final-exam

Question 1

What are the three different types of expenses and how do they differ?​

Answer 1

Variable Costs: Costs that change based on sales and production. Tend to be multiple of number of units sold or produced or percentage of sale revenue. Include Cost of Goods Sold or COst of services sold such as cost of materials and cost of direct labor. Other variable costs include sales commissions and shipping and handling.

Fixed Costs: Do not respond DIRECTLY to changes in sales. Not included in COGS, not direct costs of creating a product. Examples are expenses such as utility bills and rent. Fixed costs may change in response to a significant change in sales volume, but in a stepwise basis Or to inflation

Mixed Costs: Tend to be employee compensation where an employee is paid salary and commission or wages and overtime

Question 2

What would cause fixed costs to change?​

Answer 2

A significant change in sales volume but in a stepwise basis

Inflation, which is the general rise in the price of goods and services in an economy.

Question 3

Distinguish between committed fixed costs and discretionary fixed costs.​

Answer 3

Committed fixed costs: Long-term in nature and difficult to cut.

Discretionary Fixed costs: Annual in nature and can be cut back without major impact.

Question 4

Why should committed fixed costs be avoided?

Answer 4

They increase risk
Must be paid whether or not your business has a gross profit
Be careful about taking on fixed costs, convert fixed to variable wherever possible, and keep a cushion of protection in case of emergencies

Question 5

Define contribution margin per unit and contribution margin ratio.​

Answer 5

Contribution Margin per unit:

Price per unit LESS COGS = Gross profit
Gross Profit less other variable costs per unit = Contribution Margin per unit

Contribution Margin Ration:

Question 6

What is the “Contribution format income statement” and why is it useful?​

Answer 6

Helps identify sources of profit:

Revenue Less direct expenses = operating margin

Operating margin less indirect expenses = EBIT(operating profit

Question 7

Recognize the key assumptions that the entrepreneur must make.​

Answer 7

Assumptions that drive EBIT and NI:

Units sold, prices per unit, COGS per unit or per dolar revenue, credit terms for customers, inventory needs, direct expenses for salaries, rent, utilities, telephone, transportation, insurance, indirect administrative expenses for manager’s salaries, accounting, insurance, equipment purchases, life, and deprciation, accounts payable, funding, interest rate on debt

Question 8

What are the two key assumptions that must be made about sales?​

Answer 8

Product development time: How many months before product can be sold to public? How long are you without revenue?

Once product is sold to public, how much can be sold in the first month, the second month, etc.

Question 9

How are nonprofit financial statements different?​

Answer 9

Revenue and support from contributors
Less Program Costs
Less General and Administrative
Less Fund-raising costs
Equal Change in net assets (not profit/loss)

Balance Sheet: Assets = Liabilities + Net asset
A non-profit has no owners, and no owners equity.

Question 10

What are the three type of needs that funding must cover?​

Answer 10

Funding must cover purchased equipment, expenses for salaries, rent etcs, and Working capital.

Working capital: Included in working capital is inventory purchased in advance of sale and accounts receivable which are the delayed payments from customers.

Question 11

Distinguish between “time out of cash” and “burn rate.” Why are these ratios important?​

Answer 11

Time out of cash: Estimate of how many months currently available cash will last. This is important because it tells you when revenue is zero or nearly zero.

Time out of cash = Cash / operating cash outflow per month

Burn rate: The amount of cash used in the current month.

Question 12

In assessing risk sensitivity, the entrepreneur should examine multiple scenarios in what three areas?​

Answer 12

Should exam sensitivy in different scenarios of demand, pricing and costs.

What if analysis: What if we have to cut our price? What if we lose our biggest customer?

Question 13

In the business plan, there should be consistency between the text and the numbers in the financial statements particularly in which three areas?​

Answer 13

Marketing plan should match revenue forecast. Operating plan should match expense forecast. Sales growth in financial statements supported by marketing plan and industry analysis.

Question 14

Month-by-month forecasts are required for how many years?​

Answer 14

Month by month forecast are require for at least two years.

Question 15

Why are at least two full sets of financial statements required for the business plan?​

Answer 15

One set is for the most likely case and the other set is for thte e worst case scenario

Question 16

Why is it important to track the assumptions underlying the sales forecast?​

Answer 16

So you can do addional administrative follow up. Such as if a customer does not make an order in a given month, administration will contact to see if this customer intends to make any future orders.

