expanding markets. There is a detailed cost-sharing arrangement between the different entities of the partnership.
The joint venture can be formed to perform cooperative research. There is a detailed cost-sharing arrangement between the different entities of the partnership.
_____ is the primary reason why acquisitions fail to generate the expected synergies and future benefits.
The problem of integrating the new organization's culture with the existing organizational culture
Identify the true statements about industry-university joint ventures. (Check all that apply.) Industry-university joint ventures require industries to provide a majority of the share of the profits to universities. Government policies do not allow the formation of industry-university joint ventures. University researchers want to make the research knowledge available through research papers. Profit corporations want to obtain tangible results, such as a patent, from their research investment and want to acquire all proprietary rights.
University researchers want to make the research knowledge available through research papers. Profit corporations want to obtain tangible results, such as a patent, from their research investment and want to acquire all proprietary rights.
What units are involved with banks and a leveraged buyout?
Utilize senior-debt issues
What units are involved with venture capitalists and a leveraged buyout?
Utilize subordinated debt issues with warrants or options
An entrepreneur's best alternative to a negotiated agreement helps determine _____.
a reservation price for the negotiation
A(n) __________ is the purchase of an entire company, or part of a company.
acquisition
One method of expanding a business is the purchase of an entire company or part of it so that the entity is completely absorbed and no longer exists as a separate company. This is called:
an acquisition.
The __________ __________ refers to the range of outcomes between an entrepreneur's reservation price and the reservation price of the other party.
bargaining zone
People who sell companies are known as _____.
brokers
The __________ is the person who purchases a franchise and is given the opportunity to enter a new business with a better chance to succeed than if he or she were to start a new business from scratch.
franchisee
The disclosure document provided by the franchisor: has information that is certified by a CPA and the FTC so it is always a reliable source of data. will state a guaranteed yearly return for the franchisee. is required by the FTC. is done on a voluntary basis.
is required by the FTC.
An advantage of an international joint venture is that _____.
it has a low requirement for cash if the knowledge or patents are capitalized as a contribution to the venture
A __________ __________ is a separate entity that involves a partnership between two or more active participants to form a company.
joint venture
An advantage of acquisition for an entrepreneur is that the employees of the acquired company _____.
know how to run the business
An advantage to a franchisee in franchising is the _____.
managerial support provided by the franchisor
The joining of two or more companies into a single company is referred to as a(n) __________.
merger
Ideally, an acquisition should _____.
positively influence the bottom line, impacting both long-term gains and future growth
_____ is the last step in establishing a franchise arrangement.
the contract agreement
A franchisee usually enters into a business that has a(n)_____.
well-known name, product, or service
Which of the following are the disadvantages of franchising for a franchisor? (Check all that apply.) A franchisor may find it very difficult to obtain quality franchisees. The ability of a franchisor to maintain tight controls becomes more difficult as the number of franchises increases. A franchisor has to provide funds for the entire advertising budget of the franchisee. A franchisor cannot use the franchise route to expand internationally.
A franchisor may find it very difficult to obtain quality franchisees. The ability of a franchisor to maintain tight controls becomes more difficult as the number of franchises increases.
Which of the following are the most common means of acquisition? (Check all that apply.) An entrepreneur's direct purchase of a firm's entire stock or assets. Horizontal integration of functions of two or more firms. An entrepreneur's purchase of publicly listed shares of a firm. Bootstrap purchase of a firm's assets.
An entrepreneur's direct purchase of a firm's entire stock or assets. Bootstrap purchase of a firm's assets.
Identify a true statement about brokers in acquisitions. Brokers do not receive any commission on the sale and so are more likely to find the most economical deals. Brokers operate in a fashion opposite to that of a real estate broker. Brokers represent the seller and will sometimes aggressively find buyers using referrals, advertising, or direct sales. Brokers usually have poor working knowledge of the business, which can hinder negotiations.
Brokers represent the seller and will sometimes aggressively find buyers using referrals, advertising, or direct sales.
The key to a successful leveraged buyout is the _____.
ability of the entrepreneur taking over to cover the principal and interest payments through higher sales and profits
Which of the following is true about the managerial assistance provided by franchisors? Franchisors do not offer managerial assistance to the franchisees after the start of the franchise. Training and education is not a criterion that an entrepreneur should consider when evaluating a franchise opportunity. Franchisors do not allow new franchisees to actually work with existing franchise owners to get training. Each new franchisee is usually required to undergo a training program on all aspects of operating the franchise.
Each new franchisee is usually required to undergo a training program on all aspects of operating the franchise.
Identify an administrative control that can be used by an entrepreneur running a franchise maintain quality control of products and services offered by the franchise. Increasing the number of employees involved in providing services Ensuring that all the capital required by the franchise is provided by a commercial bank Ensuring that the employees are regularly trained to provide consistent service Reducing the number of employees who are involved in providing services on behalf of the franchise
Ensuring that the employees are regularly trained to provide consistent service
A joint venture is the purchase of an entire company, or part of a company. T/F?
False
An ideal way to start the process of building trust in a negotiation between an entrepreneur and a growth partner is by sharing one's reservation price with the other party. T/F?
