Financial & Risk Assessment in Succession Flashcards
7 cards from real CSP practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Financial & Risk Assessment in Succession flashcards as text
A business owner wants to transfer ownership to a key employee but lacks funds for a lump-sum purchase. Which financing structure best addresses this?
Answer: Leveraged buyout financed by the business's own cash flow
A leveraged buyout (LBO) uses the company's future cash flow to service acquisition debt, enabling the buyer to fund the purchase without a large upfront payment.
Which financial ratio is most critical when assessing a succession candidate company's ability to service acquisition debt?
Answer: Debt service coverage ratio (DSCR)
The DSCR measures whether operating income is sufficient to cover principal and interest payments, making it the key metric for debt serviceability in succession financing.
In a cross-purchase buy-sell agreement, how many life insurance policies are required for four co-owners?
Answer: 12
Each of the four owners must insure each of the other three owners, resulting in 4 × 3 = 12 policies in a cross-purchase arrangement.
A family business valuation reveals a 'key person discount.' What does this adjustment reflect?
Answer: Reduced value because the business depends heavily on one individual
A key person discount reduces the business value to reflect the risk that critical knowledge, relationships, or skills are concentrated in a single individual who may not remain with the business.
Which succession risk is MOST directly mitigated by maintaining a funded deferred compensation plan for successor candidates?
Answer: Retention risk of high-potential successors
A funded deferred compensation plan creates a financial incentive for key successors to remain with the organization through the succession transition.
An S-corporation's built-in gains (BIG) tax applies when the company converts from C-corp status and then sells appreciated assets within how many years?
Answer: 5 years
Under current tax law, appreciated assets sold within 5 years of an S-corporation election trigger the built-in gains tax at the highest corporate rate on the pre-conversion gain.
A succession planner recommends a 'wait-and-see' buy-sell agreement. What is the primary financial advantage of this structure?
Answer: It allows flexibility to choose between entity and cross-purchase taxation at the triggering event
A wait-and-see agreement defers the choice between entity redemption and cross-purchase until the triggering event, allowing parties to select the most tax-efficient option at that time.