MGMT 3850 CHAPTER 7 ASSIGNMENT BUYING AN EXISTING BUSINESS

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 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 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