MGMT 3850 CHAPTER 7 ASSIGNMENT BUYING
AN EXISTING BUSINESS
Essentials of Entrepreneurship & Small Business Mgmt., 7e (Scarborough)
Chapter 7 Buying an Existing Business
1) The due diligence process of analyzing and evaluating an existing business:
A) may be just as time consuming as the development of a comprehensive business plan for a
start-up.
B) helps to determine if the company will generate sufficient cash to pay for itself and leave you
with a suitable rate of return on your investment.
C) helps to determine what the company's potential for success is.
D) All of the above
Answer: D
Diff: 1 Page Ref: 231
AACSB: Analytic Skills
Learning Obj.: 1
2) When done correctly, the due diligence process will:
A) reveal both the positive and negative aspects of an existing business.
B) be time consuming and expensive.
C) most often result in the purchase of the business.
D) rarely prove to be beneficial.
Answer: A
Diff: 1 Page Ref: 231
AACSB: Analytic Skills
Learning Obj.: 1
3) Advantages to buying an existing business that you do not have with a startup include:
A) greater access to venture capital.
B) the opportunity to participate in a national advertising campaign.
C) inventory is in place and trade credit is established.
D) easy implementation of innovations and changes from past policies.
Answer: C
Diff: 2 Page Ref: 231-233
AACSB: Reflective Thinking
Learning Obj.: 1
4) Which of the following is a potential disadvantage of purchasing an existing business?
A) The employees inherited with the business may not be suitable.
B) The previous owner may have created ill will among the company's customers.
C) Equipment and facilities may be obsolete or inefficient.
D) All of the above
Answer: D
Diff: 1 Page Ref: 233-237
1
,AACSB: Reflective Thinking
Learning Obj.: 1
5) When evaluating the assets of an existing business, the inventory:
A) is always current and salable.
B) usually appreciates over time, making the business a bargain.
C) should be judged on the basis of its market value, not its book value.
D) is usually stated honestly and does not need an independent audit.
Answer: C
Diff: 2 Page Ref: 235
AACSB: Analytic Skills
Learning Obj.: 1
6) An entrepreneur who is considering purchasing a business is analyzing a company's accounts
receivable. The following table summarizes her findings.
Age of Accounts Amount Probability of Collection
0 - 30 days $12,000 .96
31 - 60 days $ 4,000 .87
61 - 90 days $ 2,500 .71
91 - 120 days $ 1,400 .65
121 + days $ 800 .24
How much should this potential buyer be willing to pay for these accounts receivable?
A) Nothing ; a buyer should never purchase existing accounts receivable.
B) $20,700
C) $17,877
D) Not enough information given to determine
Answer: C
Diff: 3 Page Ref: 235
AACSB: Analytic Skills
Learning Obj.: 1
7) The first step an entrepreneur should take when buying an existing business is to:
A) explore financing options.
B) prepare a list of potential candidates.
C) analyze his or her skills, abilities, and interests in an honest self-audit.
D) contact existing business owners in the area and ask if their companies are for sale.
Answer: C
Diff: 2 Page Ref: 237
AACSB: Reflective Thinking
Learning Obj.: 2
2
,8) When acquiring a business, the buyer should:
A) conduct a self-analysis of skills, abilities, and interests.
B) prepare a list of potential candidates.
C) investigate potential candidates and carefully evaluate them.
D) All of the above
Answer: D
Diff: 1 Page Ref: 237
AACSB: Reflective Thinking
Learning Obj.: 2
9) Which of the following statements concerning financing the purchase of an existing business
is true?
A) It is usually more difficult than securing financing for a start-up business.
B) Usually, the business seller is not a good source of financing.
C) The buyer should be able to make the payments on the loans out of the company's cash flow.
D) All of the above
Answer: C
Diff: 2 Page Ref: 239
AACSB: Analytic Skills
Learning Obj.: 2
10) Which of the following statements concerning financing the purchase of an existing business
is not true?
A) The business seller usually is a good candidate for a source of financing.
B) The deal should allow the buyer to make the loan payment out of the company's cash flow.
C) The buyer should wait until late in the purchase process to arrange financing to avoid
processing fees in case the deal falls through.
