Chapter 13: Exit/Harvest/Turnaround
List of 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.
Which of the following is the initial listing of a firm as a public entity on the public equities market?
Initial public offering (IPO)
The most widely accepted method of valuation involves some form of discounting the estimated future net _______ ________ of the business.
cash flow
Calculate the capitalization of earnings for a company with a net profit of $64,000 and a capitalization rate of 0.26
$246,154
A board of __________ will provide honest and insightful advice that challenges the entrepreneur and helps the entrepreneur view new ways to overcome problems faced by the firm.
advisors
A good estimation of firm value will recognize that the number are simply estimates that are based on ___________.
assumptions
Every company has unique features that provide it with some type of_______ ________.
competitive advantage
Every company has unique features that provides it with some type of ________ ________.
competitive advantage
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%
Which valuation method accounts for all the hard assets and then adds an acquisition or goodwill value?
Asset-based valuation
Identify the ways an entrepreneur can determine the acquisition or goodwill value of his or her company
By looking at the percentage premium being offered in general on all new public acquisitions. By examining similar companies that have been acquired.
What are some reasons for developing an exit or harvest strategy at the beginning of a business start-up?
Developing it early provides peace of mind to the family and investors. Developing it early before personality clashes arise. Everyone will know what to expect if things do not go as planned.
A small business person can effectively operate an existing company and pursue new opportunities at the same time.
False
Why might an entrepreneur consider exiting or harvesting a business?
If the business takes too much time and personal commitment If the business is successful but no longer interesting or enjoyable If the entrepreneur doesn't have the time to run an existing business and purse a new opportunity.
Practice that are directly toward providing limited liability to an entrepreneur
Incorporating the business using Subchapter S, Subchapter C, or limited liability company (LLC) forms
Which of the following are legitimate ways in which private firms adjust their annual earnings to minimize their taxes?
Individual personal expenses paid for by the firm. Payments of large year-end bonuses to the founders Creative company perquisites for their owner
Which of the following are used to determine the capitalizaiton rate?
Quality of management Business risk Consistency of earnings Longevity of the business
Which of the following are ways to sell a business?
Most common way, to sell the business intact to a third party with the aid of a broker or lawyer. Sell the business to a competitor or to a larger business interested in your location, your position in the market, your product, and so on. To divest portions of the business that will maximize the value of the business. Most idealized option by the business press, is initial public offering (IPO) Sell the business intact to a third party with the aid of a broker Sell the business to a competitor or to a larger business interested in your location. Divest portions of the business that will maximize the value of the business. Sell the business through an initial public offering.
Operating problems relate to:
Not selling enough of the product. Not being sufficiently efficient in producing the product
One way to determine the value of a publicly traded company is to divide the current earnings per share of stock into the price per share. This is called the ______ ratio.
P/E
Which of the following is a benefit paid for by the company, such as vacations, vehicles, gifts, and loans?
Perquisites
Practices that negate the limited liability nature of a corporation.
Personally guaranteeing loans that are made to the company.
Which of the following points should an entrepreneur keep in mid regarding the negotiation of a sale?
The entrepreneur should retain his or her own advisors. The entrepreneur should use a professional mediator for anything but the most basic level of discussions. The entrepreneur should know the buyer.
Which of the following statement are true of the fast-track version of Chapter 11 if a firm's debts are less than $2 million?
The fast-track plan must show back taxes will be brought current over a five-year period. The fast-track plan must show how the creditor who have pledged collateral behind their debt will be brought current.
Chapter 13 bankruptcy is used for sole proprietorships.
True
The true value of a business is the amount of money that a willing seller and buyer agree upon.
True
True or false: In the context of market estimation valuation, an industry multiple can be used to calculate the value of a business.
True
Which discounting the cash flow, the discount rate remains the same, while the factor ____________ as you move farther away from today.
increases
The effort to reverse the decline of a business is referred to as _____________.
turnaround
Calculate the value of a business assuming a total asset value of $255,00 and an acquisition premium of 3.6 times the assets.
