Chapter 15: Succession Planning and Strategies for Harvesting and Ending the Venture

The Family Business Institute indicates that about ________ percent of successful ventures make it to the second generation of ownership.

30

______ 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

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.)

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.

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.

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

Which of the following is a disadvantage of the employee stock option plan (ESOP)?

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

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

direct sale

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 Blank______.

serial entrepreneurs

An exit strategy should be put in place during the ________ stage of the business.

start-up

Exchanging stock or something else for existing debt under Chapter 11 bankruptcy is called:

substitution.

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

taking the initiative in creating a plan

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.

From the chapter on the characteristics of an entrepreneur, we know that after the failure of a business entrepreneurs are likely to:

continue starting new ventures.

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

creates a five-year repayment plan under court supervision

Stress points are a result of all of the following except:

lack of time.

The most common type of business bankruptcy is Blank______, which accounted for about two-thirds of the total in 2017.

liquidation

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

look for advice from a CPA or an attorney

An ESOP:

motivates employees because they realize they are working for themselves.

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

voluntary bankruptcy

Identify a true statement about Chapter 13 bankruptcy.

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 involved in bankruptcy?

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

The early signs of bankruptcy include all of the following except:

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

Which act (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 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.

What type of bankruptcy requires a venture to liquidate, either voluntarily or involuntarily.

Chapter 7 bankruptcy

The most severe form of bankruptcy is:

Chapter 7.

Which methods of bankruptcy require the entrepreneur to come up with a payment plan?

Chapters 11 and 13

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.

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.)

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

Which of the following is not an important part of a succession plan?

Evaluate potential successors based on how similar they are to you

Which of the following is not a requirement for keeping a new venture afloat and reducing the risk of business failure?

Excess optimism is fine as long as the business is successful

______ 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

This occurs when two or more of the largest creditors agree to postpone any claims, acting as stimulus for smaller creditors to also agree to the plan.

Extension

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

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

Involuntary bankruptcy

Identify the advantages of an employee stock option plan. (Check all that apply.)

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

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

It should be clearly communicated to all employees.

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.

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.

Identify the different reasons why companies do not successfully come out of Chapter 11 bankruptcy. (Check all that apply.)

Unstable global economy A global pandemic Firms wait for too long before filing for bankruptcy

The first principle in any successful business turnaround is Blank______.

aggressive hands-on management

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

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 Blank______.

consult with his or her family

The most common method of harvesting a venture is through:

direct sale of the business.

Suggestions for surviving bankruptcy include all of the following except:

file only after cash runs out.

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

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

Which of the following is a stress point that an entrepreneur should be aware of when managing a venture in its early stages?

Change in the size of the venture

Instead of a forcing the end of a business, Blank______ can offer an entrepreneur an option to reorganize or to merge with another company.

Chapter 11

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 11 bankruptcy Chapter 7 bankruptcy Chapter 13 bankruptcy

Identify the lessons that can be learned from entrepreneurs who have experienced bankruptcy. (Check all that apply.)

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

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.

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.

Which of the following are suggestions that can be followed for survival from bankruptcy? (Check all that apply.)

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

Which of the following is not an exit strategy?

Franchising

Select all that apply 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.

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.

This is false. A business can be more valuable if it is focused on a narrow, well-defined segment. In other words, a larger share in a small market niche can be more valuable than a smaller share in a large market.

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

This is false. Entrepreneurs should have an exit strategy or plan in place at the start-up stage, instead of waiting until it may be too late to effectively implement a desirable option.

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

This is false. Management buyouts usually involve a direct sale of the venture for some predetermined price.

True or false: The results of each bankruptcy filing is mostly similar.

This is false. The results of each bankruptcy filing can be quite distinct because of the nature of the business or the uniqueness of an industry.

True or false: Bankruptcy should be shared with employees and everybody else involved in an organization.

This is true. Bankruptcy is emotionally painful. Going into hiding after bankruptcy is a big mistake. Bankruptcy needs to be shared with employees and everybody else involved.

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

employee stock option plan

All of the following are benefits of an ESOP except:

it is relatively simple to establish.

The key to enhancing the bankruptcy process is Blank______.

keeping creditors informed of how the business is doing

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

ownership

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 Blank______.

their income is at or above the state income median level

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