CBB Business Operations & Profitability Assessment Flashcards

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

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

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

What is 'goodwill' in a business sale context?

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

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

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

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

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

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

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

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

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

Answer: A one-time legal settlement paid during the reporting year

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

Why might a business with declining revenue still sell at a strong price?

Answer: Because the business may have valuable assets, IP, customer lists, or strategic value to a specific buyer

Strategic buyers may value a business for its assets, market position, or synergies rather than solely its current earnings trajectory.