RFC Business Planning & Owner Strategies

Question 1

Under a cross-purchase buy-sell agreement, who purchases a departing owner's business interest?

Accepted Answer

The surviving owners individually

Answer

The business entity itself

Answer

A trustee designated by the agreement

Answer

The departing owner's estate

Question 2

Which primary advantage does a cross-purchase buy-sell agreement provide to surviving owners compared to an entity purchase (stock redemption) agreement?

Accepted Answer

Surviving owners receive a stepped-up cost basis in the purchased interest

Answer

Fewer life insurance policies are required

Answer

The business entity pays all premiums

Answer

Transfer taxes are completely eliminated

Question 3

A 'wait-and-see' buy-sell agreement is best described as one in which:

Accepted Answer

The entity has first right to purchase, followed by the surviving owners if the entity declines

Answer

The business has no obligation to purchase a departing owner's interest

Answer

Surviving owners must decide whether to buy at the time of the triggering event

Answer

The purchase price is determined after the triggering event occurs

Question 4

Which business valuation approach estimates value by dividing a company's normalized earnings by an appropriate capitalization rate?

Accepted Answer

Income approach using capitalization of earnings

Answer

Asset-based approach

Answer

Market comparable approach

Answer

Liquidation value approach

Question 5

Which business entity form avoids double taxation while providing all owners with limited liability protection?

Accepted Answer

S Corporation

Answer

C Corporation

Answer

General Partnership

Answer

Limited Partnership with a corporate general partner

Question 6

Which business valuation method determines value primarily by comparing the subject company to recent sale prices of similar businesses?

Accepted Answer

Market approach

Answer

Discounted cash flow method

Answer

Capitalization of excess earnings method

Answer

Book value method

Question 7

When funding a buy-sell agreement with life insurance in a corporation with three equal owners, how many policies are required under a cross-purchase structure?

Accepted Answer

6 policies

Answer

3 policies

Answer

9 policies

Answer

1 policy