At some point, it may become necessary to modify one or more assumptions and adjust the financial plan accordingly.

Question 17

What are milestones? What are they based on?​

Answer 17

Based on TIme, Sales growth or events in company’s development.

Examples include take 50% of current salary in first year(time), take 50% of current salary until sales reach $500,000(sales growth), 50% of current salary until first office is fully operational.

Question 18

How do we evaluate the current year’s financial performance?​

Answer 18

You can use previous years performance, the budget, competitor, industry average and industry leader.

Question 19

How can we get Competitor/ Industry numbers?​

Answer 19

We can get competitor/industry numbers from the internet, trade journals, chamber of commerce, trade shows, conferences.

Question 20

How many performance measures should we use?​

Answer 20

We should choose 5-8 key performance measures. Should measure short-term performance, long-term performance and cash flow. Also avoid unfocused data dump.

Question 21

Recognize the four categories of ratios. Be able to match each category with the question that it addresses. Be able to assign a ratio to one of the four categories.​

Answer 21

Financial statement analysis: vertical analysis aka “commons=-size income statement”, compare this year’s financial statements to previous years.

Ration analysis:

Liquidity rations which tell companys ability to pay short term liabilities as the come due. Working capital = current assets - current liabilities.
Quick ratio = cash and cash equivalents + accounts receivables / Current liabilities

Activity rations-How effectively is management using the available assets? Solvency and coverage ratios-How risky is the firm’s debt? Profability ratios-Net income or EBIT compared to some other factor suc as sales, assets, or equity.

Solvency and Coverage ratios: debt to equity = total liabilities / equity
debt ratio = Total liabilities / total assets
Times interest earned = EBIT / Interest expense

Profitability ratios: Return means net income.
Return on sales = net income / Sales or EBIT / Sales
Return on Assets = NI / Total Assets
Return on Equity = NI / Book Value of Equity

Question 22

What does du Pont analysis tell us?​

Answer 22

Formula is ROE(NI /Equity) = (NI/SALES) x (Sales/Assets) / (1-debt/assets) x (assets/equity)

Increased ROE (profit per dollar contributed by equity is driven by increased Return on sales(more profitability), Increased “Total asset turnover(more activity), and Increased”debt ratio” (less solvency)

Question 23

How should ratio analysis be used in the business plan?​

Answer 23

It should not be a data dump, only focus on a few key ratios that tell the story.

Tell firm’s story and use ratios to prove your point. Ratios cannot stand alone.

Question 24

Which ratios are of interest to lenders? To equity investors?​

Answer 24

Lenders are interested in solvency and coverage and liquidity. Equity investors interested in profitability and growth.

Question 25

What tasks should we expect from a bookkeeper, a controller, a CFO, an external accountant?​

Answer 25

bookkeeper: keeps accurate financial records. controller: custom financial reports for better decision making. Manage day to day cash flows. CFO: Structure complex financing, gernerate complex financial projections, manage relationship with bankers and other suppliers of capital. External accountants: Prepare tax returns (review tax returns prepared by bookkeeper), perform annual review or audit.

Question 26

Recognize the five common misconceptions about entrepreneurial financing.​

Answer 26

1) Venture capitalists fund most businesses 2) Banks lend to start-ups 3) SBA lends money directly to entrepreneurs. 4) Entrepreneurs Tend to Rely onone single source of funding. 5) Government grants are a common source of money for small business.

Question 27

Recognize the three factors that affect the level and type of financing.​

Answer 27

1) The nature of the business model(category of business) 2) Aspirations of the entrepreneur. 3) the stage of development of the business venture.

Question 28

Match the category of business to the type of financing normally used.​

Answer 28

Lifestyle business(self-employed): Little or no need for outside funding. Small Businesses (employees, slow to moderate growth): Entrepreneur, family, friends, and bank loans once established. High growth, high potential ventures: Equity investors.

Question 29

How do the entrepreneur’s aspirations affect funding needs?​

Answer 29

You have to consider the entrepreneur's need for wealth, income, and personal time. Ambitious financial plans require more outside investment.

