This Document Contains Chapters 7 to 8 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 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 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 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 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 6) An entrepreneur who is considering purchasing a business is analyzing a company's accounts receivable. The following table summarizes her findings. 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 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 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 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 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 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 12) To ensure a smooth transition when buying an existing business, a buyer should: A) communicate with employees to reduce their uncertainty and anxiety. B) be honest with existing employees about upcoming changes and plans for the company's future. C) consider asking the seller to stay on and serve as a consultant until the transition is complete. D) All of the above Answer: D 13) The most common reasons owners of small- and medium-sized businesses give for selling their businesses are: A) need for money and low return on investment. B) boredom and burnout. C) low return on investment and burnout. D) greater opportunities working for someone else and low return on investment. Answer: B 14) Important factors to investigate regarding the business to be purchased include: A) assessing the physical assets of the business. B) reviewing accounts receivable and business records. C) reviewing contractual arrangements and assessing intangible assets. D) All of the above Answer: D 15) Laurette has entered into a contract with Jackson to purchase his retail music shop. Jackson's lease on the existing building (which is in an excellent location) has five years remaining. If Laurette wants the lease to be part of the business sale: A) she should include a clause in the sales contract in which Jackson agrees to assign to her his rights and obligations under that lease. B) she should notify the landlord of Jackson's assignment of the lease agreement to her. C) A and B are correct. D) None of the above. Because Jackson does not actually own the building, he can transfer no rights to it to Laurette. Answer: C 16) Generally, a seller of an existing business can assign any contractual right to the buyer unless: A) the contract specifically prohibits the assignment. B) the contract is personal in nature. C) A and B are correct. D) None of the above. Business sellers typically cannot assign any contractual rights to buyers. Answer: C 17) During the acquisition process, the potential buyer usually must sign a ________, which is an agreement to keep all conversations and information secret and legally binds the buyer from telling anyone any information the seller shares with her. A) covenant not to compete B) nondisclosure document C) letter of intent D) purchase agreement Answer: A 18) Which of the following is required for the covenant not to compete to be enforceable? A) Part of a business sale and reasonable in scope B) Approved by a court of law and reasonable in scope C) The assistance of an attorney and approved by a court of law D) The registration of the due-on-sale agreement Answer: A 19) Sources of potential legal liabilities for the buyer of an existing business include all but which of the following? A) Problems with the physical premises, such as hazardous materials B) Product liability claims C) Labor problems and disputes D) Errors and omissions Answer: D 20) A toy manufacturer is sued based on the claim of injuries caused by a product it makes. This is an example of a: A) product liability lawsuit. B) promissory estoppel lawsuit. C) restrictive covenant lawsuit. D) contingent liability lawsuit. Answer: A 21) When evaluating the financial position of a business he or she is considering buying, an entrepreneur should examine: A) its income statements and balance sheets from the past three to five years. B) its income tax returns for the past three to five years. C) the owner's compensation and that of relatives. D) All of the above Answer: D 22) In a business sale, a letter of intent: A) states that the buyer and the seller have reached a sufficient meeting of the minds to justify the time and expense of negotiating a final agreement. B) should contain a clause calling for "good faith negotiations" between the parties. C) addresses such issues as price, payment terms, a deadline for closing the deal, and others. D) All of the above Answer: D 23) During the acquisition process, the buyer and the seller sign a ________, which spells out the parties' final deal and represents the details of the agreement that are the result of the negotiation process. A) covenant not to compete B) nondisclosure document C) letter of intent D) purchase agreement Answer: D 24) Which of the following statements about valuing a business is true? A) The balance sheet technique is the best way to value a business. B) Business valuation is partly art and partly science. C) Buyers should rely on the seller's industry expertise and years of experience to determine what his company is worth. D) Business valuation processes are consistently misleading regarding the future earning potential of a business. Answer: B 25) The main reason a buyer purchases an existing business is for: A) its future income and profits for earning potential. B) its customer base and access to those customers. C) its tangible assets and the ability to liquidate those assets. D) its goodwill. Answer: A 26) A method of valuing a business based on the value of the company's net worth is the: A) balance sheet technique. B) adjusted balance sheet technique. C) earnings approach. D) opportunity cost technique. Answer: A 27) A valuation method that is more realistic than the balance sheet technique, because it adjusts book value to reflect actual market value, is the: A) excess earnings method. B) market approach. C) capitalization method. D) adjusted balance sheet method. Answer: D 28) Which of the following valuation methods does not consider the future income-earning potential of a business? A) Balance sheet technique B) Excess-earnings method C) Discounted future earnings approach D) Market approach Answer: A 29) When valuing inventory for a business sale, the most common methods used are: A) first-in-first-out (FIFO) and last-in-first-out (LIFO). B) first-in-first-out (FIFO) and average costing. C) cost of last purchase and replacement value of inventory. D) cost of last purchase and average costing. Answer: C 30) Business valuations based on balance sheet methods suffer certain disadvantages, including: A) they are extremely complex and are difficult to calculate. B) they do not consider the future earning potential of the business. C) they fail to take into account what is usually the largest asset a company owns: inventory. D) All of the above Answer: B Use the following information to answer the question(s) below. Baubles and Bells, a small business, is up for sale. The book value of its assets is $397,650, and its liabilities have a book value of $148,500. After adjusting for market value, total assets are worth $386,475, and total liabilities are $153,600. The business is considered to be a "normal risk" venture. The new owner (if he buys) plans to draw a salary of $28,000. Estimated earnings for the upcoming year are $88,400. Complete net earnings estimates for the next five years are: 31) Using the adjusted balance sheet technique, what is the business worth? A) $397,650 B) $386,475 C) $249,150 D) $232,875 Answer: B 32) The valuation approach that considers the value of goodwill is the: A) balance sheet technique. B) excess earnings method. C) discounted future earnings approach. D) market approach. Answer: B 33) Under the excess earnings method, what is the "extra earning power" of the business? A) $86,219 B) $2,181 C) $11,175 D) Cannot be determined from the information given Answer: B 34) Using the excess earnings method, what is the company's "goodwill"? A) $6,543 B) $33,525 C) $15,267 D) Cannot be determined from the information given Answer: A 35) Which of the following is considered an opportunity cost of buying an existing business? A) The salary that could be earned working for someone else and the owner's investment in the business B) Dividends C) The market value of tangible assets D) The salary that the business has paid to previous owners Answer: A 36) The amount the seller of a business receives for "goodwill" is taxed as: A) a long-term capital gain. B) regular income. C) superlative income. D) None of the above Answer: B 37) The capitalized earnings approach determines the value of a business by capitalizing its expected profits using: A) the interest rate that could be earned on a similar risk investment. B) the prime interest rate. C) the normal rate of return. D) the prevailing return of inflation. Answer: A 38) If a business buyer estimates that 20 percent is a reasonable rate of return for an existing business expected to produce a profit of $27,000, its capitalized value would be: A) $5,400. B) $32,400. C) $135,000. D) $540,000. Answer: C 39) In the earnings methods of business valuation, the rate of return associated with a "normal risk" business is: A) 15 percent. B) 25 percent. C) 35 percent. D) 50 percent. Answer: B 40) Which method of business valuation relies on three forecasts of future earnings: optimistic, pessimistic, and most likely? A) Balance sheet technique B) Excess-earnings method C) Discounted future earnings D) Market approach Answer: C 41) The ________ approach to valuing a business assumes that a dollar earned in the future is worth less than that same dollar is today. A) balance sheet B) capitalized earnings C) adjusted balance sheet D) discounted future earnings Answer: D 42) Which of the following valuation techniques is best suited for determining the value of service businesses? A) Discounted future earnings approach B) Balance sheet technique C) Adjusted balance sheet technique D) Excess earnings approach Answer: A 43) The ________ approach to valuing a business uses the price-earnings ratios of similar businesses to establish the value of a company. A) balance sheet B) capitalized earnings C) discounted future earnings D) market Answer: D 44) Which of the following is a disadvantage of the market approach to valuing a business? A) Necessary comparisons between publicly traded and privately owned companies B) Unrepresentative earnings estimates C) Difficulty in finding similar companies for comparison D) All of the above Answer: D 45) Which of the following is a drawback of the market approach of evaluation? A) It does not consider current earnings. B) It may underrepresent earnings. C) Its reliability depends on the forecasts of future earnings. D) It overemphasizes the value of goodwill. Answer: B 46) You are considering purchasing Babcock Office Supply. You estimate that the company's earnings next year will be $67,400. You have found three similar companies whose stock is publicly traded. Their P/E ratios are 6.8, 7.4, and 7.1. Using the market approach, you estimate Babcock Office Supply to be worth: A) $478,540. B) $9,493. C) $67,400. D) $498,760. Answer: A 47) A company's P/E ratio is: A) the price of one share of its common stock divided by its earnings per share. B) its profits per share divided by its equity per share. C) its profits per share divided by its excess cash flow per share. D) None of the above Answer: A 48) Some business brokers differentiate between the types of buyers: ________ buyers see buying a business as a way to generate income and ________ buyers view the purchase as part of a larger picture to offer a long-term advantage. A) strategic; financial B) financial; strategic C) strategic; optimistic D) financial; passive Answer: B 49) This type of business sale is best for those entrepreneurs who want to step down and turn over the control of the company to the new buyer as soon as possible. A) Straight business sale B) Earn-out C) Sale of controlling interest D) Employee stock ownership plan - ESOP Answer: A 50) Which of the following strategies would not be suitable for an entrepreneur who wants to surrender control of the company gradually? A) Forming a family limited partnership B) Restructuring the company C) Straight business sale D) Using a two-step sale Answer: C 51) Mitchell Schlimer, founder of the Let's Talk Business Network, a support community for entrepreneurs, says that, initially, about ________ percent of small business owners who sell their companies to larger businesses remain with the acquiring company. A) 40 B) 50 C) 70 D) 90 Answer: D 52) ________ gives owners the security of a sales contract but permits them to stay at the "helm" for several years. A) Earn-out B) A controlled sale C) Company restructuring D) An ESOP Answer: A 53) A(n) ________ allows owners to "cash out" by selling their companies to their employees as gradually or as quickly as they choose. A) two-step sale B) controlled sale C) company restructuring D) ESOP Answer: D 54) An ESOP: A) allows an owner to transfer all or part of his company to the employees as gradually or as quickly as he chooses. B) works best in companies where pre-tax profits exceed $100,000. C) is not beneficial to companies with fewer than 15 to 20 employees. D) All of the above Answer: D 55) To avoid a stalled deal, a buyer should: A) take a hard line and never give an inch. B) understand that they may not be able to get what they really want. C) go into the negotiation with a list of objectives ranked in order of priority. D) be firm, focused, and unbending. Answer: C 56) The process of investigating the details of a company that is for sale to determine the strengths, weaknesses, opportunities and threats facing it is known as the: A) hidden market process. B) due diligence process. C) skimming process. D) business assessment process. Answer: B 57) The due diligence process in analyzing and evaluating an existing business can be just as time consuming as the development of a comprehensive business plan for a start-up. Answer: True 58) With an existing business, the new owner can depend on employees to help him make money while he is learning the business. Answer: True 59) For a new owner of an existing business, physical facilities and equipment costs are very similar to what would have been spent on a startup with all new facilities and equipment. Answer: False 60) When buying a business, an entrepreneur can usually purchase equipment and fixtures at prices well below their book value. Answer: True 61) A principal advantage of buying an existing business is the purchaser's ability to rely on the previous owner's experience. Answer: True 62) An entrepreneur should never purchase a business that is losing money. Answer: False 63) A new owner of an existing business can generally introduce change and innovation almost as easily as if the company were a new business because employees and customers expect change in business practice when there is a change in ownership. Answer: False 64) Accounts receivable are rarely worth face value and should be "aged" when evaluating a company's assets. Answer: True 65) The reason an entrepreneur should conduct a self-audit of his or her skills, abilities, and interests is to help focus on those businesses that will best "fit." Answer: True 66) The business acquisition process should begin with the search for potential companies to acquire. Answer: False 67) The hidden market of companies -those companies that might be for sale and are not advertised-is one of the richest sources of top quality businesses to purchase. Answer: True 68) Financing the purchase of an existing business usually is easier than financing the startup of a new one. Answer: True 69) When evaluating a business as a potential candidate for purchase, an entrepreneur should determine the real reason the current owner wants to sell. Answer: True 70) The most common reasons that owners of small businesses give for selling are the intensity of competition and an inability to raise sufficient cash to continue to grow. Answer: False 71) Before purchasing an existing business, an entrepreneur should analyze both its existing and its potential customers. Answer: True 72) If a business has a lien against any of its assets at the time of the sale, the buyer must assume them and is financially responsible for them. Answer: True 73) A creditor's claim against an asset is referred to as lien. Answer: True 74) A prospective buyer should have an attorney thoroughly investigate all of the assets for sale in a business and their lien status before buying any business. Answer: True 75) One way for a business buyer to avoid being surprised by liens against the assets purchased is to include a clause in the sales contract stating that any liability not shown on the balance sheet at the time of the sale remains the responsibility of the seller. Answer: True 76) A due-on-sale clause is a loan contract provision that prohibits a seller from assigning a loan arrangement to the buyer and instead, the buyer is required to finance the remaining loan balance at prevailing interest rates. Answer: True 77) When a buyer purchases an existing business, she may "inherit" liability for damages and injuries caused by products the company has manufactured or sold in the past. Answer: True 78) A due-on-sale clause allows an entrepreneur buying a business to "assume" the seller's loan (usually at a lower interest rate). Answer: False 79) A due-on-sale clause requires a buyer to pay the full amount of the remaining balance on a loan or to finance the balance at prevailing interest rates. Answer: True 80) A due-on-sale clause in a loan contract prohibits the buyer of a business from assuming a seller's loan even though it may carry a lower interest rate. Answer: True 81) If the corporation, rather than the business seller, signs a restrictive covenant, the seller may not be bound by its terms. Answer: True 82) A restrictive covenant prohibits the seller of an existing business from opening a competitive business within a specific time period and geographic area of the existing one. Answer: True 83) Ralph buys a software business from Waldo in Columbus, Ohio. As part of the deal, Waldo signs a covenant not to compete by opening another software business anywhere in Ohio for the rest of his life. Such a covenant would be enforceable. Answer: False 84) A business buyer can be held liable in product liability lawsuits for unsafe products that cause damage or injuries to customers even though they were made prior to the business purchase. Answer: True 85) Potential buyers should examine income statements, balance sheets, and income tax returns for the past three to five years. Answer: True 86) Many business owners show low profits in their businesses intentionally to lower their tax obligations. Answer: True 87) Because so many business owners take money from their companies' sales without