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TRUE/FALSE
1. Harvesting is the method entrepreneurs and investors use to grow their firms.
ANS: F
Harvesting is the method entrepreneurs and investors use to exit a business and, hopefully, reap the
value of their investment in the firm.
2. Many entrepreneurs successfully grow their firms, but fail to develop an effective exit plan.
3. Investors in a startup company are mainly interested in the new firm’s growth and are not particularly
interested in an exit plan.
ANS: F
The harvest (exit plan) is vitally important to investors.
4. The harvesting process encompasses more than just selling and leaving a business.
ANS: F
The sale of a firm is concerned with not only how to value a company, but also how to structure the
payment overlaid with the entrepreneur’s motivation for selling the company.
6. A financial buyer of a small business is most interested in the firm as a stand-alone, cash-generating
business.
ANS: F
A strategic buyer is most interested in the synergies that can be achieved via an acquisition.
8. More recently, the bust-up leveraged buyout was replaced with the build-up leveraged buyout.
9. The build-up leveraged buyout is typically used in industries that are dominated by large firms.
ANS: F
The build-up leveraged buyout is typically used in industries that are dominated by small business,
such as funeral services and automobile dealerships.
11. The boost to employee motivation and effort that results from an ESOP will vary significantly from
firm to firm.
12. ESOPs may require educating the buyer about the company’s operations for continued company
growth.
13. For value-creating firms, owners who decide to harvest by withdrawing cash flows should accelerate
the process as much as possible for a company with growth needs.
ANS: F
Since a value-creating firm is earning attractive rates of return for its investors, this option would be
incorrect since the firm's rate of return exceeds the investors' opportunity cost of funds.
14. One of the drawbacks of harvesting by withdrawing cash flows slowly is that the owner must seek out
a buyer for the eventual sale of the business.
ANS: F
Not having to seek out a buyer for the business is one of the advantages of harvesting via free cash
flow withdrawal as well as still retaining control.
15. For the entrepreneur who is simply tired of the day-to-day operations of the business, slowly
withdrawing cash flows over time may require too much patience.
16. In most cases of IPOs, the equity capital raised is used for growth as opposed to an immediate exit
strategy of the original entrepreneur.
17. With a private equity placement, the firm's equity is sold in public equity markets, but the transaction
is handled by a private investment banker.
ANS: F
With a private equity placement, private equity capital is infused to help a family-controlled firm
transfer ownership from one generation to the next and eventually to outside investors, while at the
same time providing growth capital.
18. A private placement sale can be more flexible in structure to meet an entrepreneur’s needs even though
the entrepreneur can not sell stock immediately.
ANS: F
A private placement sale is more flexible in structure as well as allowing the entrepreneur to sell stock
immediately.
19. Opportunity cost of funds is the rate of return that an investor can earn on another investment of
similar risk.
ANS: T PTS: 1 DIF: Difficulty: Easy
REF: p. 357 OBJ: LO: 13-3a NAT: BUSPROG: Analytic
STA: DISC: Finance KEY: Bloom’s: Knowledge
20. Owing to the formulas that guide practice, business valuation has become an exact science.
ANS: F
Business valuation is part science and part art—there is no precise formula for determining the price of
a private company.
21. Harvesting owners can be paid in cash or in stock of the acquiring firm, with stock generally being
preferred over cash.
ANS: F
Harvesting owners can be paid in cash or in stock of the acquiring firm, with cash generally being
preferred over stock.
22. Entrepreneurs who accept stock in payment for the sale of their businesses are usually pleased with the
results because they escape a significant tax burden.
ANS: F
Entrepreneurs who accept stock in payment for the sale of their businesses do avoid some unfavorable
tax consequences, but overall they are frequently disappointed with the outcome.
23. Entrepreneurs frequently do not appreciate the difficulty of selling or exiting a business.
24. While investors always think ahead about how to exit an enterprise, the entrepreneur should focus on
daily operational strategies more than the exit strategy.
ANS: F
Entrepreneurs need to have a similar mind-set as investors, especially when they are planning an IPO.
26. Entrepreneurs should think very carefully about their motives for exiting a business and what they plan
to do after the harvest.
27. Entrepreneurs often do not make good employees at their former company.
28. Many entrepreneurs, grateful for their past success, feel the need to give something back to society
after selling their company.
29. The harvesting of a business should cause the entrepreneur to ask for advice from the experts who
helped build the company.
ANS: F
These experts may not be the best ones to use since they may not experience in selling firms.