D) All of the above
Answer: C
Diff: 2 Page Ref: 239
AACSB: Reflective Thinking
Learning Obj.: 2
11) Perhaps the ideal source of financing the purchase of an existing business is:
A) a venture capitalist.
B) the Small Business Administration.
C) the seller of the business.
D) an insurance company.
Answer: C
Diff: 2 Page Ref: 239-240
AACSB: Analytic Skills
Learning Obj.: 2
3
, 12) To ensure a smooth transition when buying an existing business, a buyer should:
A) communicate with employees to reduce their uncertainty and anxiety.
B) be honest with existing employees about upcoming changes and plans for the company's
future.
C) consider asking the seller to stay on and serve as a consultant until the transition is complete.
D) All of the above
Answer: D
Diff: 1 Page Ref: 240
AACSB: Communication
Learning Obj.: 2
13) The most common reasons owners of small- and medium-sized businesses give for selling
their businesses are:
A) need for money and low return on investment.
B) boredom and burnout.
C) low return on investment and burnout.
D) greater opportunities working for someone else and low return on investment.
Answer: B
Diff: 2 Page Ref: 242
AACSB: Analytic Skills
Learning Obj.: 3
14) Important factors to investigate regarding the business to be purchased include:
A) assessing the physical assets of the business.
B) reviewing accounts receivable and business records.
C) reviewing contractual arrangements and assessing intangible assets.
D) All of the above
Answer: D
Diff: 1 Page Ref: 240-247
AACSB: Analytic Skills
Learning Obj.: 3
15) Laurette has entered into a contract with Jackson to purchase his retail music shop. Jackson's
lease on the existing building (which is in an excellent location) has five years remaining. If
Laurette wants the lease to be part of the business sale:
A) she should include a clause in the sales contract in which Jackson agrees to assign to her his
rights and obligations under that lease.
B) she should notify the landlord of Jackson's assignment of the lease agreement to her.
C) A and B are correct.
D) None of the above. Because Jackson does not actually own the building, he can transfer no
rights to it to Laurette.
Answer: C
Diff: 3 Page Ref: 244
AACSB: Reflective Thinking
Learning Obj.: 3
4
AN EXISTING BUSINESS
Essentials of Entrepreneurship & Small Business Mgmt., 7e (Scarborough)
Chapter 7 Buying an Existing Business
1) The due diligence process of analyzing and evaluating an existing business:
A) may be just as time consuming as the development of a comprehensive business plan for a
start-up.
B) helps to determine if the company will generate sufficient cash to pay for itself and leave you
with a suitable rate of return on your investment.
C) helps to determine what the company's potential for success is.
D) All of the above
Answer: D
Diff: 1 Page Ref: 231
AACSB: Analytic Skills
Learning Obj.: 1
2) When done correctly, the due diligence process will:
A) reveal both the positive and negative aspects of an existing business.
B) be time consuming and expensive.
C) most often result in the purchase of the business.
D) rarely prove to be beneficial.
Answer: A
Diff: 1 Page Ref: 231
AACSB: Analytic Skills
Learning Obj.: 1
3) Advantages to buying an existing business that you do not have with a startup include:
A) greater access to venture capital.
B) the opportunity to participate in a national advertising campaign.
C) inventory is in place and trade credit is established.
D) easy implementation of innovations and changes from past policies.
Answer: C
Diff: 2 Page Ref: 231-233
AACSB: Reflective Thinking
Learning Obj.: 1
4) Which of the following is a potential disadvantage of purchasing an existing business?
A) The employees inherited with the business may not be suitable.
B) The previous owner may have created ill will among the company's customers.
C) Equipment and facilities may be obsolete or inefficient.
D) All of the above
Answer: D
Diff: 1 Page Ref: 233-237
1
,AACSB: Reflective Thinking
Learning Obj.: 1
5) When evaluating the assets of an existing business, the inventory:
A) is always current and salable.
B) usually appreciates over time, making the business a bargain.
C) should be judged on the basis of its market value, not its book value.
D) is usually stated honestly and does not need an independent audit.
Answer: C
Diff: 2 Page Ref: 235
AACSB: Analytic Skills
Learning Obj.: 1
6) An entrepreneur who is considering purchasing a business is analyzing a company's accounts
receivable. The following table summarizes her findings.