reporting it as income, a business buyer should expect to pay for undocumented, "phantom" profits when buying an existing business. Answer: False 88) The practice of taking money from sales without reporting it as income is called sliding. Answer: False 89) Some buyers may assume that if profits are adequate, there will be sufficient cash to pay all of the bills and fund an attractive salary for themselves, but that is not necessarily the case. Answer: True 90) Skimming is the act of taking money from sales without reporting it as income and it is an illegal and unethical practice. Answer: True 91) A nondisclosure document is an agreement between a business buyer and a seller that requires the buyer to maintain strict confidentiality of all records, documents, and information he receives during the parties' negotiations. Answer: True 92) A letter of intent is a nonbinding document stating that a business buyer and a seller have reached a sufficient "meeting of the minds" to justify the time and the expense of negotiating a final agreement. Answer: True 93) If the owner of an existing business refuses to disclose the company's financial records, an entrepreneur who is considering buying it should walk away from the deal. Answer: True 94) Goodwill is the difference between an established successful business and one that has yet to prove itself. Answer: True 95) Goodwill is an intangible asset that the business buyer cannot depreciate or amortize for tax purposes. Answer: False 96) When an entrepreneur purchases an existing business, he or she essentially is purchasing its future profit potential. Answer: True 97) The balance sheet technique is one of the most commonly used methods of evaluating an existing business, although it oversimplifies the valuation process because it values a company only on the basis of its net worth. Answer: True 98) Most small businesses have market values that exceed their book value. Answer: True 99) The most meaningful method of determining the value of an existing business's inventory is its book value. Answer: False 100) Business evaluation based on balance sheet methods offers one key advantage: it considers the future earning potential of the business. Answer: False 101) The adjusted balance sheet method of valuing a business changes the book value of net worth to reflect its actual market value. Answer: True 102) Neither the balance sheet method nor the adjusted balance sheet method of valuing a business considers the future earning power of the business. Answer: True 103) FIFO, LIFO, and average costing are three frequently used techniques, but the most common methods use the cost of last purchase and the replacement value of the inventory. Answer: True 104) A method of valuing a business that recognizes that a buyer is purchasing the future income (earning) potential is the earnings approach. Answer: True 105) Assessing the opportunity cost associated with the decision is not a valuable consideration when deciding to purchase a business. Answer: False 106) The rate of return used to value a business is composed of the basic, risk-free return, an inflation premium, and the risk allowance for investing in the particular business. Answer: True 107) Under the capitalized earnings approach to business valuation, firms with higher risk factors are more valuable than those with lower risk factors. Answer: False 108) The discounted future earnings approach to valuing an existing business involves estimating the company's net income for several years into the future and then discounting those future earnings back to their present value. Answer: True 109) Under the capitalized earnings approach to business valuation, firms with lower risk factors are more valuable than those with higher risk factors. Answer: True 110) Under the capitalized earnings approach to valuing an existing business, most normal-risk businesses use a rate-of-return factor ranging from 20 to 25 percent. Answer: True 111) According to the discounted future earnings technique, a dollar earned in the future is worth more than a dollar earned today. Answer: False 112) The reliability of the discounted future earnings approach to valuing a business depends on making accurate forecasts of future earnings and on choosing a realistic present value rate. Answer: True 113) The best method for determining a business's worth is the discounted future earnings approach. Answer: False 114) A business buyer should build his or her own pro forma income statement from an existing firm's accounting records and compare it to the same statement provided by the owner. Answer: True 115) A disadvantage of the market approach to valuing a business is the difficulty of finding similar companies for comparison. Answer: True 116) Next to picking the right buyer, planning the structure of a business sale is one of the most important decisions a seller can make. Answer: True 117) Owners who do not want to sell a business outright, but want to stay around for a while or surrender control gradually can use a restructuring strategy. Answer: True 118) Although selling the business outright is the cleanest exit path for an entrepreneur, it may have negative tax consequences, and it often excludes the option of "staying on" and exiting gradually. Answer: True 119) An earn-out is an exit strategy in which an entrepreneur can increase his or her payout by actively participating in the business to make sure the company hits specific performance targets. Answer: True 120) A family limited partnership allows entrepreneurs to transfer their business to their children, however, the entrepreneur will forfeit all control over the business from that point forward. Answer: False 121) To use an ESOP successfully, a company should have pre-tax profits of at least $100,000 and a payroll exceeding $500,000 a year. Answer: True 122) Briefly describe the advantages and the disadvantages of buying an existing business. Answer: Advantages of buying an existing business may include: • Increased likelihood of success • Superior location • Employees are in place • Established customer base • Equipment installed and productive capacity is known • Inventory in place and financing in place • Trade credit is established • The turnkey aspects of the business • Location established • Previous owner experience base • Easier financing • High value and it may be a bargain Disadvantages of buying an existing business may include: • Lower cash requirements • The business may be losing money • Previous owner may have created ill will • Employees inherited with the business may not be suitable • Business location may have become unsatisfactory • Equipment and facilities may be obsolete or inefficient • Change and innovation are difficult to implement • Inventory may be outdated or obsolete • Accounts receivable may be worth less than face value • Business may be overpriced 123) Briefly discuss the seven steps in acquiring a business. Answer: 1. Analyze your skills, abilities, and interests to determine what kind(s) of businesses you should consider. Think about what you expect to get out of a business, what size company you want to buy, what location you prefer, etc. 2. Develop a list of criteria to provide specific parameters against which you can evaluate potential acquisition candidates. 3. Prepare a list of potential candidates. Search not only the obvious sources, but also the hidden market of companies that may be for sale but are not advertised as such. This might include business brokers, bankers, accountants, industry contacts, networking, trade associations, etc. 4. Investigate and evaluate potential companies and work through the due diligence process. Consider the strengths and weaknesses of the candidates, their profitability, customer base, physical condition, competition, etc. 5. Explore financing options. Consider approaching the seller for financial assistance. Also, consider traditional sources. 6. Negotiate a reasonable deal with the owner and establish the terms of the deal. 7. Ensure a smooth transition. Communicate openly with employees. Consider asking the seller to serve as a consultant until the transition is complete. 124) Your friend Susan is considering purchasing an existing business. How would you explain to her what due diligence is, why it is important, and the critical areas of it? Answer: The due diligence process in analyzing and evaluating an existing business may be just as time consuming as the development of a comprehensive business plan for a start-up company. It is also just as crucial. It is important to verify all the facts and figures provided to you by the seller. It is also important in determining the potential for success. The five critical areas include: 1. Why does the owner really want to sell the business? His stated reason may not be the real one. Is he trying to hide anything from you? 2. What is the physical condition of the business? Carefully evaluate the assets to determine their value. Consider the location and physical facility's appearance. 3. What is the potential for the company's products or services? Complete a thorough market analysis to develop an accurate and realistic sales forecast. Evaluate industry trends. 4. What legal aspects should you consider? Liens, bulk transfers, contract assignments, covenants not to compete, ongoing legal liabilities, and product liability lawsuits should all be considered. 