False
An unproven franchise will be a less expensive investment with a low risk. T/F?
False
For the franchisor, the capital required to expand a venture quickly is more than it would be without franchising. T/F?
False
Most leveraged buyouts use the same standardized financial package. T/F?
False
Synergy is defined as "the intangible benefits of mergers and acquisitions." T/F?
False
The bargaining zone approach in a negotiation between an entrepreneur and the growth partner focuses on the integrative stage. T/F?
False
The degree of symmetry in a joint venture is limited to the chemistry between the companies involved. T/F?
False
The methods used for valuing an acquisition candidate are different from those used to determine the value of a merger candidate. T/F?
False
The most common type of franchise is the dealership. T/F?
False
The most common type of joint venture is between two or more public sector companies. T/F?
False
Identify and describe the three parts of a leveraged buyout evaluation procedure an entrepreneur can use to determine whether a specific company is a good candidate for an LBO.
First, the entrepreneur must determine whether the present owner's asking price is reasonable. The entrepreneur can use subjective and/or quantitative techniques to make this determination. Subjective evaluations should be made of the competitiveness of the industry and the competitive position of the firm in that industry; the uniqueness of the offerings of the firm and its stage in the product like cycle; and the abilities of management and key personnel remaining with the firm. Quantitative techniques include the price-earnings ratio of the LBO prospect compared to similar companies, as well as the present value of future earnings of the prospect and its book value. Next, the entrepreneur must assess the firm's debt capacity. The amount of long-term debt a prospective LBO can carry depends on the prospect's business risk and the stability of its future cash flows. The cash flow must cover the long-term debt required to finance the LBO, otherwise the difference will need to be in the form of equity from the entrepreneur or other investors. Finally, the entrepreneur must develop the appropriate financial package to meet the needs and objectives of the providers of the funds as well as the company's and the entrepreneur's situation. Each financial package is tailored to the specific situation but there are usually some restrictions, such as no payment of dividends. Frequently, an LBO agreement with venture capitalists has warrants convertible into common stock at a later date. A sinking fund repayment of the long-term debt is frequently required.
__________ is a way by which an entrepreneur may grow his or her firm by having others pay for the use of the firm's name, process, product, service, and so on.
Franchising
Identify the disadvantages of franchising to a franchisee. (Check all that apply.) Restriction on the use of the franchisor's name for the promotion of the franchise. Inability of the franchisor to keep promises made in the franchise agreement. Lack of freedom for a franchisee in recruiting employees. Failure of the franchisor to offer services, advertising, and location.
Inability of the franchisor to keep promises made in the franchise agreement. Failure of the franchisor to offer services, advertising, and location.
_____ refers to exploring possible mutual benefits from a business relationship so that the "size of the pie" can be increased.
Integration task
Identify a true statement about a franchise agreement. It should contain details about the exclusivity of territory coverage. It should not require the services of a lawyer for its preparation. It should not contain any financial requirements. It should deal with conditions only prior to the termination of the franchise.
It should contain details about the exclusivity of territory coverage.
Which of the following is true about mergers? Deterioration of the capital structure in an entrepreneur's venture can deter mergers. Mergers guarantee a fixed return on investment for entrepreneurs. Mergers can safeguard against market encroachment, product innovation, or an unwarranted takeover. Mergers fail to work in cases of some technical obsolescence or if there is a market or raw material loss.
Mergers can safeguard against market encroachment, product innovation, or an unwarranted takeover.
Which of the following are the disadvantages of acquisition for an entrepreneur? (Check all that apply.) Most ventures that are up for acquisition have a marginally successful or even unprofitable track record. The business's future potential cannot be assessed due to absence of any track records. The entrepreneur has to spend more time on finding suppliers and creating customer awareness. The actual purchase price may be inflated due to the established image, existing customer base, channel members, or suppliers.
Most ventures that are up for acquisition have a marginally successful or even unprofitable track record. The actual purchase price may be inflated due to the established image, existing customer base, channel members, or suppliers.
Identify the advantages of acquisition for an entrepreneur. (Check all that apply.) New customers of the acquired firm are already familiar with the customer location. The acquired firm always has a successful and profitable track record. The acquired firm has an established image and track record. The acquired firm guarantees a fixed return on investment.
New customers of the acquired firm are already familiar with the customer location. The acquired firm has an established image and track record.
Identify the true statements about industry-university joint ventures. (Check all that apply.) Government policies do not allow the formation of industry-university joint ventures. Profit corporations want to obtain tangible results, such as a patent, from their research investment and want to acquire all proprietary rights. Industry-university joint ventures require industries to provide a majority of the share of the profits to universities. University researchers want to make the research knowledge available through research papers.
Profit corporations want to obtain tangible results, such as a patent, from their research investment and want to acquire all proprietary rights. University researchers want to make the research knowledge available through research papers.
