Deck 4: Franchises and Buyouts

Question 1

As part of the valuation process, a buyer should scrutinize the seller's balance sheet to see whether asset book values are realistic.

Answer 1

True

Question 2

Jill sees an advertisement for a franchise opportunity that matches her interests. Her first step in pursuing the franchise is to look for independent, third-party sources of information to verify that the opportunity is legitimate.

Answer 2

True

Question 3

Franchising offers both a proven line of business and reduced risk.

Answer 3

True

Question 4

A franchising strategy whereby a single franchisee owns more than one unit in a given area is typically referred to as an area developer strategy.

Question 5

The processing of a loan application can be completed more quickly if the franchising organization is registered with the U.S. Small Business Administration.

Question 6

Financial statements can mislead a potential purchaser trying to develop an accurate business valuation.

Question 7

There is no need to find out more information about a prospective franchise as the franchisor should be the primary source of information.

Question 8

One of the advantages of buying a franchise is that the purchaser has access to a proven business system.

Question 9

Conducting a thorough due diligence should always be accomplished if purchasing an existing corporation or franchise, but is unnecessary if acquiring a sole proprietorship.

Question 10

The unscrupulous actions by franchisors to void contracts of franchisees in order to sell the franchise to someone else and collect an additional fee is called chewing.

Question 11

To control costs when purchasing a business, an attorney at the closing can represent both sides.

Question 12

In many cases, a franchisor will receive payments in the form of royalties that are based on a percentage of the franchisee's gross income.

Question 13

The Pepsi-Cola Company is an example of a product and trade name franchisor.

Question 14

A wise buyer will also evaluate the legal commitments of an existing business.

Question 15

Jarrod is reading a detailed statement of the franchisor's finances, experience, size, and involvement in litigation. Jarrod is reading a Franchise Disclosure Document.

Question 16

The buyer of an existing business typically acquires its personnel, inventories, physical facilities, established banking connections, and ongoing relationships with trade suppliers.

Question 17

As of 2008, the Federal Trade Commission's Franchise Rule prescribes that franchisors must disclose to prospective franchisees information such as bankruptcies, business experience of the principals, and litigation in which the firm is involved.

Question 18

The practice of putting one franchise right next to another is referred to as piggyback franchising.

Question 19

A nondisclosure agreement signed by a prospective buyer shows the seller that the buyer intends to purchase the business.

Question 20

One drawback of becoming a franchisor relates to possible new restrictions as a requirement for contract renewal.

Question 21

Match the term with its definition.
a.co-branding
e.noncompete clause
b.master licensee
f.non-disclosure agreement
c.multibrand franchising
g.piggyback franchising
d.multiple-unit ownership
h.product and trade name franchising
An independent firm or individual acting as a middleman or sales agent with the responsibility of finding new franchisees within a specified territory

Question 22

Match the term with its definition.
a.area developer
e.co-branding
b.business brokers
f.due diligence
c.business format franchising
g.encroachment
d.churning
h.fair market value
A franchise arrangement whereby the franchisee obtains an entire marketing and management system geared to entrepreneurs

Question 23

Match the term with its definition.
a.due diligence
e.Franchise Disclosure Document
b.fair market value
f.Franchise Rule
c.franchise
g.franchisee
d.franchise contract
h.franchisor
The exercise of reasonable care in the evaluation of a business opportunity

Question 24

Match the term with its definition.
a.area developer
e.co-branding
b.business brokers
f.due diligence
c.business format franchising
g.encroachment
d.churning
h.fair market value
The franchisor's selling of another franchise location within the market area of an existing franchise

Question 25

Match the term with its definition.
a.co-branding
e.noncompete clause
b.master licensee
f.non-disclosure agreement
c.multibrand franchising
g.piggyback franchising
d.multiple-unit ownership
h.product and trade name franchising
An agreement in which the buyer promises the seller that s/he will not reveal confidential information or violate the seller's trust

Question 26

Match the term with its definition.
a.due diligence
e.Franchise Disclosure Document
b.fair market value
f.Franchise Rule
c.franchise
g.franchisee
d.franchise contract
h.franchisor
The legal document between a franchisor and a franchisee

Question 27

Match the term with its definition.
a.due diligence
e.Franchise Disclosure Document
b.fair market value
f.Franchise Rule
c.franchise
g.franchisee
d.franchise contract
h.franchisor
The party in a franchise contract that specifies the methods to be followed and the terms to be met by the other party