5. Is the business financially sound? Remember that any investment in a company should produce a reasonable salary for her, an attractive return on the money she invests, and enough to cover the amount she must borrow to make the purchase. Carefully review past sales, operating expenses, and profits, as well as the assets used to generate those profits. Analyze income statements, balance sheets, and income tax returns for the past three to five years, as well as cash flow documents. 125) Explain the steps in the acquisition process. Answer: The acquisition process involves these seven steps as seen in Figure 7.2: 1. Identify and approach candidate 2. Sign nondisclosure document 3. Sign letter of intent 4. Buyer's due diligence investigation 5. Draft purchase agreement 6. Close the final deal 7. Begin the transition 126) What is "goodwill"? Give an example of goodwill. Is it possible to inherit "ill will" from an existing business? Answer: Goodwill is an intangible asset and represents the difference in the value of an established business and one that has not yet built a solid reputation for itself. Goodwill is based on the company's reputation and ability to attract customers. Expect student's to provide an example of goodwill based on this definition. Yes, it is possible to inherit ill will. Customers are not always aware when a business changes hands, nor are previous poor business practices easily forgiven. 127) Is there a "best method" for determining the value of a business? Why? How should a prospective buyer go about establishing the value of a business? Answer: No, there is no "best" business valuation method. Valuation is partly an art and partly a science and is based on the situation, the expectations of the buyer, and the desires of the seller. Establishing a reasonable price for a privately held business is difficult due to a wide variety of factors that influence its value: The nature of the business itself, its position in the market or industry, the outlook for the market or industry, the company's financial status, its earning capacity, goodwill, any intangible assets it may own (such as patents, trademarks, copyrights), the value of other similar publicly held companies, and many other factors. The wisest approach is to compute a company's value using several techniques and then to choose the one that makes the most sense. 128) Briefly summarize the mechanics of each of the methods for valuing an existing business: balance sheet technique, adjusted balance sheet technique, excess earnings method, capitalized earnings method, discounted future earnings method, and the market approach. Answer: • Balance sheet technique: Book value of net worth = Total assets - Total liabilities • Adjusted balance sheet technique: Net worth adjusted to reflect market value • Earnings approach: Net worth + Intangible value • Capitalized earnings: Net income - Owner's salary divided by ROR similar risk investment • Discounted future earnings: Weighted average of 5 years use optimistic + 4 (most likely) + pessimistic divided by 6 • Market approach: Uses price/earnings ratios of similar businesses-once an average P/E ratio is found from as many businesses as possible-it is then multiplied by the private company's estimated earnings 129) Explain the strategies business owners can use to exit their businesses. Cite a specific advantage of each. Answer: • Straight business sale - turning over control immediately • Sell a controlling interest - facilitating a gradual transition to new owners • Forming a family limited partnership - able to keep control while transitioning ownership to family members • Restructure company - replacing the existing business while taking on new investors • Sell to an International Buyer - appealing to a broader pool of potential buyers • Use a two-step method sale - security of a sales contract with a planned transition from leadership • Establish an employee stock option plan (ESOP) - transitioning ownership to employees 130) Explain what the buyer and the seller of a business are each looking for in the negotiation process. Answer: The seller is looking to: • get the highest price possible for the business. • sever all responsibility for the company's liabilities • avoid unreasonable contract terms that might limit future opportunities • maximize the cash from the deal • minimize the tax burden from the sale • make sure the buyer will be able to make all future payments The buyer seeks to: • get the business at the lowest possible price • negotiate favorable payment terms, preferably over time. • get assurances of buying the business desired • avoid putting the seller in a position to open a competing business • minimize the amount of cash paid up front 131) Identify five questions that influence the negotiation process between a business buyer and a seller. Answer: • How strong is the seller's desire to sell? • Will the seller help with financing? • What terms does the buyer suggest? Which terms are most important to him? • Is it urgent that the seller close the deal quickly? • What deal structure best suits your needs? • What are the objectives for both parties? • Will the seller sign a restrictive covenant? • Is the seller willing to stay on with the company for a time as a consultant? • What general economic conditions exist in the industry at the time of the sale? Mini-Case 7-1: What's It Worth? Lauren Holcombe has wanted to open her own clothing store since she was in high school. Her career interest and dynamic personality enabled her to get a part-time job at a small women's clothing shop in her hometown after school. When Lauren enrolled in the state university to major in retail management, she got a part-time job in the ladies' clothing section of a prestigious department store in the city. Lauren's supervisor was impressed with her business acumen and her congenial personality. "Lauren is one of the best workers we've ever had in this department. She's very bright, quite attractive, and very outgoing. Lauren is eager to learn anything she can about the business; she's always asking questions!" During Lauren's senior year in college, her Aunt Bessie died and left her an inheritance totaling nearly $300,000. "I'll miss dear old Aunt Bessie, but have I got plans for my inheritance! Now, I'll be able to run my own clothing store just like I've always dreamed." Lauren immediately began planning to launch her business venture, but progress was slow. During a trip to her hometown over the Christmas break, Lauren discovered that a well-established ladies' clothing shop was up for sale. The shop was well known and quite successful, but the owner, Kathleen Todd, was quitting to retire in Tahiti. Lauren contacted Ms. Todd to discuss the sale of the business. Ms. Todd hired a company to conduct an independent appraisal of the business, which concluded that tangible assets were $230,000 and assumable liabilities were $18,000. The appraisal estimated net profit for the next year to be $73,000 before deducting any managerial salaries. Lauren expects to draw $20,000 in salary since she believes this is the salary she could expect when working for someone else. Lauren estimates that a reasonable rate of return on an investment of similar risk is 25 percent. Ms. Todd has set a value of $85,000 for intangibles such as goodwill, and is asking $297,000 for the business. 132) Using the capitalized earnings method, calculate the value of the business. Answer: 133) Based on the excess earnings approach, what do you expect the business to be worth? Answer: Tangible net worth ($230,000 - $18,000) $212,000 134) Given the following earnings estimates, compute the value of the business using the discounted future earnings technique. Answer: Estimate of cash flow stream beyond 6 years: 79,167 × 1/25% = $316,668 $316,688 × .2621 = $83,013 Total Value = $284,433 135) Is Ms. Todd's asking price reasonable? How much should Lauren offer Ms. Todd at the beginning of the negotiation process? Answer: P/E Ratios 3.98 Average = 11.18/3 = 3.37 Value = $73,800 × 3.73 = $275,274 Ms. Todd's asking price of $297,000 seems to be high. Lauren should offer Ms. Todd a price below the $297,000 to allow some room for bargaining. Mini-Case 7-2: Building Supply You have recently decided to purchase a local building supply store. The business has passed the initial screening test and you are ready to begin discussing prices with the present owner. An independent appraisal has calculated the tangible net worth of the business to be $175,000. You determine the rate of return on an investment of similar risk to be 25 percent. You plan to draw a salary of $19,000. Your CPA estimates the net profit of the business (before your salary is deducted) to be $75,000. The present owner has selected a goodwill value of $65,000, and is asking $240,000 for the business. 