CBB Marketing & Deal Structuring 3 — Questions and Answers
Question 1: A broker is marketing a service business where 80% of revenue comes from contracts. How should these contracts be addressed in the marketing materials?
- Omit contract details to simplify the presentation
- Highlight contract transferability and average remaining contract duration (Correct answer)
- List only contracts with clients the buyer already knows
- Describe contracts as verbal agreements to avoid complexity
Correct answer: Highlight contract transferability and average remaining contract duration
Contract transferability and remaining duration are key value indicators that directly affect business continuity and buyer confidence.
Question 2: In an asset sale, which of the following does NOT typically transfer to the buyer?
- Equipment and fixtures
- Customer lists and goodwill
- Seller's pre-existing liabilities (Correct answer)
- Inventory at closing
Correct answer: Seller's pre-existing liabilities
In an asset sale, pre-existing liabilities remain with the seller's entity, which is one of the primary reasons buyers prefer asset sales over stock sales.
Question 3: A business broker uses a 'teaser' document when marketing a business. The teaser's PRIMARY purpose is to:
- Provide full financial details to serious buyers
- Generate interest while maintaining confidentiality before NDA execution (Correct answer)
- Satisfy regulatory disclosure requirements
- Replace the need for a Confidential Business Review
Correct answer: Generate interest while maintaining confidentiality before NDA execution
A teaser is a brief, anonymous summary designed to spark buyer interest without revealing the business identity before confidentiality is established.
Question 4: Which deal structure is MOST advantageous for a seller who wants to minimize immediate tax liability while maximizing total consideration?
- All-cash lump sum payment at closing
- Installment sale with payments spread over multiple years (Correct answer)
- Stock swap with a public company
- Asset sale with payment in cryptocurrencies
Correct answer: Installment sale with payments spread over multiple years
An installment sale under IRC Section 453 allows sellers to spread capital gains recognition over multiple tax years, potentially reducing overall tax burden.
Question 5: When calculating Seller's Discretionary Earnings (SDE), which item should be ADDED BACK to net income?
- Cost of goods sold
- Owner's health insurance premiums paid by the business (Correct answer)
- Accounts receivable
- Current portion of long-term debt
Correct answer: Owner's health insurance premiums paid by the business
Personal benefits like owner health insurance are discretionary expenses that a new owner might not incur, so they are added back to reflect true business earning power.
Question 6: A buyer and seller agree on a $1.5M purchase price but disagree on working capital requirements at closing. The broker should recommend:
- Ignoring working capital since it's not part of the purchase price
- Defining a working capital peg and adjustment mechanism in the LOI (Correct answer)
- Having the buyer fund all working capital from their own resources
- Excluding accounts receivable from the deal entirely
Correct answer: Defining a working capital peg and adjustment mechanism in the LOI
A working capital peg with a defined adjustment mechanism prevents disputes at closing by establishing a clear baseline and true-up process.
Question 7: A business broker receives competing offers at different price points with different structures. The BEST approach for the seller is to:
- Automatically accept the highest headline price
- Evaluate each offer's net present value accounting for terms, risk, and structure (Correct answer)
- Counter only the lowest offer to improve it
- Request a best-and-final offer from only one buyer
Correct answer: Evaluate each offer's net present value accounting for terms, risk, and structure
The true value of an offer depends on terms, payment timing, risk allocation, and structure, not just the headline price.
CBB Marketing & Deal Structuring 3
A broker is marketing a service business where 80% of revenue comes from contracts.
How should these contracts be addressed in the marketing materials?