Question 30

What types of financing are common in the early stages of a small business with modest growth potential?​

Answer 30

In the early stages(prelaunch and start-up) it's common to see seed financing, entrepreneur's own resources, family and friends, careful cash management, and bootstrapping.

Question 31

What types of financing are commonly added in the growth stage of a small business with modest growth potential?​

Answer 31

During the growth stage there is a need for permanent space, additional equipment, and significant working capital(current assets). Common to add equity financing from local angel investors and loans as business becomes "bankable".

Question 32

Recognize six sources of self-financing​

Answer 32

1) Cash from personal saving:  purchase equipment, inventory, other start-up expenses and to cover at least six months of basic personal living expenses before quitting day job. 2) Other personal assets: tools and equipment, computers, cell phones, office furniture, vehicles. 3) Cash from unsecured personal loans (like credit cards). 4) Cash from second mortgage on home or other property. 5) Cash from loan secured by other personal assets (publicly traded stock or bonds.) 6) Cash from working second job.

Question 33

Know advantages and disadvantages of self-financing​

Answer 33

Advantages: relative easy of securing funding, avoid complexity created by adding partners, better alignment with entrepreneur's aspirations, no dilution of profits or gains, eventual exit process is often simpler. Disadvantages: May limit size and scope of start-up, may limit ability to grow, increases exposure to personal risk from business failure, entrepreneur may lack all necessary experience, contacts, skills, and/or knowledge.

Question 34

What forms can funding from family and friends take. Which form(s) require a written agreement?​

Answer 34

Can take the form of gifts, equity, and loans. You should put all forms in writing. If it is a gift, have the agreement say so. If it is a loan, have the agreement specify the exact interest and payment terms, if it is an equity investment, consider non-voting stock.

Question 35

Recognize forms of personal gifts. Which form is most common?​

Answer 35

Unpaid labor:  1/3 of small businesses report having unpaid labor contributed by family members.  More than just a gift, loaded with special meanings(strings attached). Other forms are cash, picking up the tab, accelerated cash-outs(inheritance, etc.), free use, overpayment, forgiveness, piggybacking.

Question 36

What needs to be communicated to family and friends before they invest?​

Answer 36

Make sure everyone has realistic expectations of risks, potential gains, time and money may be tied up. Determine their true motives, use a business plan and fully explain it, make sure investors understand that the business could fail.

Question 37

What needs to be communicated to family and friends after they invest?​

Answer 37

Provide accurate, objective, and full information about the business which should include quarterly or monthly reports, written and oral, progress, achievements, significant problems, updates for good or bad news.

Question 38

What does “keep boundaries” mean?​

Answer 38

Don't discuss business at social gatherings.

Question 39

What is a pass through entity? What provisions should be made for taxes on a pass through entity?​

Answer 39

Partnerships, LLCs, LLPs, Subchapter S corps are pass through entities. There earnings are passed through to the shareholders. You need to distribute 1/3 of profits to pay increased personal income taxes.

Question 40

What flexibility can a loan from family or friends provide? What determines the minimum interest rate on a loan?​

Answer 40

Flexibility: Loan payments cand be delayed when money is tight and the interest continues to accrue. Minimum interst rate is specificed by IRS (irs.gov) Should be a formal loan agreement that defines the interest rate and payment terms. Also should specify if the loan is to the business or to the entrepreneur.

Question 41

What rights do voting shareholders have?​

Answer 41

Voting shareholders elect members of board and approve major decisions, such as selling the company.

Question 42

Define bootstrapping​

Answer 42

The process of finding creative ways to exploit opportunities to launch and grow businesses with the limited resources available for most start-up ventures.

Question 43

Recognize reasons for bootstrapping​

Answer 43

It's often necessary for small businesses to get started, difficulty in raising money for growth, "extend the runway" meaning postponing raising additional capital until key milestones can be met, preservers the value and wealth of a business, reduces risk associated with debt financing.

Question 44

Recognize the four rules of bootstrapping​

Answer 44

1) Overhead matters. 2) Employee expeneses are usually the highest single recurring cost. 3) Minimize operating costs. 4) Marketing matters, but know your customers and how they make decisions.