MULTIPLE CHOICE
1. Millard has worked for the past five years to build his business but as retirement nears, he is thinking it
is time for the harvest. Harvesting refers to
a. starting a business.
b. managing the growth of a business.
c. exiting a business.
d. diversifying a business.
ANS: C PTS: 1 DIF: Difficulty: Easy
REF: p. 348 OBJ: LO: 13-1 NAT: BUSPROG: Analytic
STA: DISC: Finance KEY: Bloom’s: Comprehension
3. The availability of a company’s exit options is an important determinant of the appeal of the firm to
a. suppliers.
b. investors.
c. employees.
d. management.
ANS: B PTS: 1 DIF: Difficulty: Easy
REF: p. 348 OBJ: LO: 13-1 NAT: BUSPROG: Analytic
STA: DISC: Finance KEY: Bloom’s: Comprehension
4. One of the big financial questions associated with selling a business is:
a. To whom should I sell the business?
b. How much should I ask for the business?
c. Should I offer the business to my employees?
d. Would it be better to liquidate the assets?
ANS: B PTS: 1 DIF: Difficulty: Moderate
REF: p. 348 OBJ: LO: 13-2 NAT: BUSPROG: Analytic
KEY: Bloom’s: Analysis
5. Jack is a professional who assists in the buying and selling of businesses. Jack is:
a. a stock broker.
b. an investment broker.
c. a real estate broker.
d. a business broker.
ANS: D PTS: 1 DIF: Difficulty: Easy
REF: p. 349 OBJ: LO: 13-2a NAT: BUSPROG: Analytic
KEY: Bloom’s: Knowledge
7. Dennis, the owner of a hardware store, has agreed to sell his business to another local hardware store
owner. This transaction would likely be described as a sale to a _____ buyer.
a. competing
b. employee
c. financial
d. strategic
ANS: D PTS: 1 DIF: Difficulty: Moderate
REF: p. 349 OBJ: LO: 13-2a NAT: BUSPROG: Analytic
STA: DISC: Finance KEY: Bloom’s: Analysis | Bloom’s: Comprehension
9. A potential buyer for Teresa’s business has mentioned a leveraged buyout, which involves a high level
of _____ financing.
a. debt
b. equity
c. strategic
d. unsecured
ANS: A PTS: 1 DIF: Difficulty: Easy
REF: p. 350 OBJ: LO: 13-2a NAT: BUSPROG: Analytic
STA: DISC: Finance KEY: Bloom’s: Comprehension
10. In earlier years, leveraged buyouts became synonymous with the ____ LBO.
a. bust-up
b. build-up
c. owner-financed
d. publicly-funded
ANS: A PTS: 1 DIF: Difficulty: Easy
REF: p. 350 OBJ: LO: 13-2a NAT: BUSPROG: Analytic
STA: DISC: Finance KEY: Bloom’s: Knowledge
12. Marvin is planning to sell his company to his management team. Marvin will be financing part of the
purchase. This type of arrangement is a form of:
a. ESOP
b. IPO
c. PPO
d. LBO
ANS: D PTS: 1 DIF: Difficulty: Moderate
REF: p. 351 OBJ: LO: 13-2a NAT: BUSPROG: Analytic
STA: DISC: Finance KEY: Bloom’s: Comprehension
13. An employee stock ownership plan represents
a. a good way for a business founder to build his/her position in the company.
b. an opportunity for employees to acquire an ownership interest in their company.
c. a harvest method of choice.
d. an effort to ease investor concerns.
ANS: B PTS: 1 DIF: Difficulty: Moderate
REF: p. 351 OBJ: LO: 13-2a NAT: BUSPROG: Analytic
STA: DISC: Finance KEY: Bloom’s: Comprehension
14. Steve wants to sell his business but the bank will not lend the buyer enough money. Between personal
savings and the bank loan, the buyer has about 80% of the asking price. Which of the following
options would be best for Steve in this situation?
a. Look for a different buyer.
b. Lower the asking price.
c. Retain a 20% ownership in the business and a seat on the advisory board.
d. Offer to finance the remaining 20%, accepting payments over the next few years.