Age of Accounts Amount Probability of Collection
0 - 30 days $12,000 .96
31 - 60 days $ 4,000 .87
61 - 90 days $ 2,500 .71
91 - 120 days $ 1,400 .65
121 + days $ 800 .24
How much should this potential buyer be willing to pay for these accounts receivable?
A) Nothing ; a buyer should never purchase existing accounts receivable.
B) $20,700
C) $17,877
D) Not enough information given to determine
Answer: C
Diff: 3 Page Ref: 235
AACSB: Analytic Skills
Learning Obj.: 1
7) The first step an entrepreneur should take when buying an existing business is to:
A) explore financing options.
B) prepare a list of potential candidates.
C) analyze his or her skills, abilities, and interests in an honest self-audit.
D) contact existing business owners in the area and ask if their companies are for sale.
Answer: C
Diff: 2 Page Ref: 237
AACSB: Reflective Thinking
Learning Obj.: 2
2
,8) When acquiring a business, the buyer should:
A) conduct a self-analysis of skills, abilities, and interests.
B) prepare a list of potential candidates.
C) investigate potential candidates and carefully evaluate them.
D) All of the above
Answer: D
Diff: 1 Page Ref: 237
AACSB: Reflective Thinking
Learning Obj.: 2
9) Which of the following statements concerning financing the purchase of an existing business
is true?
A) It is usually more difficult than securing financing for a start-up business.
B) Usually, the business seller is not a good source of financing.
C) The buyer should be able to make the payments on the loans out of the company's cash flow.
D) All of the above
Answer: C
Diff: 2 Page Ref: 239
AACSB: Analytic Skills
Learning Obj.: 2
10) Which of the following statements concerning financing the purchase of an existing business
is not true?
A) The business seller usually is a good candidate for a source of financing.
B) The deal should allow the buyer to make the loan payment out of the company's cash flow.
C) The buyer should wait until late in the purchase process to arrange financing to avoid
processing fees in case the deal falls through.
D) All of the above
Answer: C
Diff: 2 Page Ref: 239
AACSB: Reflective Thinking
Learning Obj.: 2
11) Perhaps the ideal source of financing the purchase of an existing business is:
A) a venture capitalist.
B) the Small Business Administration.
C) the seller of the business.
D) an insurance company.
Answer: C
Diff: 2 Page Ref: 239-240
AACSB: Analytic Skills
Learning Obj.: 2
3
, 12) To ensure a smooth transition when buying an existing business, a buyer should:
A) communicate with employees to reduce their uncertainty and anxiety.
B) be honest with existing employees about upcoming changes and plans for the company's
future.
C) consider asking the seller to stay on and serve as a consultant until the transition is complete.
D) All of the above
Answer: D
Diff: 1 Page Ref: 240
AACSB: Communication
Learning Obj.: 2
13) The most common reasons owners of small- and medium-sized businesses give for selling
their businesses are:
A) need for money and low return on investment.
B) boredom and burnout.
C) low return on investment and burnout.
D) greater opportunities working for someone else and low return on investment.
Answer: B
Diff: 2 Page Ref: 242
AACSB: Analytic Skills
Learning Obj.: 3
14) Important factors to investigate regarding the business to be purchased include:
A) assessing the physical assets of the business.
B) reviewing accounts receivable and business records.
C) reviewing contractual arrangements and assessing intangible assets.
D) All of the above
Answer: D
Diff: 1 Page Ref: 240-247
AACSB: Analytic Skills
Learning Obj.: 3
15) Laurette has entered into a contract with Jackson to purchase his retail music shop. Jackson's
lease on the existing building (which is in an excellent location) has five years remaining. If
Laurette wants the lease to be part of the business sale:
A) she should include a clause in the sales contract in which Jackson agrees to assign to her his
rights and obligations under that lease.
B) she should notify the landlord of Jackson's assignment of the lease agreement to her.
C) A and B are correct.
D) None of the above. Because Jackson does not actually own the building, he can transfer no
rights to it to Laurette.
Answer: C
Diff: 3 Page Ref: 244
AACSB: Reflective Thinking
Learning Obj.: 3
4