Question 45

Recognize ways the firm can bootstrap administrative overhead​

Answer 45

Firms ca bootstrap space, furnishings and office equipment and administrative salaries.

Question 46

Recognize ways the firm can bootstrap employee expenses​

Answer 46

Fims can bootstrap employee expenses through the use of independent contractors, employee leasing and temporary employees, student interns, equity compensation, and non-monetary benefits.

Question 47

Recognize ways the firm can bootstrap operating expenses

Answer 47

Firms can bootstrap operating expenses through outsourcing, Just-in-time inventory techniques and effective cost accounting.

Question 48

Recognize the important considerations in bootstrap marketing​

Answer 48

Know your customer, focus on the impact of message and not on "volume", focus on benefits for customer, understand the market niche, spend your marketing dollars wisely, marketing is a process not an event.

Question 49

Recognize the basic bootstrap marketing tools​

Answer 49

Word of mouth, business cards, blogs, facebook and twitter, brochures, banners and signs, newsletters, direct mailing/e-mailing, publicity.

Question 50

What are the important considerations in using each of the following marketing tools?​

Answer 50

See cells below.

Question 51

Word of mouth​

Answer 51

Motivate customers to talk about business, create incentives to spread teh word, ask customers to "sell", create a "buzz" campaign, viral marketing.

Question 52

Business cards​

Answer 52

Design is important, include needed data about business, use quality papter, use color, include description and/or slogan, us both sides of the card.

Question 53

Blogs​

Answer 53

Be consistent in blogging, do no blog merely to promote business, take time to create quality blogs, be patient blogging takes time to build following, be cautius about what you write.

Question 54

Facebook and Twitter​

Answer 54

Replacing websites for many new ventures, fans more likely to purchase, builds on credibility of recommendations of friends, find motivational methods for people to become friends and fans.

Question 55

Recognize unethical bootstrapping methods​

Answer 55

Deliberately delaying payment and illegaly using others' intellectual property.

Question 56

In what stages is the firm likely to use external equity funding?​

Answer 56

Startup and growth phase

Question 57

What are the five sources of equity funding discussed in chapter 12?​

Answer 57

Angel investors, strategic partners, private placement, crowdfunding, SBIC

Question 58

Define angel investors, strategic partners, private placement, crowdfunding, SBIC​

Answer 58

Angel investors:  Wealthy individuals who make direct investment in entrepreneurial firms.  They tend to invest locally, specialize in an industry, and are involved in multiple ventures. Strategic Partners:  Larger corporations in same industry (supplier, customers).  There are lower expectations for returns.  Parterns are seeking closer relationship or acquisition over time if entrepreneurial firm is successful. Private Placement:  Large funding from many invesotrs that is regulated by SEC.  Must be accredited investors. Crowdfunding:  Began with donations through kickstarter and other similar websites.  Jumpstart our business startup (JOBS) Act of 2012 opened door for equity crowdfunding. It's regulated by SEC, business has to be less than $1 billion in revenue, can raise up to $1 million per year, up to 5% of income from investors with income less than 100k, up to 100k from wealthy investors.

Question 59

What are the goals of angel investors.​

Answer 59

To provide seed and early stage financing between 50k and 1 million dollars, they seek payoff in 3-7 years during an exit event in the business plan, and since accurate terminal value is difficult to find, often use "convertible promissory notes."

Question 60

Recognize steps in working with angel networks​

Answer 60

1) Submit formal business plan to angel network staff 2) Network staff screens for plans with potential 3) Staff works with entrepreneur to refine and improve plan and sharpen the presentaion 4) Entrepreneurs present plans to angels. 5) Entrepreneur and angel negotiate terms. 6) Entrepreneur may be accountable directly to the angel investor or to the network staff.

Question 61

Describe some ways of finding angle investors​

Answer 61

Network with local attorneys, accountants, bankers and other professional advisors. Programs sponsored by universities and other neutral institutions. Brokers and small investment bankers, this option is expensive. Matchmaking websites and magazines(SBA has discontinued "Active Capital")

Question 62

Recognize “accredited investors” for a private placement. How are investors found for a private placement?​

Answer 62

Accredited investors are either national banks, corporation or trust with $5 million assets, insider/officer in the business, individurals with adequate income ($200,000) and/or wealth ($1 million). Advertising and formal promotion are prohibited therefore investors are found by networking.