ANS: D PTS: 1 DIF: Difficulty: Challenging
REF: p. 352 OBJ: LO: 13-2a
NAT: BUSPROG: Analytic | BUSPROG: Reflective Thinking KEY: Bloom’s: Evaluation
15. Matt owns a car dealership that is very profitable. Since he plans to retire in 5-10 years, Matt has
decided to retain ownership for now, but without continuing to grow the business. This change would
also allow him to invest for retirement some of the cash that the business is now generating. Which
harvesting method does this example illustrate?
a. A delayed sellout
b. A strategy to release the firm's free cash flows to the owners
c. Offering stock to the public through an IPO
d. Issuing a private placement of stock
ANS: B PTS: 1 DIF: Difficulty: Easy
REF: p. 352 OBJ: LO: 13-2b NAT: BUSPROG: Analytic
STA: DISC: Finance KEY: Bloom’s: Analysis
16. The mere fact that a firm is earning high rates of return on the firm's asset indicates that
a. the firm is worth more as a going concern than as a dead one.
b. downsizing is likely to be an economically sound option for the business.
c. it is time to start growing the business again.
d. it might be wise to further limit the cash flows returned to investors.
ANS: A PTS: 1 DIF: Difficulty: Moderate
REF: p. 352 OBJ: LO: 13-2b NAT: BUSPROG: Analytic
STA: DISC: Finance KEY: Bloom’s: Comprehension
17. Paul is approaching retirement and has decided to siphon off funds form his company rather than sell
it. From his perspective, the advantage of systematically withdrawing cash from the firm is:
a. retaining control
b. preserving cash for later reinvestment
c. greater latitude in seeking out a buyer for the firm
d. increasing long-term returns from the business
ANS: A PTS: 1 DIF: Difficulty: Easy
REF: p. 353 OBJ: LO: 13-2b NAT: BUSPROG: Analytic
STA: DISC: Finance KEY: Bloom’s: Analysis
18. Nettie’s Knits, Inc. paid taxes on its net income then distributed part of the earnings as dividends to
investors. These investors paid tax on the dividends they received. This practice is know as:
a. initial public offering.
b. double taxation.
c. twice taxation.
d. harvesting taxation.
ANS: B PTS: 1 DIF: Difficulty: Easy
REF: p. 353 OBJ: LO: 13-2b NAT: BUSPROG: Analytic
STA: DISC: Finance KEY: Bloom’s: Knowledge
19. Pat, owner of Pat’s Welding, LLC, would like to let someone else run the day to day operations while
he continues to draw an income from the business. Because the business is an LLC, Pat will not have
to be concerned about:
a. a reduction in the value of the company.
b. seller financing.
c. paying a brokerage fee.
d. double taxation on his income.
ANS: D PTS: 1 DIF: Difficulty: Easy
REF: p. 353 OBJ: LO: 13-2b NAT: BUSPROG: Analytic
KEY: Bloom’s: Analysis
20. Harvey has reached the point in his business when he needs a large amount of capital to expand, more
than he can borrow. This might be a good time for him to consider selling stock to the public in a(n):
a. ESOP
b. IPO
c. MBO
d. LBO
ANS: B PTS: 1 DIF: Difficulty: Easy
REF: p. 354 OBJ: LO: 13-2c NAT: BUSPROG: Analytic
STA: DISC: Finance KEY: Bloom’s: Knowledge
24. Charles and Nancy have decided to sell their family business and would like to transfer ownership to
the next generation. Which harvesting form would be best?
a. cash flow distribution
b. initial public offering
c. private placement
d. selling to a strategic buyer
ANS: C PTS: 1 DIF: Difficulty: Easy
REF: p. 355 OBJ: LO: 13-2d NAT: BUSPROG: Analytic
STA: DISC: Finance KEY: Bloom’s: Analysis
25. Valerie is beginning to think of harvesting her company. Which question should be asked first?
a. Why does she want to harvest?
b. What is the value of her firm?
c. Does the firm have a leadership succession plan in the event that the firm sells?
d. What will be the method of payment?
ANS: B PTS: 1 DIF: Difficulty: Easy
REF: p. 357 OBJ: LO: 13-3 NAT: BUSPROG: Analytic
STA: DISC: Finance KEY: Bloom’s: Analysis
26. Eleanor has money to invest and is considering buying a company. When comparing her alternatives,
her opportunity cost on a any investment is the:
a. projected future value of the investment.
b. present value of that investment.
c. value of the assets used for capital for that investment.
d. rate of return that she could earn on a similar investment.
ANS: D PTS: 1 DIF: Difficulty: Moderate
REF: p. 357 OBJ: LO: 13-3a NAT: BUSPROG: Analytic
STA: DISC: Finance KEY: Bloom’s: Comprehension
27. Two years ago, Harold inherited $30,000 and decided to open a coffee shop in his hometown instead
of buying stock in Ford Motor Company. The rate of return he could have earned on his investment in
Ford stock represents his
a. lost profit.
b. opportunity cost of funds.
c. investment opportunity.
d. potential profit.
