Ch 13 Planning the Harvest

A/n _________ occurs when a private firm sells its shares for the first time to the public.

IPO

employee stock ownership plan (ESOP)

A harvesting method by which a firm is sold either in part or in total to its employees.

management buyout (MBO)

A leveraged buyout in which the firm's top managers become significant shareholders in the acquired firm.

bust-up LBO

A leveraged buyout involving the purchase of a company with the intent of selling off its assets.

build-up LBO

A leveraged buyout involving the purchase of a group of similar companies with the intent of making the firms into one larger company for eventual sale or to be taken public.

business broker

A professional who assists in the buying and selling of a business.

leveraged buyout (LBO)

A purchase heavily financed with debt, where the future cash flows of the target company are expected to be sufficient to meet debt repayments.

Fortunately, an entrepreneur can cash out immediately after the completion of the IPO. a. True b. False

False

When harvesting a firm, getting professional advice is helpful but not vital to the process. a. True b. False

False

seller financing

Financing in which the seller accepts a note from a buyer in lieu of cash in partial payment for a business.

private equity recapitalization

Provision of debt and equity by private equity investors that allows an entrepreneur to cash out part of his or her investment.

double taxation

Taxation of income that occurs twice—first as corporate earnings and then as stockholder dividends.

initial public offering (IPO)

The first sale of shares of a company's stock to the public.

Harvesting, or exiting

The process used by entrepreneurs and investors to reap the value of their investment in a business when they leave it.

harvesting (exiting)

The process used by entrepreneurs and investors to reap the value of their investment in a business when they leave it.

opportunity cost of funds

The rate of return that could be earned on another investment of similar risk.

Conflicts are more likely to occur if an entrepreneur remains with the company after the sale. a. True b. False

True

Harvesting is best described as: a. Capturing value in the form of cash flows, reducing risks, and creating future options. b. Buying all other owners out and gaining 100% control over the company. c. Selling the business for cash. d. Picking the best parts of the business (those with the highest cash flow) and gutting the rest.

a. Capturing value in the form of cash flows, reducing risks, and creating future options.

The best definition of value creation by a company is: a. Its return is greater than the investors' opportunity cost of funds. b. It makes a profit. c. It realizes positive cash flows. d. It has more assets than competitors.

a. Its return is greater than the investors' opportunity cost of funds.

Which of the following would most CEOs state as being the most likely motivation for going public with stock? a. Raise capital for growth b. Facilitate selling the company c. Establish a market value for the firm d. Enhance the firm's ability to raise capital

a. Raise capital for growth

Value is created when a firm's return on invested capital is _________ the investors' opportunity cost of funds. a. greater than b. less than c. equal to d. similar to

a. greater than

A more recent development in acquisitions is the ______ which involves pulling together a group of smaller firms to create a larger enterprise that might eventually be sold or taken public via an initial public offering. a. bust-up LBO b. IPO c. build-up LBO d. CMO

c. build-up LBO

Yongmei's company is the target of an acquisition by a larger company that will finance the deal primarily through taking on a large debt. This type of deal is called: a. An employee buyout. b. A seller-financed buyout. c. A management buyout. d. A leveraged buyout.

d. A leveraged buyout.