Question 63

Why is SBIC funding less costly for the entrepreneur?​

Answer 63

SBIC stands for Small Business Investment Company. and they are over 300 privately owned and managed companies licensed by the SBA. SBA guarantees the loan which means less risk for the investor and lower cost for the entrepreneur.

Question 64

Explain the difficulties with equity funding?​

Answer 64

Dilution of ownership, the riske of sharks, and dynamics of adding on new partners.

Question 65

Recognize the items required in working with outside investors.​

Answer 65

Business plan that has a clear description of the company, product and market description, description of management team, and assessment of all risks. Also requires a confidentiality agreement, letter of intent, modifications of any shareholder agreements, and communications with shareholders.

Question 66

What are the costs associated with institutional gifts?​

Answer 66

Not free money, costs time and money to obtain, often requires time and money for accounting and reporting to the granting agency.

Question 67

What is the most common form of institutional gift financing?​

Answer 67

Most common form is reduced taxes. Tax abatement is a legal reduction in taxes to encourage specific activities to improve blighted areas. Tax credits are direct reductions dependent on meeting some legal criteria. This is to encourage investment in specific assets, to increase economic activity, and to support industries.

Question 68

What are some sources of grants?

Answer 68

Government Grants:  Small Business Innovation Research program and Small Business Technology Transfer program.  Also, 2% of grant budget of every agency that makes research grants must go to small business as defined by the SBA. Economic Development Agencies, Foundations(rarely to profit businesses)

Question 69

In which stages will debt financing be available to the firm?​

Answer 69

Debt financing generally available to firm during growth and transition phase. Although can be available towards the end of the start-up phase.

Question 70

What is funded with short-term debt? What is funded with long-term debt?​

Answer 70

General principle: match the life of the asset to the life of the funding. Short term debt: Debt paid within one year that is used to finance expenses(supplies, payroll) and seasonal levels of current assets (inventory, AR) Long term debt: Debt beyond one year used to finance fixed assets and permanent levels of current liabilities.

Question 71

What are “spontaneous” short-term liabilities? Recognize examples.​

Answer 71

Accrued wages, accrued taxes, deposits and pre-payments from customers, trade credit(may be difficult to establish)

Question 72

Describe the sources of short-term interest-bearing debt. What are aggressive banks?

Answer 72

Banks:  Least willing to take credit risk and are strictly regulated.  Agressive banks are small, locally owned community banks more willing to work with entrepreneurs.  Line of Credit and Credit Limits. Asset based lenders:  Lower standards/higher interests rates.  Accounts receivable and/or inventory are used as collateral. Factors: Buy accounts receivable from entrepreneur.(Usually seen as bad).

Question 73

Recognize the sources of long-term loans.​

Answer 73

Banks: Term Loans Leasing companies Real estate lenders

Question 74

What are some other sources of long-term “debt” often overlooked by entrepreneurs?​

Answer 74

Leases, employee contracts, credit card balances, long-term contracts.

Question 75

Describe the basic features of SBA loans. How do SBA loan guarantees affect the borrower?​

Answer 75

Funds are provided by independent lenders. Loan guaranty from SBA transfers risk of borrower non-payment up to the amount of the guaranty, from the lender to SBA

Question 76

What three criteria are most important to bankers in making loans?​

Answer 76

Ability of the business to generate enough cash flow to easily make interest and principle payments, entrepreneur's ability to personally pay back the loan if the business fails, assets to serve as collateral.

Question 77

Describe the three key loan documents.​

Answer 77

Loan proposal/commitment letter: outlines general terms. Loan document: Legal documentation of the loan. Personal guarantees: Joint and several guarantee.

Question 78

Know the advantages and disadvantages of financing with debt.​

Answer 78

Advantages:  Lender has no say in management, loan payments are predictable, lenders do not share in profits. Disadvantages: Failure to make loan payment results in bankruptcy(creditors can force a company into bankruptcy or take over company property), Debt payments are a fixed cost(increased risk during economic slowdown, reduced available cash), Restrictive covenants(reduced managerial flexibility), Personal guarantees(claim against the entrepreneur's personal assets, impact on after-tax proceeds from business sale.