136) Based on the balance sheet method, what do you calculate the business to be worth? Answer: Value = $175,000 137) Based on the capitalized earnings method, what do you calculate the business to be worth? Answer: 138) Based on the excess earnings approach, what do you calculate the business to be worth? Answer: Adjustable tangible net worth $175,000 *Students may use a years-of-profit figure of 3 or 4 years 139) You have found two similar businesses whose stock is publicly traded on the OTC market. Their price-earnings ratios are 3.19 and 2.91. Using these two firms as a benchmark, what do you estimate the business to be worth using the market approach? Answer: Average P/E ratio = 3.05 Value = $75,000 × 3.05 = $228,750 140) Given the following earnings estimates, compute the value of the business. Answer: Estimate of cash flow stream beyond 6 years: $88,667 × 1/.25 = $354,667 $354,667 × .2621 = $92,974 Total value = $213,539 + 92,974 = $306,513 141) How much would you offer the present owner at the beginning of the negotiation process? Answer: Students' responses will be different, but their initial offer price should be below the asking price of $240,000. At the beginning of the negotiation process, I would offer an amount slightly below my maximum budget or valuation to leave room for negotiation. This initial offer should be reasonable enough to show serious interest but also flexible enough to accommodate counteroffers and reach a mutually beneficial agreement. It's important to base the offer on thorough market research and the current value of the business. Chapter 8 Building a Powerful Marketing Plan 1) ________ is the process of creating and delivering desired goods and services to customers and involves all of the activities associated with winning and retaining loyal customers. A) Marketing B) Personal selling C) Promotion D) Customer service Answer: A 2) For an entrepreneur, a business plan: A) is of relatively little importance due to the dynamic nature of the marketplace. B) is synonymous with the marketing plan. C) tends to stress how the entrepreneur will operate rather than detailing what he/she wants to accomplish. D) contains both a marketing plan and a financial plan. Answer: D 3) The focus of a small company's marketing plan should be on: A) preparing accurate financial forecasts. B) the customer. C) describing how its products or services are superior to those of competitors. D) the competition. Answer: B 4) Small businesses can compete with larger rivals with bigger budgets by employing unconventional, low-cost creative techniques known as: A) market research. B) astonishing customer service. C) guerrilla marketing strategies. D) psychographics. Answer: C 5) Warren Cassell, owner of Just Books, a very small book store, makes special orders for customers at no extra charge, provides free gift-wrapping, conducts out-of-print book searches, offers autographed copies of books, hosts "Meet the Author" breakfasts, and publishes a newsletter for book lovers. By offering his customers lots of "extras" they do not get at larger bookstores, Cassell has won a growing base of loyal customers. Cassell is relying on which marketing strategy? A) Demographic marketing B) Transaction selling C) Individualized marketing D) Guerrilla marketing Answer: D 6) Guerilla marketing is a marketing approach that takes an unconventional, low-cost and creative approach to marketing that can give ________ a competitive edge over ________ competitors. A) small companies; larger B) larger companies; smaller C) small companies; entrepreneurial D) entrepreneurs; small Answer: A 7) Which of the following is not one of the objectives a guerrilla marketing plan should accomplish? A) Determine customer needs and wants through market research. B) Determine how the company will be able to serve all customers. C) Analyze the firm's competitive advantages and build a marketing strategy around them. D) Create a marketing mix that meets customer needs and wants. Answer: B 8) The specific group of customers at whom a company aims its good or services is referred to as a: A) market segmentation. B) guerrilla marketing. C) niche marketing. D) target market. Answer: D 9) Successful marketing requires a business owner to: A) understand target customers' needs, demands, and wants. B) offer customers products and services that will satisfy their needs, demands, and wants. C) provide customers with service, convenience, and value so that they will return. D) All of the above Answer: D 10) The foundation of every business is: A) its products and services. B) satisfying the customer through a customer-driven marketing strategy. C) doing whatever it takes to earn a profit. D) operating in a socially responsible manner. Answer: B 11) Which of the following statements concerning a company's target market is false? A) Marketing experts contend that the greatest marketing mistake small companies make is failing to clearly define the target market to be served. B) A "shotgun approach" to marketing-trying to appeal to everyone rather than to only a small market segment-is the most effective way to compete with large companies and their bigger marketing budgets. C) Small companies are usually better suited to pinpointing target markets that their larger rivals overlook or consider too small to be attractive. D) Most successful small businesses have well-defined portraits of the customers they are trying to attract. Answer: B 12) One of the greatest marketing mistakes small businesses make is: A) failing to identify the target market. B) spending too little on advertising. C) under-pricing their products and services. D) spending too little on quality improvement. Answer: A 13) Studies of shifting patterns in age, income, education, race, and other population characteristics are the subject of: A) psychographics. B) demographics. C) sociographics. D) paleontology. Answer: B 14) Tracking ________ patterns can enable entrepreneurs to adjust their strategies accordingly to better position them to take advantage of the opportunities these trends may create. A) population B) demographic C) weather D) traffic Answer: B 15) A common mistake entrepreneurs make is: A) assuming that a market exists for their product or service. B) taking too much time to conduct planning and research. C) conducting informal research. D) conducting online research, which is too impersonal and does not yield accurate information. Answer: A 16) Which of the following statements concerning marketing research is false? A) Market research is the vehicle for gathering the information that serves as the foundation for the company's marketing plan, helps avoid costly marketing mistakes, and can uncover unmet customer needs the business can serve. B) Market research involves systematically collecting, analyzing, and interpreting data pertaining to the small company's market, customers, and competitors. C) Small companies are at a distinct disadvantage compared to larger ones when conducting market research since it is so expensive. D) Small businesses cannot afford to miss their target markets and market research can help them focus their efforts. Answer: C 17) Which of the following techniques does marketing consultant Faith Popcorn recommend to small business owners interested in tracking market trends? A) Hire a top-10 market research firm to track trends for you. B) Watch what the large corporations in your industry are doing. C) Read as many current publications as possible. D) Talk with two to three people at random each week to hear what they are buying and why. Answer: C 18) Entrepreneurs can find the right match based on trends, their products or services, and the appropriate target markets through: A) expecting "more of the same" for the future. B) looking back and not forward. C) following their intuition. D) market research. Answer: D 19) Your friend has decided to conduct market research to assist in making informed decisions for his small business. What should you recommend as the first step in the market research process? A) Collect data B) Define the objective C) Design the research D) Determine the relevant information Answer: B 20) An individualized (one-to-one) marketing campaign requires business owners to: A) collect information on their customers, linking their identities to their transactions. B) calculate the long-term value of their customers so they know which ones are most desirable and most profitable. C) practice "just-in-time marketing" by knowing what their customers' buying cycle is and time their marketing efforts to coincide with it. D) All of the above Answer: D 21) Which of the following is not a primary market research source? A) Customer surveys B) Focus groups C) Daily transactions D) All of the above are sources of primary market research. Answer: D 22) Which of the following is not a secondary source of market research data? A) Census data B) Trade publications C) Focus groups D) Magazines Answer: C 23) A process in which computer software that uses statistical analysis, database technology, and artificial intelligence finds hidden patterns, trends, and connections in data so that business owners can make better marketing decisions and predictions about customers' behavior is know as: A) guerilla marketing. B) data mining. C) individualized marketing. D) total quality management. Answer: B 24) One "natural" advantage small businesses have over large businesses, which can be a significant competitive advantage, is: A) by building a community with customers and connecting with them on an emotional level. B) their ability to conduct market research. C) their lower costs. D) their ability to serve many highly diverse target markets. Answer: A 25) Which of the following guerrilla marketing tactic(s) allow a small company to utilize relationship marketing successfully? A) Keep in close contact with customers with "thank yous" and other personal communication techniques. B) Organize and sponsor a service- or community-oriented project. C) Launch a loyalty or frequent buyer program. D) All of the above Answer: D 26) The marketing approach that is most effective today for a small business is: A) mass marketing. B) market segmentation. C) niche marketing. D) individualized (one-to-one) marketing. Answer: C 27) Which of the following was not identified as one of the guerrilla marketing principles in your text? A) Strive to be like everyone else so that your