Title: Credit Unit 4 Answer Key
Course: SkillsCom BA 260 15.0 > Section: END of Credit Unit 4

1. The following factors may intervene in the valuation process of a business. Start-up costs are extensive and a buyer may be willing to pay more for an on-going business in order to avoid these costs. Sales revenues, market potential, and earnings potential, should all be examined carefully for their accuracy because they are subject to economic data, fluctuating trends, and uncertain environments. The degree of control that the seller has in his or her business is equal to his or her actual interest. Therefore, the seller should control 51 percent of the company or the buyer will not be purchasing full control of the company

2. Advantages of selling to insiders are many.  The insiders (top management) know the company best.  Presumably, they have the best chance of continuing the company on its successful path.  If they do not have sufficient money, a leveraged buy-out can be structured.  Also, an employee stock ownership plan (ESOP) can be set up.  These approaches can give the ownership to the management team over a period of time as payments are made to the entrepreneur.  When selling to outsiders, certain groups of people come to mind:  direct competitors and non-direct competitors.  A business broker can be of assistance in this matter.   As to which is best, the entrepreneur must look at his ultimate goals and see which option gives him most of what he wants.  It must be looked at in a case-by-case basis.

3. Five qualities or characteristics a successor might possess are enthusiasm about the enterprise, a high degree of perseverance, a reasonable amount of aggressiveness, problem-solving ability, and talent to develop people.

4. Many entrepreneurs seek capital through the public markets. They seek an exit from their firm in the form of what is referred to as a “liquidity event” which stands for the positioning of the venture for the realization of a cash return for the owners and the investors. This “event” is most often achieved through an initial public offering or complete sale of the venture.

An IPO is a very expensive and complicated process. The price of the stock can go up and down thus affecting the value of the owners equity in the new company . The company could also become the target of a hostile takeover.