Question 79

Recognize the seven concepts that govern any valuation.​

Answer 79

1) Fair market value:  the price, in cash or equivalent, that a buyer could reasonably be expected to pay and a seller could reasonably be expected to accept. 2) Going concern value: Live firms usually worth more than liquidation value. 3) Highest and best use: activity or use of the assets that generates the highest economic value. 4) Future benefits:  future potential benefits determine the value not past benefits. 5) Substitutes and alternatives - higher returns with less risk? 6)  Discounted cash flow analysis:  Present value of all expected future cash flows discount at rate that reflect risk.   7) Objectivity: Only supportable data should be used to assure a consistent and objective analysis of business valuation.

Question 80

Recognize information that buyers will require.​

Answer 80

Income statements and/or tax returns, balance sheet, rates of return consistent with the risk level, interviews with current owners and staff(buyer may seek outside confirmation from someone familiar with the industry, a professional appraiser, an experienced acquisition attorney), and Assessment of future business environment(analysis of competitors and potential competitors, is industry shrinking or growing?, is number of competitors increasing?, where does this particular firm fit in the industry?)

Question 81

Recognize information that buyers will try to obtain from management interviews.​

Answer 81

List of employees and salaries, list of all owner's personal expenses charged to business, summary of equipment needing repair or replacement, key employees likely to stay with the company, list of judgments or potential judgments against the firm, list of receivables that are unlikely to be collected, list of payables that are past due, expectations to keep customers satisfied, common problems, cost accounting capabilities, outlook for the industry.

Question 82

What adjustments will the buyer need to make in estimating the firm’s EBITDA.​

Answer 82

Reported EBIT + owner's salary - reasonable salary + personal expenses charged to business + depreciation = estimated EBITDA

Question 83

How do we get from EBITDA to FCF?​

Answer 83

In general: FCF = EBITDA x (1-T) + Depreciation(T) - capital expenditures - CHange in NWC where T is tax rate and "Depreciation(T)" is the tax shield or tax savings from depreciation. For the small firm: FCF = Estimated EBITDA(1-T) + Depreciation(T) - Equipment Purchased - Inventory Investment. Sometimes simplified to FCF approximately = EBITDA(1-T)

Question 84

What is the “terminal value”? Why is it important to include the terminal value in the DCF analysis?​

Answer 84

The value of all cash flows beyond the t-year planning period. Treated as a cash flow in the last year of the planning period.

Question 85

Be able to describe the relationship between price, value, and the return earned by buyers.​

Answer 85

Price > value:  buyer paid too much and earns less than the required rate of return. Price< Value:  buyer got a bargain and returns more than the required rate of return.  Why did the seller take this price? Price = Value: Buyer earns exactly the required rate of return.

Question 86

Why are firm more valuable when debt financing is used?​

Answer 86

The increase in value represents tax savings because interest payments on debt are a tax deductible expense. Taxpayers get less and capital gets more.

Question 87

What is the method of “market multiples”? What are the two major problems with that method of valuing firms?​

Answer 87

Get the ratio of price over some accounting value for recent business sales such as price over net income/EBIT/EBITDA.  Price over sales revenue is frequently used.  Apply the ratio to the accounting value for the business being evaluated.  It is mathematically simple and used mainly to confirm FCF valuation. Problems: Market data are difficult to obtain and it's susceptible to large errors because the companies for comparison are very different from the company of interest.

Question 88

Define “Exit Planning”​

Answer 88

The process of preparing for the transition of both the entrepreneur and the business.

Question 89

Why does exit planning need to be part of the original business plan?​

Answer 89

External equity investors need to know when they can cash out. For lenders, life of the business affects "ability of the business to generate enough cash flow to easily make interest and principle payments" Founders need an exit date that meets financial and personal goals. MOst business plans' exit strategies estimate that going public will happen within just four years from the launch date. This is not a realistic plan and timeframe.

Question 90

How does self-assessment affect the exit plan?​

Answer 90

Entrepreneur's wealth objectives. Timing: Personal plans, market opportunities for sale, time often conflict. Exit plans must be re-evaluated over the life of the business: business delivers much more or less than expected income, economic changes, changes in personal situation.

