CSP Financial & Risk Assessment in Succession 2

Question 1

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?

Accepted Answer

Leveraged buyout financed by the business's own cash flow

Answer

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.

Question 2

Which financial ratio is most critical when assessing a succession candidate company's ability to service acquisition debt?

Accepted Answer

Debt service coverage ratio (DSCR)

Answer

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.

Question 3

In a cross-purchase buy-sell agreement, how many life insurance policies are required for four co-owners?

Accepted Answer

12

Answer

Each of the four owners must insure each of the other three owners, resulting in 4 × 3 = 12 policies in a cross-purchase arrangement.

Question 4

A family business valuation reveals a 'key person discount.' What does this adjustment reflect?

Accepted Answer

Reduced value because the business depends heavily on one individual

Answer

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.

Question 5

Which succession risk is MOST directly mitigated by maintaining a funded deferred compensation plan for successor candidates?

Accepted Answer

Retention risk of high-potential successors

Answer

A funded deferred compensation plan creates a financial incentive for key successors to remain with the organization through the succession transition.

(CSP) Certified Succession Planner Practice Test

(CSP) Certified Succession Planner Practice Test

CSP Financial & Risk Assessment in Succession 2