company "fits in." B) Create an identity for your business. C) Connect with customers on an emotional level. D) Do not just sell-entertain. Answer: A 28) A combination of news covered by the media that boosts sales without having to pay is best described by the term: A) guerilla marketing B) entertailing C) public relations. D) data mining Answer: C 29) A marketing concept designed to draw customers into a store by creating a kaleidoscope of sights, sounds, smells, and activities, all designed to entertain-and of course, sell, is: A) entertailing. B) entertaining. C) retailing. D) branding. Answer: A 30) Some of the most successful companies interact with their customers regularly, intentionally, and purposefully to create meaningful and lasting: A) relationships. B) sales. C) obligations. D) memories. Answer: A 31) A key customer benefit of a product or service that sets it apart from the competition answers the critical questions every customer asks: "What's in it for me?" and is known as: A) its brand identity. B) the unique selling proposition (USP). C) total quality management (TQM). D) branding. Answer: B 32) The unique selling proposition (USP) focuses on: A) a feature that is unlike others found in competing products that answers the question: What is different? B) a unique customer benefit that answers the question: What's it in for me? C) a premier priced product that answers the question: What product offers the highest quality? D) emulating the most successful products in the industry. Answer: B 33) A ________ is a company's "face" in the marketplace and communicates a key message to the target market. A) blog B) logo C) unique selling proposition (USP) D) brand Answer: D 34) ________ is the process of communicating a company's unique selling proposition to its target customers in a consistent and integrated manner. A) Branding B) Selling C) Entertailing D) Marketing Answer: A 35) Examples of ________ include a presence on Facebook, LinkedIn and Twitter. A) Web sites B) blogging C) social media marketing D) online advertising Answer: C 36) ________ can be an effective part of a guerrilla marketing strategy, enabling an entrepreneur to economically communicate with large numbers of customers. A) Frequent emails B) Brand awareness C) Direct mail D) Blogging Answer: D 37) An effective approach to creating effective online videos is to take an ________ approach to present information in an entertaining way. A) "entertainment" B) "edutainment" C) "entertailing" D) "entrepreneurial" Answer: B 38) Most customers never complain to the business; in fact, for every complaint that a company receives, there are ________ other complaints that go unspoken. A) 2 B) 7 C) 10 D) 17 Answer: D 39) How can a company achieve stellar customer service and satisfaction? A) Listen to customers and define superior service. B) Set standards and measure performance. C) Hire the right employees and treat them with respect. D) All the above Answer: D 40) The majority of customers who stop patronizing a particular store do so because: A) its prices are too high. B) its quality is too low. C) an indifferent employee treated them poorly. D) it failed to advertise enough. Answer: C 41) A recent survey reports that ________ percent of customers say that they will return to a business after a negative customer service experience if the company offers an apology, a discount, or proof that its customer service will improve. A) 32 B) 52 C) 72 D) 92 Answer: D 42) A study by the National Science Foundation concluded that when pay is linked to performance, employees' motivation and productivity climb by as much as ________ percent. A) 36 B) 56 C) 63 D) 75 Answer: C 43) Research shows that repeat customers spend ________ percent more than new customers. A) 5 B) 52 C) 67 D) 97 Answer: C 44) In your training program, you stress to all new employees the importance of customer satisfaction, citing the fact that ________ of the average company's sales come from present customers. A) a small amount B) about one-half C) a majority D) an undetermined percentage Answer: C 45) A global customer loyalty consulting firm reports that a company must land ________ to ________ new customers to offset the impact of one lost loyal customer. A) 2; 12 B) 6: 18 C) 12: 20 D) 20; 30 Answer: C 46) Companies with a customer focus typically ask their customers all but which of the following questions? A) What are we doing right? B) What have we done wrong? C) What can we do in the future? D) What have our competitors done wrong? Answer: D 47) The philosophy of producing a high-quality product or service and achieving quality in every aspect of the business and its relationship with the customer, with a focus on continuous improvement in the quality delivered to customers is. A) total quality management, or TQM. B) time compression management, or TCM. C) guerilla marketing. D) customer experience management, or CEM. Answer: A 48) The process of systematically creating the optimum experience for customers every time they interact with the company is: A) total quality management (TQM). B) time compression management (TCM). C) customer experience management (CEM). D) guerilla marketing. Answer: C 49) Which of the following is not a suggestion of a means of focusing on the customer? A) Seeing the customer's point of view. B) Get total commitment to superior customer service from everyone in the organization. C) Carefully select and train everyone who will deal with the customer. D) Actually, all of the above are suggested as a means of focusing on the customer. Answer: A 50) Which of the following is a way to improve customer service? A) Encourage customers to complain. B) Ask employees for feedback on improving customer service. C) Develop a service theme that communicates the importance of customer service in the company. D) All of the above Answer: D 51) The total quality management (TQM) concept: A) strives to achieve quality not just in the product or service itself, but in every aspect of the business and its relationship with the customer. B) relies on quality inspections through an army of quality control inspectors. C) focuses on reducing the time it takes to fulfill a customer's request for a product. D) None of the above Answer: A 52) Companies with strong reputations for quality follow certain guidelines, such as: A) establishing long-term relationships with suppliers. B) fostering individual effort and pride of workmanship. C) securing employees' commitment to the quality philosophy; it is not important to secure top management's full support, as the employees are the ones who work more closely with the products and the customers. D) All of the above Answer: A 53) ________ pay the bills: without them, you have no business. A) Accountants B) Employers C) Employees D) Customers Answer: D 54) Location, delivery services, effective use of easy-to-use technology and multiple communication options are examples of: A) convenience. B) customer service. C) blogging. D) social media marketing. Answer: A 55) A marketing strategy that relies on three principles to speed products to market, shorten customer response times in manufacturing, and deliver and reduce the administrative time required to fill an order is: A) total quality management (TQM). B) time compression management (TCM). C) customer experience management (CEM). D) guerilla marketing. Answer: B 56) ________ is the key to future success and small companies can detect and act on new opportunities faster than large companies. A) Innovation B) Speed C) Convenience D) Technology Answer: A 57) What can a company do to achieve stellar customer service and satisfaction? A) Listen to customers with the help of suggestion boxes, focus groups, surveys, and other tools. B) Define what "superior service" means so that customers and employees know exactly what to expect and what to provide. C) Hire friendly, courteous sales and service representatives. D) All of the above Answer: D 58) The key ingredient in the superior customer service equation is: A) state-of-the-art equipment. B) standards and measurements of customer service. C) the support of managers. D) friendly, courteous, well-trained people delivering customer service. Answer: D 59) Time compression management (TCM) involves: A) speeding new products to market. B) reducing the administrative time required to fill an order. C) shortening customer response time in manufacturing and delivery. D) All of the above Answer: D 60) Which of the following is not a suggestion for using time compression management (TCM) to turn speed into a competitive advantage? A) Instill speed in the company's culture. B) Use technology to find shortcuts wherever possible. C) Pay workers more if they do their jobs the same way- only faster. D) Set aggressive goals for time reduction and stick to them. Answer: C 61) To attract potential customers, a ________ can serve multiple business purposes, including keeping customers updated on new products, enhancing customer service, and promoting the company. A) newspaper advertisement. B) brochure. C) blog D) radio promotion Answer: C 62) The Internet offers entrepreneurs tools to provide existing and potential customers with meaningful information: A) in a passive, one-directional manner. B) for those with advanced high-tech skills. C) in a complex and difficult-to-manage method. D) in an interactive rather than passive setting. Answer: D 63) In addition to treating employees with respect, smart entrepreneurs see customer service as an investment that builds long-term value for their