Question 28

Match the term with its definition.
a.co-branding
e.noncompete clause
b.master licensee
f.non-disclosure agreement
c.multibrand franchising
g.piggyback franchising
d.multiple-unit ownership
h.product and trade name franchising
A provision in a franchise contract prohibiting the franchisee from severing the relationship and becoming a competitor

Question 29

Match the term with its definition.
a.co-branding
e.noncompete clause
b.master licensee
f.non-disclosure agreement
c.multibrand franchising
g.piggyback franchising
d.multiple-unit ownership
h.product and trade name franchising
The operation of a retail franchise within the physical facilities of a host store

Question 30

Match the term with its definition.
a.due diligence
e.Franchise Disclosure Document
b.fair market value
f.Franchise Rule
c.franchise
g.franchisee
d.franchise contract
h.franchisor
A business model involving a business owner who licenses trademarks and methods to an independent entrepreneur

Question 31

Match the term with its definition.
a.area developer
e.co-branding
b.business brokers
f.due diligence
c.business format franchising
g.encroachment
d.churning
h.fair market value
The price at which the property would change hands between a willing buyer and willing seller, with both parties having reasonable knowledge of relevant facts

Question 32

Match the term with its definition.
a.area developer
e.co-branding
b.business brokers
f.due diligence
c.business format franchising
g.encroachment
d.churning
h.fair market value
Specialized brokers that bring together buyers and sellers of businesses

Question 33

Match the term with its definition.
a.due diligence
e.Franchise Disclosure Document
b.fair market value
f.Franchise Rule
c.franchise
g.franchisee
d.franchise contract
h.franchisor
A detailed statement that provides the accepted format for satisfying the franchise disclosure requirements of the FTC

Question 34

Match the term with its definition.
a.co-branding
e.noncompete clause
b.master licensee
f.non-disclosure agreement
c.multibrand franchising
g.piggyback franchising
d.multiple-unit ownership
h.product and trade name franchising
The operation of several franchise organizations within a single corporate structure

Question 35

Match the term with its definition.
a.co-branding
e.noncompete clause
b.master licensee
f.non-disclosure agreement
c.multibrand franchising
g.piggyback franchising
d.multiple-unit ownership
h.product and trade name franchising
A franchise agreement granting the right to use a widely recognized product or name

Question 36

Match the term with its definition.
a.area developer
e.co-branding
b.business brokers
f.due diligence
c.business format franchising
g.encroachment
d.churning
h.fair market value
Individuals or firms that obtain the legal right to open several franchised outlets in a given area

Question 37

Match the term with its definition.
a.due diligence
e.Franchise Disclosure Document
b.fair market value
f.Franchise Rule
c.franchise
g.franchisee
d.franchise contract
h.franchisor
An entrepreneur whose power is limited by a contractual relationship with a franchising organization

Question 38

Match the term with its definition.
a.area developer
e.co-branding
b.business brokers
f.due diligence
c.business format franchising
g.encroachment
d.churning
h.fair market value
Bringing two or more franchise brands together under one roof

Question 39

Match the term with its definition.
a.area developer
e.co-branding
b.business brokers
f.due diligence
c.business format franchising
g.encroachment
d.churning
h.fair market value
Actions by franchisors to void the contracts of frahchisees in order to sell the franchise to someone else and collect an additional fee

Question 40

Match the term with its definition.
a.due diligence
e.Franchise Disclosure Document
b.fair market value
f.Franchise Rule
c.franchise
g.franchisee
d.franchise contract
h.franchisor
A rule that prescribes that the franchisor must disclose certain information to prospective franchisees

Question 41

Annabell has been granted the right to conduct business according to specified methods and terms of another party. Annabell is a:

A) franchisor.
B) franchisee.
C) franchise.
D) licensee.

Question 42

Individuals or firms that possess the legal right to open multiple outlets in a given area are referred to as

A) development franchisees.
B) area developers.
C) piggyback franchisees.
D) multiple-unit owners.

Question 43

Sister Mary Cupcake has partnered with the management of the toll road to operate her stores in the travel plazas. This arrangement is an example of:

A) master licensing.
B) piggyback franchising.
C) area development.
D) multibrand franchising.

Question 44

Business format franchising is best illustrated by the system offered by

A) Goodyear Tires.
B) Coca-Cola.
C) Subway.
D) Dr. Pepper.

Question 45

Rick was so successful with his Sweet Treats franchise that he opened several other Sweet Treats locations. Rick could best be described as:

A) a franchisor.
B) a franchisee.
C) a master licensee.
D) a multiple-unit owner.

