ENT 2113 Chapter 13 SmartBook
Which of the following are reasons for developing an exit or harvest strategy at the beginning of a business start-up?
There is a need to develop it early before personality clashes arise, developing it early provides peace of mind of the family and the investors
The cash flow method of valuation requires which of the following?
a salvage value for the firm must be added, the net cash flow must be projected for five years into the future
Which valuation method accounts for all the hard assets and then adds an acquisition or goodwill value?
asset-based valuation
Which valuation method is typically the lowest business valuation number calculated unless you are an asset-intensive business?
asset-based valuation
A critical addition to any business plan, and certainly a necessity for any valuation analysis, is a complete set of ___ used by the founders.
assumptions
A good estimation of firm value will recognize that the numbers are simply estimates that are based on _______.
assumptions
If the turnaround effort does not succeed, ___ may need to be filed by the entrepreneur.
bankruptcy
The procedures for ______ are arduous and have lasting impacts upon the founders, but in declining situations it is the only viable option.
bankruptcy
An entrepreneur should ideally consider the topic of exit and harvest for the business at the _____.
beginning of the business start-up
In the context of standard valuation models for businesses, perquisites refer to the _____.
benefits paid for by a firm
Negotiating is based on understanding the needs and wants of:
both buyer and seller
Identify the ways in which an entrepreneur can determine the acquisition or goodwill value of his or her company.
by examining similar companies that have been acquired, by looking at the percentage premium being offered in general on all new public acquisitions
Which method of valuation is performed by taking the net profit of the organization; subtracting or adding any unusual items; and dividing that figure by a capitalization rate?
capitalization of earnings valuation
The most widely accepted method of valuation involves some form of discounting the estimated future net ___ ___ of the business.
cash flows
Which of the following are examples of hard assets?
cash, equipment, signed contracts, buildings
Which of the following are true regarding the calculation of the premium that will be offered above the market capitalization value?
it considered how much cash will be paid versus stock transferred, it is more a matter of art than science, it considers any future investment in the business
Which of the following statements are true about the price/earnings (P/E) valuation method?
it requires the founder to locate the P/E ratio for public companies in the same industry, it is straightforward system that uses the industry in which the start-up operates
Identify the legitimate ways in which private firms adjust their annual earnings to minimize their taxes.
making payments of large year-end bonuses to the founders, having creative company perquisites for their owners
Calculating the premium that will be offered above the ___ capitalization is more a matter of art than one of science.
market
Taking the earnings before interest, taxes, depreciation, and amortization, reworking the figure based on analysis of the cash flow statement, and multiplying the remaining figure by a market multiple is a popular method for which valuation technique?
market estimation valuation
Which of the valuation methods involves taking the projected earnings of the business and multiplying that figure by the market premium of companies in their industry?
market estimation valuation
What is the art of trying to reach an agreed-upon price between a willing buyer and a willing seller?
negotiating
Calculate the value of a business assuming a total asset value of $255,000 and an acquisition premium of 3.6 times the asset.
$918,000
The price/earnings (P/E) ratio for an industry is 15, a company's net cash flow for year 5 is $300,000, and its discount rate is 30%. What is the sale/residual value for the company?
$932,256
List the steps for selling a business in order.
1) Develop a sense of the true value of the business. 2) Prepare the business to be sold. 3) Negotiation and actual selling of the business.
A rule of thumb for new businesses that are run by owner-managers is to use _____ as a factor for discounting the cash flow.
30%
Felix, an entrepreneur, sets up a number of sporting goods stores in his town. Several years after founding, he begins to realize that there are major chains entering the market, which is leading to market saturation in his area. In this scenario, why would he decide to harvest the venture?
Harvesting would let him avoid going through the process of resetting his firm's strategic position, harvesting would help him reap the value of the business that he has grown
Identify the most common way to sell a business.
Sell the business intact to a third party with the aid of a broker.
What is the true value of a business?
The amount of money that a willing seller and a willing buyer agree upon for the sale of the business
A firm's discount rate for cash flow represents _____.
the return expected by an investor and the accounts for the riskiness of the venture
The effort to reverse the decline of a business is referred to as ___.
turnaround
The effort to reverse the decline of a business that has been affected by internal and external factors is referred to as _______.
turnaround
The cash flow method of ___ requires that the net cash flow of the business be projected for some period of time into the future.
valuation
Even if a business were performing poorly, there would always be sizable goodwill value.
false
What is the approximate capitalization of earnings for a company with a net profit of $764,000 and a capitalization rate of 0.3?
$2,546,667
What is the approximate capitalization of earnings for a company with a net profit of $64,000 and a capitalization rate of 0.26?
$246,154
The price/earnings (P/E) ratio for an industry is 10, the net cash flow for a company for year 5 is $250,000, and its discount rate is 30%. What is the sale/residual value for the company?
$517,920
Calculate the value of a business assuming a total asset value of $115,000 and an acquisition premium of 6.2 times the asset.
$713,000
Any buildings or equipment, even though not fully owned, would be considered a hard asset.
false
What is the first step necessary for selling a business?
develop a sense of the true value of the business
Which valuation is the most widely accepted method of valuation and the most insightful?
discounted future net cash flow
The capitalization of ___ method of valuation is performed by taking the net profit of the organization; subtracting or adding any unusual items; and dividing that figure by a capitalization rate.
earnings
If a business is strong now but the entrepreneur senses that the future does not hold the same potential, then it might be a good time to ___ or harvest the business.
exit
Benefits paid for by a company, such as a vacation or vehicle, are called _____; they are often used by the company to minimize the tax owed to the government.
perquisites
Which of the following is a method of valuation that requires the founder to find the price/earnings (P/E) ratio of a similar company and then multiply the P/E ratio by the net cash flow for year 5 and discount the P/E ratio back as a potential sales price in year 6 of the venture?
price/earnings valuation
For ventures considering a sale, it is advisable to contract with a CPA firm to have it do certain tasks when looking to exit the firm. Identify these tasks.
providing an audit of the current year's financial statements and giving an accounting opinion, developing procedures for the accounting of all activities
The owner of a firm considering a sale should have a CPA firm audit the current year's and last year's financial statements of the business and _____.
put all the statements into a standardized format
What business activity is analogous to medical situations where doctors must quickly seek to stabilize the patient before they can do more substantive actions?
retrench
What is the first thing a firm must do once it decides to perform a turnaround?
retrench
Identify the ways to sell a business.
sell the business through an initial public offering, sell the business to a competitor or to a larger business interested in the business's location, sell the business intact to a third party with the aid of a broker