companies through: A) listening to customers and providing superior service. B) setting standards and measuring performance. C) examining the company's service cycle and empowering employees. D) All the above build long-term customer service value. Answer: D 64) Because they lack the size and financial resources of their larger competitors, small companies are powerless when it comes to developing effective marketing strategies. Answer: False 65) Too many marketing plans describe in great detail what an entrepreneur intends to accomplish and pay little, if any, attention to practical and affordable strategies to achieve those targets. Answer: True 66) -unconventional, low-cost, creative techniques-small companies can get as much "bang" for their marketing bucks as their larger rivals. Answer: True 67) The specific group of customers at whom a company aims its goods and services is its target market. Answer: True 68) A guerrilla marketing plan should identify a small company's target customers and describe how the business will attract and keep them. Answer: True 69) A "shotgun approach" to marketing is the small business's secret to competing successfully with larger rivals and their bigger marketing budgets. Answer: False 70) An effective marketing program depends on a clear, concise definition of the firm's target market. Answer: True 71) A critical marketing step is to clearly define their target market. Answer: True 72) The company's target customer should permeate the entire business, from the merchandise purchased, in the layout and decor of the store, and on their Web site. Answer: True 73) The increasing diversity of our population is creating a marketing "threat" to small businesses because they cannot profitably serve small niches. Answer: False 74) Small companies that spot demographic trends and act on them early can gain a distinctive edge in the market. Answer: True 75) Demographics is the study of important population characteristics such as age, income, education, race, and others. Answer: True 76) Market research is a valuable tool for defining the firm's target market, its needs, and its potential profitability. Answer: True 77) Watching the top ten TV shows, seeing the top ten movies, or listening to her children are all ways a small business owner could conduct market research. Answer: True 78) To be useful, market research must be structured, formal, and highly sophisticated. Answer: False 79) Primary research data is less time consuming and less costly to gather than secondary research data. Answer: False 80) Secondary research data is less time consuming and less costly to gather than primary research data. Answer: True 81) Market research requires a business owner to define the objective, collect data, analyze and interpret that data, and draw conclusions and act. Answer: True 82) Small entrepreneurial companies are at a definite disadvantage compared to larger ones when it comes to conducting market research since it is so expensive. Answer: False 83) A company has a competitive edge when customers perceive that its products or services are superior to those of competitors. Answer: True 84) Branding is communicating a company's unique selling proposition to its target customers in a consistent and integrated manner. Answer: True 85) Because about 20 percent of a typical company's customers account for about 80 percent of its sales, a business should focus its resources on keeping its best customers rather than trying to chase "fair weather" customers who will defect to any better deal that comes along. Answer: True 86) Customer experience management (CEM) is the process of systematically creating the optimum experience for their customers every time they interact with the company. Answer: True 87) Most dissatisfied customers complain about rude or discourteous service to the owner or the manager. Answer: False 88) The best way to find out what customers really want and value is to ask them. Answer: True 89) Giving customers a chance to complain about a problem usually is fruitless; once a business makes a customer angry, he typically will not buy from that company again under any circumstances. Answer: False 90) If given the chance to complain, 95 percent of customers will buy again when a business handles their complaints promptly and effectively. Answer: True 91) Truly customer-oriented companies seek to go beyond customer satisfaction, striving for superior customer service. Answer: True 92) When an employee in a business treats a customer poorly, that customer usually does not complain; however, she does tell her "horror story" about that business to more than 10 other people. Answer: True 93) Since front-line service workers are not able to predict the causes of customer complaints, managers must be the ones to identify potential customer service problems. Answer: False 94) One disadvantage of total quality management (TQM) is that its principles apply only to manufacturers. Answer: False 95) If employees are committed to quality, management's commitment becomes unimportant. Answer: False 96) It takes much less money and time to keep existing customers than it does to attract new ones. Answer: True 97) Because a majority of the average company's sales come from present customers, few can afford to alienate any customers. Answer: True 98) Providing low prices is the most effective way for a small business to attract and maintain a growing customer base. Answer: False 99) Total quality management (TQM) works best when it becomes an integral part of a small company's strategy and focuses on continuous improvement in the quality the company delivers to customers. Answer: True 100) The best way for a small business to ensure quality products is to use quality inspections. Answer: False 101) Studies have found that customers value convenience and easy access to goods and services. Answer: True 102) Adding innovative products and services is important to a companies' success and small entrepreneurial companies may be able to respond faster than larger organizations. Answer: True 103) Most businesses are finding technology provides efficiency and speed in providing a wide array of services to their customers. Answer: True 104) The Internet allows creative small business owners to make their companies look as big as their larger rivals. Answer: True 105) For many small businesses, nonprice competition-focusing on factors other than price-is a more effective strategy than trying to beat larger competitors in a price war. Answer: True 106) Why is it important for small business owners to define clearly their target market(s) as part of their marketing strategies? Answer: It is important that small businesses define the specific group of customers at whom the company aims its goods or services. Many companies try a "shotgun approach" to marketing, where the company fires marketing blasts at every customer they see, hoping to capture some of them. Unfortunately, most small businesses do not have the deep pockets to continue this type of marketing approach. Small businesses must be more focused on the types of customers they want to target. Small firms are ideally suited to reaching market segments that their larger rivals overlook or consider too small to be profitable. A clear, concise target market allows a small business to be profitable. 107) Why is it important for small business owners to track demographic trends? How can small companies become effective trend trackers? Answer: Shifting patterns in age, income, education, race, and other population characteristics (demographics) will have a major impact on companies, their customers, and the way they do business with those customers. Small businesses can become effective trend trackers by staying close to their customer base and staying abreast of changes in their environment through various information sources. According to Faith Popcorn, possible sources of market information include current publications, top ten shows, top ten movies, and customers. 108) Your friend Maria is experiencing declining sales in the business she has owned and successfully operated for three years. She has asked for your guidance in determining the course(s) of action she should take. Your recommendation to her is to undertake a marketing research project. Briefly outline the steps involved in market research. She is concerned that market research will be too expensive and sophisticated for a small business such as hers. Is this true? Explain. Answer: The steps in marketing research include: • Define the objective-most crucial step; should be clear and concise; do not confuse a symptom with the true problem. • Collect the data-gather secondary research and, if necessary, conduct primary research on your customers. • Analyze and interpret the data-use judgment and common sense to determine what the facts you have uncovered actually mean. • Draw conclusions and act-decide how to use the information in the business; what is the appropriate action to take? No, market research does not have to be expensive and sophisticated to be valuable. For example, for most business owners, information is often floating around. It can often be just a matter of asking customers and suppliers, and collecting and organizing the data to make it valuable. This valuable information is often available for most small businesses. Not only is this type of information convenient, but the cost of obtaining it can be low as well. 109) Describe what is meant by guerrilla marketing. What objectives should a guerrilla marketing plan accomplish? List at least five guerrilla marketing tactics your small business might be able to use successfully. Answer: Guerrilla marketing involves using unconventional, low-cost, creative techniques in order to get more out of every marketing dollar. The guerrilla marketing plan should serve to: 1. Pinpoint the specific target market the small company will serve. 