ANS: B PTS: 1 DIF: Difficulty: Easy
REF: p. 357 OBJ: LO: 13-3a NAT: BUSPROG: Analytic
STA: DISC: Finance KEY: Bloom’s: Comprehension
30. Jill is purchasing a web design company that has patented a new form of technology. Which purchase
would be best for her in relation to the web design company’s liabilities?
a. Buy the firm’s assets.
b. Buy the firm’s stock.
c. Merge the company with her present company.
d. Any of the above three would be acceptable.
ANS: A PTS: 1 DIF: Difficulty: Easy
REF: p. 357 OBJ: LO: 13-3b NAT: BUSPROG: Analytic
STA: DISC: Finance KEY: Bloom’s: Analysis
31. Vasily is selling his business. As a harvesting owner we would expect him to prefer _____ over
_____.
a. cash, stock
b. debt, equity
c. equity, debt
d. stock, cash
ANS: A PTS: 1 DIF: Difficulty: Easy
REF: p. 358 OBJ: LO: 13-3b NAT: BUSPROG: Analytic
STA: DISC: Finance KEY: Bloom’s: Analysis
32. In a harvest situation, the exiting owners are usually paid in cash or
a. tangible assets.
b. imputed goodwill.
c. favorable publicity.
d. stock.
ANS: D PTS: 1 DIF: Difficulty: Easy
REF: p. 358 OBJ: LO: 13-3b NAT: BUSPROG: Analytic
STA: DISC: Finance KEY: Bloom’s: Knowledge
36. When is the right time to begin thinking about an exit strategy?
a. When the owner wants to retire
b. When a willing buyer expresses an interest
c. When declining health forces the owner to leave active management
d. When the money is first invested in the business
ANS: D PTS: 1 DIF: Difficulty: Moderate
REF: p. 358 OBJ: LO: 13-4a NAT: BUSPROG: Analytic
KEY: Bloom’s: Analysis
37. After harvesting, many entrepreneurs experience conflicts that are _____ in nature.
a. financial
b. practical
c. emotional
d. tactical
ANS: C PTS: 1 DIF: Difficulty: Easy
REF: p. 359 OBJ: LO: 13-4b NAT: BUSPROG: Analytic
STA: DISC: Dynamics KEY: Bloom’s: Knowledge
38. Evangeline has sold her small boutique to a large retail chain but has agreed to stay on and manage the
store. Evangeline should expect:
a. freedom from responsibility.
b. a feeling of elation with her new wealth.
c. greater independence.
d. culture conflict.
ANS: D PTS: 1 DIF: Difficulty: Easy
REF: p. 359 OBJ: LO: 13-4b NAT: BUSPROG: Analytic
KEY: Bloom’s: Knowledge
39. Arthur’s company is doing well but he has grown a bit tired of the daily grind. The idea of selling is
appealing to him. What would you recommend Arthur do next?
a. Ask his advisory board for their opinions.
b. Ask a business broker what his business is worth.
c. Go public.
d. Get advice from someone who has sold a business.
ANS: D PTS: 1 DIF: Difficulty: Moderate
REF: p. 360 OBJ: LO: 13-4c NAT: BUSPROG: Analytic
KEY: Bloom’s: Analysis | Bloom’s: Application
40. Post-harvest entrepreneurs may become disillusioned when they realize their sense of identity
a. was associated with the quest for wealth.
b. derived from interactions with employees.
c. was intertwined with their business.
d. does not return after joining in social or charitable work.
ANS: C PTS: 1 DIF: Difficulty: Moderate
REF: p. 360 OBJ: LO: 13-4d NAT: BUSPROG: Analytic
STA: DISC: Dynamics KEY: Bloom’s: Comprehension
MATCHING
ESSAY
1. Todd and Linda have decided to create a harvest plan for their home remodeling business. They
recognize selling the company will affect them since they won’t be going to work every day but have
asked you for advice on what to expect as to the impact and how to best proceed. What will you say to
them?
ANS:
Todd and Linda need to understand that harvesting the business affects them as the owners, but they
may not recognize the personal psychological considerations as they sell the business and move to the
next phase of their lives. They should start planning, specifically fine-tuning the company’s strategies,
focusing on internal growth, improving the financial systems, and creating an independent board. The
harvest will involve capturing cash flows, reducing company risk and creating future options. Todd
and Linda should talk to any investors involved in the company as they will want a return on their
investment.
