CBB Exit Planning & Seller Preparation 3

Question 1

What is an 'earnout' provision in a business sale agreement?

Accepted Answer

A portion of the purchase price paid to the seller based on the business achieving future performance targets

Answer

An earnout ties a portion of the total purchase price to the business's post-closing performance, bridging valuation gaps when buyers and sellers disagree on projected future earnings.

Question 2

How long is a seller typically expected to remain with the business in a transition capacity after closing?

Accepted Answer

6 months to 2 years to ensure full knowledge transfer

Answer

Most business sales include a 6-month to 2-year transition period where the seller helps the buyer understand operations, customer relationships, supplier terms, and institutional knowledge.

Question 3

What is 'goodwill' in the context of a business sale valuation?

Accepted Answer

The intangible value above net tangible assets, including reputation, brand, and customer relationships

Answer

Goodwill represents intangible assets — brand reputation, customer loyalty, trade secrets, and established relationships — that contribute to a business's value beyond its physical assets.

Question 4

Regarding asset sales versus stock sales, which statement is MOST accurate from a tax perspective?

Accepted Answer

Sellers generally prefer stock sales because proceeds may qualify for lower long-term capital gains tax rates

Answer

Sellers typically prefer stock sales because proceeds are often taxed at lower long-term capital gains rates, while buyers prefer asset sales to receive stepped-up basis and avoid inheriting unknown liabilities.

Question 5

Which is a key benefit of seller financing in a business sale?

Accepted Answer

It signals the seller's confidence in the business and helps close deals lacking full bank financing

Answer

Seller financing demonstrates the seller's confidence in the business's ability to service debt and helps buyers who cannot obtain full bank financing, expanding the qualified buyer pool.

(CBB) Certified Business Brokers Practice Test

(CBB) Certified Business Brokers Practice Test

CBB Exit Planning & Seller Preparation 3