2. Determine customer needs and wants through market research. 3. Analyze the firm's competitive advantages and build a guerrilla marketing strategy around them. 4. Help create a marketing mix that meets customer needs and wants. Examples of guerrilla marketing tactics include: • Help organize and sponsor a service- or community-oriented project. • Always be on the lookout for new niches to enter. Try to develop multiple niches. • Offer to speak about your business, industry, product, or service to local organizations. • Ask current customers for referrals. • Offer customers gift certificates. • Offer samples of your product to give to customers. • Offer a 100 percent, money-back, no-hassles guarantee. • Create a frequent-buyer program. • Find unique ways to thank customers for their business–a note, a lunch, a gift basket, etc. • Accept competitors' coupons. Refer to Page 283, Table 8.2 for a complete list of guerrilla marketing tactics. 110) Describe why a small business might gain a competitive edge over its rivals by using a focus on the customer, devotion to quality, paying attention to convenience, concentration on innovation, dedication to service, and emphasis on speed. Answer: • Focusing on the customer develops and allows the small business to retain a close relationship, which fosters repeat purchases and positive referrals. • Devotion to quality focuses on continuous improvement fostering trust and customer loyalty. • Paying attention to convenience makes access easy to products and services, increasing sales. • Concentration on innovation allows the company to stay abreast of new trends and opportunities that allows them to detect and act on new opportunities faster. • Dedication to service can make customer astonishment a reality. • Emphasis on speed can satisfy the time pressures of customers. 111) Explain the concept of total quality management. How is it different from the quality inspection of a final product just before being packaged? Answer: TQM is a strategic objective-an integral part of a company's strategy and culture. Quality not just in the product or service, but every aspect of the business and its relationship with the customer and continuous improvement in the quality delivered to the customer. Total quality management is a philosophy of continuous improvement where cross-functional teams and employees contribute individually to product quality along the manufacturing process. It is different from the typical quality inspection in that quality is a component all along the way, not just at the time a product is inspected before packaging or shipment. 112) Why is it important for a small business to keep existing customers satisfied? How can a company achieve such customer satisfaction? Answer: It is important to retain existing customers because a majority of the average company's sales come from its present customers. Few businesses can afford to alienate its best shoppers. Customer satisfaction can be achieved by giving your best customers incentives to return, encouraging them to complain, including employees in the feedback loop, calling customers by name, getting total commitment to superior customer service astonishment, carefully training everyone who comes into contact with customers, making your products easy to buy and access. 113) What marketing potential does the Internet offer small business owners? Answer: The Internet offers a vast network connecting the world's customers and information sources. With its ability to display colorful graphics, sound, animation, and video as well as text, the Web allows small businesses to equal or even surpass their larger rival's Web presence. It offers small businesses a worldwide opportunity for marketing and distribution system access. Blogs, social networks and a variety of affordable online tools allow entrepreneurs to extend their marketing reach. Mini-Case 8-1: Customers: Key to Success Lloyd Dixon has owned and operated a small dress shop for the past three years. Each fashion season, Lloyd attends the apparel shows and he is always very impressed by the glamour and the hundreds of different manufacturers, all with the merchandise that they say will be this season's biggest sellers. Lloyd caters to an older market and baby boomers. He hopes to tap into the upscale market. After his first year of operation, Lloyd recognized that some of his merchandise was not selling. The "inventory close-out sale" did rescue his investment in this merchandise but did not make him a profit or contribute much to his overhead. Lloyd knew that it was not reasonable to expect to sell everything you bought, but he was not sure exactly how much of his inventory was comprised of slow movers. Lloyd believed that when he went into business he knew what women wanted in dresses. He had always prided himself on having good taste. When he had the opportunity to open this store, he was confident that he could choose merchandise that would be well received. In the first three years of operations, sales have not met Lloyd's expectations. 114) How could Lloyd realistically create a competitive advantage by giving customer service a focus in his business? Answer: Lloyd should consider asking his customers questions such as: • What are we doing right? • How can we do that even better? • What have we done wrong? • What can we do in the future? Lloyd should ensure that the customers believe that he values their business. He should give his best customers incentives to return, encourage customers to complain, include employees in the feedback loop, call customers by name, get total commitment to superior customer service astonishment, carefully train everyone who comes into contact with customers, and make his products easy to buy and access. 115) Faith Popcorn offers several ways Lloyd Dixon could collect information about his customers and competitors. Explain at least five of those ways. Answer: • Lloyd should read current magazines, especially women's fashion magazines and industry trade publications to get a sense of what fashions, colors, styles, and designs are becoming popular-and which ones are not. • He should also watch the top ten TV shows and the top ten movies to see which styles they might inspire. • Lloyd should also spend time talking to his current customers and notice how they dress (perhaps even taking photos of their garments). • In addition, Lloyd could use census data and other sources such as the "Survey of Buying Power" to gather demographic statistics on his customers. To collect more specific data, he could conduct an in-depth survey of present customers using current sales records to compile a mailing list. Case 8-2: TQM and TV in Omaha Nobody who knew Marvin Tollison ever met a man who liked television better. In the Navy, he had the opportunity to learn a great deal about his trade. When he finished his tour of duty, Marvin opened a television repair shop back home in Omaha, Nebraska. Over the years the quality of his workmanship, his fair prices, and his general overall good nature made his business flourish. Marvin had a way of finding men and women like himself when expansion was needed. Over 17 years, the business had grown from a one-man shop operating in his garage to a 38-employee television repair staff that was dispatched to customers by two-way truck radio. Over the years, the time between a customer's call and the television repairman getting to the home had increased to about two days because the repairmen were taking longer with each call. Call-backs, having to "re-repair" equipment, are up significantly. Marvin wasn't sure, but he thought some of his customers were going elsewhere for service. 116) Can Marvin use TQM to develop a competitive edge? If so, what would you recommend he do? Answer: Yes, in fact, if Marvin does not improve the quality of his company's repair service soon, he will soon be out of business. Marvin should start tracking key measures of quality in his company- repair time, number of "re-repairs," number of complaints, and others-listen to them, to learn what they say about quality problems. He should also find the answers to these questions: • Are they too rushed to provide good service? • Do they lack proper tools and equipment? • Do they need additional training? Marvin should create a system of rewards (financial or otherwise) for employees who perform quality work. He should track manner of quality and post results for all to see. Above all, he should avoid the tendency to try to identify employees who are causing the quality problems just so he can punish them. Marvin should empower his employees and involve them in designing a new and improved system for improving the company's quality. 117) How can Marvin develop "stellar" customer service? Answer: Once the company's quality improves, Marvin should be able to offer additional services that his customers would appreciate, such as guarantees, overnight repairs, pick-up and delivery services, and a host of other "value-added" services. Test Bank for Essentials of Entrepreneurship and Small Business Management Norman M. Scarborough 9780132666794, 9780273787129, 9780134741086, 9780136109594, 9780133930382
Download
Close
Close