Which of the following ensures that an entrepreneur running a franchise will keep up the required quality standards of the products and services? Taking a loan from a commercial bank Increasing the investment in the stake of the franchisor Standardizing the supplies, products, and services provided Increasing the number of employees
Standardizing the supplies, products, and services provided
Which of the following would be an advantage of an acquisition? Customer familiarity with location Established customer base Existing employees Success record
Success record
Which of the terms in a franchise agreement is the most likely cause of a lawsuit? Schedule of payments Termination Initial price of the franchise Exclusivity of territory
Termination
Which of the following is an advantage of franchising to a franchisor? The ability to spend larger sums of money on advertising The lack of need to provide training to franchisees The reduction in the need to maintain controls as the number of franchisees increase The ability to have variety in terms of quality of services provided by franchisees
The ability to spend larger sums of money on advertising
Which of the following should an entrepreneur use to determine whether a specific company is a good candidate for a leveraged buyout? (Check all that apply.) The entrepreneur must evaluate the ability of getting a loan on the basis of the buyout. The entrepreneur must evaluate the firm's debt capacity. The entrepreneur must estimate the costs involved in the creation of a sales structure. The entrepreneur must analyze whether the present owner's asking price is reasonable.
The entrepreneur must evaluate the firm's debt capacity. The entrepreneur must analyze whether the present owner's asking price is reasonable.
Which of the following should an entrepreneur use to determine whether a specific company is a good candidate for a leveraged buyout? (Check all that apply.) The entrepreneur must evaluate the firm's debt capacity. The entrepreneur must evaluate the ability of getting a loan on the basis of the buyout. The entrepreneur must analyze whether the present owner's asking price is reasonable. The entrepreneur must estimate the costs involved in the creation of a sales structure.
The entrepreneur must evaluate the firm's debt capacity. The entrepreneur must analyze whether the present owner's asking price is reasonable.
Which of the following should an entrepreneur do when assessing the opportunity of investing in a franchise? The entrepreneur should assess the management abilities of the owner of each franchisee. The entrepreneur should ensure that the franchise has franchisees in all the regions of the country. The entrepreneur should ensure that all the founding members are graduates from Ivy League schools. The entrepreneur should assess the profit potential for the franchise.
The entrepreneur should assess the profit potential for the franchise.
Which statement about capital requirements in franchising is not true? Franchisees pool monies to lower the costs for advertising and sales promotion. Newsletters and other publications reflecting new ideas and developments are continuously sent to franchisees. Most franchisors will offer managerial assistance on the basis of need upon the start of the franchisee. The franchisee has to spend resources to establish the credibility of the business.
The franchisee has to spend resources to establish the credibility of the business.
Identify a true statement about the capital requirements of franchisees. The startup costs for a franchise remains the same for different sectors. The franchisor may finance the initial investment to start the franchise operation in some cases. The initial capital required to purchase a franchise is independent of the fee for the franchise, construction costs, and the purchase of equipment. The franchisee needs the approval of a commercial bank to receive the initial capital from the franchisor to start a franchise.
The franchisor may finance the initial investment to start the franchise operation in some cases.
Identify a true statement about the features of a leveraged buyout. The repayment plan established must be independent of the pro forma cash flows. The interest rates are consistent with the present yields of comparable risk investment. The interest rates are always fixed. The repayment plan is established based on the instrument used.
The interest rates are consistent with the present yields of comparable risk investment.
Which of the following is true about the process of a merger of two companies? Both companies should be able to accurately estimate the expected rate of return on investment. The merger should ensure that there are no after-tax earnings attributable to the merger. Both companies should break down any existing channel and sales structure during the merger process. The merger objectives must be clearly listed with the resulting gains for the owners of both companies delineated.
The merger objectives must be clearly listed with the resulting gains for the owners of both companies delineated.
Identify the factors that should be considered by an entrepreneur when choosing a franchise. (Check all that apply.) The purchase of a franchise should involve an assessment of the financial stability of the franchisor. The purchase of a franchise should ensure that the franchisor is providing funds for the entire advertising budget. It is important for the entrepreneur to confirm that the fees charged by the franchisor is the lowest among its peers. It is important for the entrepreneur to assess the market that the franchise will attract.
The purchase of a franchise should involve an assessment of the financial stability of the franchisor. It is important for the entrepreneur to assess the market that the franchise will attract.
Identify the factors involved in a joint venture success. (Check all that apply.) The companies involved in the venture should belong to different industries. The timing of the venture must be right. The expectations of the results of the venture must be exceptionally high. The assessment of the parties involved should be accurate to best manage the new entity in light of the ensuing relationships.
The timing of the venture must be right. The assessment of the parties involved should be accurate to best manage the new entity in light of the ensuing relationships.
Identify a true statement about joint venture agreements between two or more private-sector companies. These types of joint venture agreements require approval from the federal government. These types of joint venture agreements are between companies from different countries. These types of joint venture agreements are the most common. These types of joint venture agreements require sharing of research and development functions.
These types of joint venture agreements are the most common.
According to the work of Bazerman and Neale (1992), identify the different strategies that may work best for the negotiation between an entrepreneur and the growth partner. (Check all that apply.) Using differences to create trade-offs that are a source of mutually beneficial outcomes. Asking few questions about the preferences of the other party in the negotiation. Making only a single offer to the growth partner. Building trust and sharing information.
Using differences to create trade-offs that are a source of mutually beneficial outcomes. Building trust and sharing information.