$255,000 * 3.6= $918,000
Assuming a net profit of $35,000 and an industry multiple of 15, calculate the value of the business using the market estimation technique.
$35,000*15= $525,000
Assuming a net profit of $350,000 and an industry multiple of 12, calculate the value of the business using the market estimation technique.
$4,200,000
The price/earnings (P/E) ratio for the industry is 10, the net cash flow for a company for year 5 is $250,000 and its discount rate is 30%. Calculate the sale/residual value for the company.
$518,027
The price/earnings (P/E) ratio for the industry is 15, a company's net cash flow for year 5 is $300,000 and its discount rate is 30%. Calculate the sale/residual value for the company.
$932,449
Negotiating is based on understanding the needs and wants of:
both buyer and seller
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
The root internal causes of decline are usually based in either ______ or _____ problems.
operating strategic
When should the entrepreneur consider the topic of exit and harvest for the business?
At the beginning of business start-up
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. Which of the following are these tasks?
Audit last year's financial statements. Put all of the statements into a standardized format. Develop procedures for the accounting of all activities. Provide an audit of this year's financial statements and render an accounting opinion.
Which form of bankruptcy allows the firm to reorganized?
Chapter 11
Which form of bankruptcy requires the business to sell off all the assets of the business?
Chapter 7
Which of the following is a common avenue for getting the word out that a business is for sale?
Contacting your accountant and lawyer Contacting competitors Contacting your suppliers and customers Contacting a business broker
Which valuation is the most widely accepted method of valuation and the most insightful?
Discounted future net cash flow
Asset valuation is typically the highest business valuation number that one calculates, unless the business is asset-intensive.
False
Chapter 12 bankruptcy is used for the protection of family-owned business assets
False
True or false: Any buildings or equipment, even though not fully owned, would be considered a hard asset.
False
True or false: If a firm's debt are less than $2 million, there is a fast-track version of Chapter 11 that gives creditors more control than in a larger organization Chapter 11 filing.
False
Which of the following are true about market capitalization established by public company?
It is the value of the business as it exists at the present time. It accounts for future earnings and all future prospects that are known today.
Which of the following statements is true of discounted future net cash flow?
It requires that difference in the cash inflows and outflows of a business be projected for some period of subsequent time.
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
Which method of valuation requires the founder to find the P/E ratio of a similar company and then multiply the P/E ratio by the net cash flow for year 5 and discount back as a sales price in year 6?
Price/earnings valuation
Developing an accurate valuation as the firm begins to have cash flow helps:
Provide insight for the founders as to the amount of future labor and capital they should invest in the effort The business obtain loans by demonstrating the value of the firm to potential creditors Convince outside equity investors of the potential long-term returns associated with the harvesting of the business.
What business activity is analogous to medical situations where doctors must quickly seek stabilize the patient before they can do more substantive actions?
Retrench
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
It the turnaround effort does not succeed, ___________ may need to be filed by the entrepreneur.
bankruptcy
In the context of standard valuation models for businesses, perquisites refer to the __________.
benefits paid for by a firm
Retrenchment efforts focus on a firm's gaining control of its __________ __________ quickly, regardless of the impact to the long-term effort.
cash flow
When using the cash flow method, the entrepreneur will take the net cash flow figure generated for each year and ________ that cash flow back to today's dollars.
discount
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
Calculating the premium that will be offered above the _________ capitalization is more a matter of art than one of science.
market
A small business owner may want to exit the business because
other opportunities are available. all the assets are in the business. the business has done very well but the future does not hold the same potential for similar success.
When negotiating the sale of his or her business, an entrepreneur should ____________.
recognize that there are many options for selling the business.
In order to aid the transfer of the founder's contacts and reputation to the new owners, there should be a ______ plan in place for this transfer in order for the purchase to be viable.
transition
Establishing the _______ of the firm is the starting point for any exit or harvest plan.
valuation
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