Question 91

How can the entrepreneur preserve the culture of the business upon exit?​

Answer 91

Select buyer who agres to continue culture, sell to employees or managment, avoid going public.

Question 92

What three tasks should the entrepreneur preform in preparation for exit?​

Answer 92

Manage Financial statements:  Pay down outstanding loans, sell off unproductive assets, move real estate into a separate unit, keep leases short, maximize EBITDA(minimize non-productive overhead) Mostly stuff you should have been doing anyway Begin conducting external audits three years before anticipated sale if revenues exceed $500k per year.  Retroactive audits are much more expensive, let staff handle routine functions. Develop a comprehensive business plan that substantiates potential: Thorough industry analysis, marketing plan linked to revenue forecast, financial plan(most likely case and best case scenario), operating plan for at least three to five years in the future.

Question 93

Why would an entrepreneur try to grow the firm in preparation for exit?​

Answer 93

Often must grow large enough to attract buyers.

Question 94

Describe the three strategies for growth.​

Answer 94

Diversification/aquire other firms:  addition of product or service offerings beyond your core product or service.  Can increase market share but can also unfocus the company.  Products or services acquired must fit without unfocusing the company. licensing:  replication strategie becaus way to obtain money from a business you created by letting others copy or replicate it.  License is the right to use a name or image on a product.  Must be careful that a licensee doesn't damage the licensing company's name., franchising: business that markets a product or service in the exact manner prescribed by the person who developed the business. partnership between a large business and a franchisee for the mutual profit of both parties.

Question 95

What are the two categories of exit options?​

Answer 95

Transfer of ownership or cease operations

Question 96

Recognize considerations when selecting an exit option.​

Answer 96

What provides best financial return, most cash to the entrepreneur, entrepreneur's nonfinancial aspirations, nonfinancial aspects of the entrepreneur's aspirations, tax implications, continuation of vision, culture, and values, transaction costs to sell a business are high.

Question 97

Describe each of the options for complete ownership transfer. Partial or limited transfer. Ceasing operations.​

Answer 97

Ownershp transfer:  

Question 98

What are the advantages and disadvantages or asset sales and stock sales?​

Answer 98

Advantages of an asset sale are cash sale, clean break, earn-out possible.  Disadvantages are immediate tax on full sale, lower face value sale price.  Advantages of a stock sale are a higher face value of sale price and tax deferment of sale price(if paid with stock).  Disadvantages are potential volatility of stock from sale and restrictions on sale of stock.

Question 99

What are the advantages and disadvantages of Mergers, IPOs, Selling to the firm’s ESOP, MBOs, Family Business Transfers.​

Answer 99

Merger- Advantages are potential synergies, tax deferment of sale price.  Disadvantages are that cultures may clash, limited opportunity for immediate cash.   IPO- Advantages are taking some cash out possible and can bring in professional management.  Disadvantages are limits on sale of stock. Strategic Alliance- Advantages are it reduces risk to existing value.  Disadvantage is it may be long time if at all to actual exit. ESOP-Advantage is you can maintain business culture.  Disadvantage is it may be long time, if at all, to actual exit. Management buyout- Advantage is that managers know value of firm and you are selling to people you know.  Disadvantage is there might be too much debt to pay you and they can manipulate EBITDA. Family BUsiness Transfer- Advantage is that you can maintain business culture.  Disadvantage is the challenge of generational succession.

Question 100

How is Liquidation different from Bankruptcy. What are the advantages and disadvantages of each?​

Answer 100

Liquidation:  Advantage is that it may result in more value especially for service business.  Disadvantage is that there is no value for going concern and that it can be viewed as "failure" Bankruptcy: The advantage is an orderly end to business. Disadvantages are there are ethical challenges, results in no realization of wealth from business, and it can hurt entrepreneur's ability to fund future deals.

Question 101

What is the basis for the selling price of a business?​

Answer 101

A realistic estimation of value should be the starting point for any attempt to sell a business. Price based on buyer's expected future cash flows, book values are irrelevant, historical cash flows are relevant only for making forecasts,

Question 102

What is “seller’s remorse”​

Answer 102

When you have regret that you sold the business. You should take time before starting new endeavors.