What's your Entrepreneurial IQ?

Test your knowledge as a business buyer. Here are 25 key issues you'll need to address when buying a business. The right answers and detailed explanations will be provided after you complete the quiz.

Questions

1) When buying a business, it's best for you to complete the transaction as a:

Stock purchase

Asset purchase

Either case is fine as long as you have adequate protections since there's no tax consequences to you in either case

2) There are many businesses listed for sale online, by owners or through business brokers. Of these, what percentage will actually sell?

20%

33%

50%

80%

3) The most effective valuation method to use for a small business is:

Asset-based approach

Income Capitalization

Rules of Thumb - Market Comparables

Owner Benefit Multiple Approach

Cash Flow

4) Which of the following formulas will you use to calculate the Total Owner Benefit Amount:

EBIT: Earnings Before Interest and Taxes + Owner Salary

EBITDA: Earnings Before Interest, Taxes, Depreciation and Amortization

Pre-Tax Profit + Owner's Salary/Perks + Depreciation + Interest LESS Allocation for Capital Expenditures

Cash Flow + Interest + Excess Owner Salary

5) According to industry statistics, what percentages of the people who begin the search to buy a business will actually complete a transaction?

10%

25%

50%

90%

6) Business Brokers are involved in what percentage of small business transactions:

10%

20%

40%

60%

7) The most important factor to consider in any prospective business is:

The company has to be operational for at least three years

The business has to be right for you

To be certain that you do not overpay

The employees are willing to stay

The owner is willing to provide you with an extended training period

8) According to Rule 164(R)(ii) of the Securities and Exchange Commission, business brokers-intermediaries, are required to pass a minimum state certification and a background check prior to being licensed.

True

False

9) If you are buying a business where there are partners involved you'll want to be sure that:

Your negotiations are conducted directly with the majority partner

You negotiate with all individuals to be sure each is aware of the deal and there's no confusion down the road.

You have written confirmation that whomever you deal with has the authority to make binding representations on behalf of the other.

10) In a typical small business purchase, you will acquire the company's accounts receivable at the closing date, which you can then use as your working capital:

True

False

11) After you purchase a business you will be able to depreciate the following:

Tangible Assets

Goodwill

Customer Lists

The value of the non-compete clause

All of the above

Assets and Goodwill only; the others are considered non-deductible or depreciable expenses according the new IRS tax code subsection 417xi -2004.

12) When meeting with a seller, it is critical that you:

Let them ask you about yourself first so they gain confidence in you

Ask your questions about their business before they ask you anything

13) When you meet with the seller, it is best to conduct the meeting:

At their place of business during normal business hours

At the office of the intermediary or their accountant

At any non-threatening neutral location so all parties are comfortable

14) By using the business' tax returns to evaluate the financials, you are assured that you are getting an accurate picture of the business' worth.

True

False

15) Gathering information about a business should commence:

As soon as the business may be of interest to you

After you've had a chance to meet with the seller or speak with their intermediary

Upon receiving copies of their financial statement

16) Many standard purchase agreements have a clause related to your financial review and due diligence whereby you can walk away from the deal if the actual numbers vary by more than 5% of what has been represented to you. This clause is:

Acceptable for the buyer

Unacceptable for the buyer

17) Over 90% of our clients finance their purchase through the seller. Of course you should negotiate as much seller financing as possible, but as a general rule you should target:

20% - 25% seller financing

25% - 33% seller financing

33% - 50% seller financing

18) When negotiating seller financing you must be willing to:

Provide collateral for the loan

Sign personally, pledge the business' assets but without any personal collateral

Sign personally and allow the seller to have a lien against the assets of the business

Never sign personally

19) You should negotiate a due diligence/inspection phase of:

10 days minimum

20 days minimum

As long a period as you can negotiate

20) The average small business sells for what multiple of the Owner's Benefit amount:

1-2

1-3

3-4

3-5

21) If you find a business that meets your initial criteria, and you determine after meeting with the seller and conducting some background research that it may be right for you, but the seller will not release financials, you should:

Walk away immediately as this demonstrates a completely unreasonable seller

Make a full-price offer on the business in a non-binding Letter of Intent

Make an offer on the business noting the financials as a contingency and allowing yourself enough “outs” without penalty

22) Confidentiality is the number-one concern of nearly every seller. They will not want you to meet with any of their employees, customers, or suppliers, as they fear the consequences in the event that you do not go through with the purchase. As long as you have verified the financials and the industry in general, this is:

Acceptable

Unacceptable

23) The best way to learn about the strengths and weaknesses of the competition is to:

Ask the seller

Contact and investigate the competition directly

All of the above

24) You will be required to submit a deposit with any offers you make. This deposit should be held by:

Only your attorney no matter what any of the other parties may want

The seller's attorney

A business broker

An escrow agent

Any of the above as long as the money is regulated by being a bona fide trust and/or escrow account

25) During the process of buying a business you will incur certain expenses for accountants, lawyers, car expenses visiting business, and educational materials. All of these are:

Potentially deductible expenses as a “cost of acquisition”

Not deductible since this is ruled a “betterment” exercise

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