CBB CBB Business Operations & Profitability Assessment 3

Question 1

What is the purpose of an 'asset vs. stock sale' analysis in a business transaction?

Accepted Answer

To evaluate the tax and liability implications of how the business ownership is transferred

Answer

Asset versus stock sale structure has significant tax and liability implications for both buyer and seller that affect the deal's net value.

Question 2

What is 'goodwill' in a business sale context?

Accepted Answer

The intangible value of brand reputation, customer relationships, and business processes above net asset value

Answer

Goodwill represents intangible assets like brand recognition and loyal customers that contribute to earnings beyond the value of hard assets.

Question 3

A business broker notices a business has high revenue but thin net profit margins. What might this indicate?

Accepted Answer

The business may have high overhead costs, inefficient operations, or excessive owner compensation

Answer

Thin profit margins relative to revenue suggest operational inefficiencies, excessive costs, or discretionary spending that should be investigated.

Question 4

What is 'DSCR' (Debt Service Coverage Ratio) and why is it important in a business sale?

Accepted Answer

A ratio showing whether business earnings sufficiently cover debt payments; critical for buyer financing approval

Answer

DSCR tells lenders whether a business generates enough cash flow to cover loan payments, directly affecting a buyer's ability to obtain financing.

Question 5

Which of the following would be considered a non-recurring expense when recasting financials?

Accepted Answer

A one-time legal settlement paid during the reporting year

Answer

Non-recurring expenses like legal settlements are added back to earnings because they will not repeat under new ownership.

(CBB) Certified Business Brokers Practice Test