ANS:
1. Bust-up LBO - A leveraged buyout involving the purchase of a company with the intent
of selling off its assets
3. Management buyout (MBO) - A leveraged buyout in which the firm’s top managers
become significant shareholders in the acquired firm
3. List and briefly explain the four basic harvest strategies for the small business.
ANS:
1. Selling the firm involves transferring ownership of the business to a willing and able buyer.
2. Releasing the firm's cash flows to its owners involves the orderly withdrawal of the owner's
investment in the firm, rather than reinvesting this excess capital for the future growth of the firm.
3. Offering stock to the public through an IPO is used primarily as a way to raise additional capital to
finance company growth, but it is also used as a way to harvest the owner's investment.
4. Issuing a private placement of the firm's stock entails the infusion of private equity capital. This
form is best for a family-controlled firm transferring ownership from one generation to the next and
eventually to outside investors, while at the same time providing growth capital.
4. List the three basic types of acquisitions and identify the purpose of each type.
ANS:
1. Strategic acquisitions focus on synergy formation.
2. Financial acquisitions look primarily to the firm's stand-alone, cash-generating potential.
3. Employee acquisitions are designed to preserve employment.
ANS:
1. An IPO is one way to signal to investors that a firm is a quality business and will likely
perform well in the future.
2. A firm whose stock is traded publicly has access to more investors when it needs to
raise capital to grow the business.
3. Being publicly traded helps create ongoing interest in the company and its continued
development.
4. Publicly traded stock is more attractive to key personnel whose incentive pay includes
the firm’s stock.
6. Monica developed a business chain called Sun Rayz throughout the Midwest that offers only UV bed
indoor tanning services. Solar POWer, an east coast United States indoor tanning chain, also offers
UV beds and other sunless tanning options and has made an offer to purchase Sun Rayz. Explain this
type of harvest transaction and what motivations Solar POWer may have for purchasing Sun Rayz.
ANS:
This transaction would be considered a sale to strategic buyer because Solar POWer is in a similar line
of business and is looking to branch out into a new geographic market. Solar POWer also offers
sunless tanning options that are not currently offered at Sun Rayz which may give the newly developed
business a competitive advantage over other competitors in the Midwestern market.
7. John is developing a harvest plan and figuring the value of his art gallery. What two issues are of
importance?
ANS:
1. What is the firm worth? What was the opportunity cost of funds?
2. How will John be paid? Does he sell his assets (artwork, gallery, other equipment), sell his stock (if
the company is an S or C corporation) or merge with another company if he is approached with an
offer? Does he accept cash or stock in the acquiring company?
8. What are professional and personal issues an entrepreneur may face in the period of time from when
the harvest is announced and it is completed?
ANS:
* Harvesting takes a lot of time and energy on the part of the firm’s management team and can be very
distracting from day-to-day affairs. The result is often a loss of managerial focus and momentum,
leading to poor performance.
* Uncertainties accompanying an impending sale often lower employee morale in relation to a new
owner.
* A buyer can be quite unemotional and detached, while a seller is likely to be much more concerned
about non-financial considerations.
* Entrepreneurs have a real need for good advice, both from experienced professionals and from those
who have personally been through a harvest.
* A sense of loss may occur as the entrepreneur changes their identity from small business owner to
small business seller. Persons the entrepreneur has been in regular contact with (employees, clients,
vendors) will not be part of their life.
* “Seller’s remorse” is definitely a major issue for a number of entrepreneurs.
9. Ellen is a dentist and has decided to develop a harvest plan. She wants her efforts to be successful and
effective. Discuss suggestions for crafting an effective exit strategy.
ANS:
- Anticipate the Harvest: Hopefully Ellen has thought about the harvest strategy from the beginning
of the practice. She needs to be prepared from day one and begin planning in anticipation of a
harvest. This planning will better prepare her for unexpected changes and options.
- Expect Emotional and Cultural Conflict: Ellen has both financial and emotional ties to the
business. Any type of change will effect the her directly as well as her employees and family
members. Expecting conflict would better prepare Ellen for when it arises.
- Get Good Advice: More than likely, the harvest plan is the first one for Ellen. It is important to get
professional and personal advice from individuals who can relate to the circumstances and give a
non-biased opinion. Since she has a medical practice, what should she tell her patients?
- Understand the Motivation: Ellen should think about why she wants to leave the practice and what
she wants to do afterwards. She should understand the practice is part of her personal identity and
prepare herself life after the business. Does she want to help a non-profit that could use her dentistry
skills? Does she want to work for another practice?