Question 46

The franchising strategy whereby an individual or firm is granted the legal right to own more than one unit of a franchised business is known as

A) multi-brand franchising.
B) multiple-unit ownership.
C) piggyback franchising.
D) aggregate ownership.

Question 47

McDonald's corporation helps select the location for a new restaurant and provides financial assistance, training, marketing, and products. McDonald's engages in:

A) product and trade name franchising.
B) business format franchising.
C) master licensing.
D) area development.

Question 48

Matthew is an individual acting as a sales agent with the responsibility for finding new franchisees within a specified territory. Matthew is a(n):

A) multiple-unit franchisor.
B) area developer.
C) franchisor representative.
D) master licensee.

Question 49

Martina's franchise agreement allows her top open up to seven new stores within a 100 mile radius of the first one. Martina is best described as:

A) a master licensee.
B) a franchisee.
C) a franchisor.
D) an area developer.

Question 50

Caron signed a contract with Devon allowing her to provide services using Devon's trademark, logo, and business model. This business is:

A) a franchise.
B) a franchisor.
C) a franchisee.
D) an independent business.

Question 51

Quality Dining, Inc. operates several different restaurant franchises including Burger King, Olive Garden, Dairy Queen, and several others. Quality Dining has its own corporate structure and stockholders. This corporation is an example of:

A) master licensing.
B) multibrand franchising.
C) piggyback franchising.
D) co-branding.

Question 52

Abner signed a contract allowing him to use Brian's business model and sell products approved by Brian. Abner is:

A) a franchise.
B) a franchisor.
C) a franchisee.
D) an independent business operator.

Question 53

Jeffrey's job is to identify potential business people in his country who might want to do business using a particular brand name. When the contract is signed, Jeffrey then provides training to the business person. Jeffrey is most likely:

A) a franchisee.
B) a franchisor.
C) a master licensee.
D) a warehouser.

Question 54

The agreement Irma signed with McDonald's that allows her to open a restaurant using the McDonald's name is:

A) a master license.
B) an area development plan.
C) a lend-lease agreement
D) a franchise contract.

Question 55

Edward signed a contract allowing Francine to use sell products using his brand name so long as the product meets Edward's quality standards. Edward is:

A) a franchise.
B) a franchisor.
C) a franchisee.
D) an independent business owner.

Question 56

JKL Corporation grants another party the right to conduct business according to specified methods and terms. JKL is a:

A) franchisor.
B) franchisee.
C) franchise.
D) licenser.

Question 57

Geraldo owns a well-known brand and allows Henry to sell products with that brand name. Geraldo has agreed to:

A) product and trade name franchising.
B) business format franchising.
C) master licensing.
D) co-branding

Question 58

Belinda signed a _____________ that is a legal agreement between two parties in a franchise arrangement.

A) master license.
B) franchise contract.
C) requirements contract.
D) franchise consent draft.

Question 59

Match the term with its definition.
a.co-branding
e.noncompete clause
b.master licensee
f.non-disclosure agreement
c.multibrand franchising
g.piggyback franchising
d.multiple-unit ownership
h.product and trade name franchising
Ownership by a single franchisee of more than one franchise from the same company

Question 60

A Starbucks franchise located inside a Target store is called ______ franchising.

A) folded
B) internalized
C) cooperative
D) piggyback

Question 61

In what way is a franchisee's control over the business greatly reduced?

A) Most franchisors are located near the franchisee.
B) The franchisees are technically employees of the franchisor.
C) The franchisee is bound by the terms of the franchise contract.
D) The franchisee is completely dependent on the franchisor for funding.

Question 62

Martin operates an ABC franchise. Recently the franchisor has attempted to make changes to the contract that would increase Martin's costs so as to make the business unprofitable. The franchisor is engaging in:

A) master licensing.
B) encroachment.
C) due diligence.
D) churning.

Question 63

The franchise contract Pamela signed with DEF Company specified she would have an exclusive sales territory. While the contract was still in force, DEF opened a corporate-owned store within her territory. DEF is guilty of:

A) master licensing.
B) encroachment.
C) due diligence.
D) churning.

Question 64

RST, Inc., a franchisor, is requiring its franchisee, Raymond, to make significant changes to the equipment and interior appearance of his business as a condition of renewing the contract. RST claims this is necessary because:

A) RST has changed its marketing plan and Raymond's store did not keep up with the changes.
B) Raymond's contract has a lower royalty fee than current contracts.
C) sales from Raymond's franchise are lower than those in newer facilities.
D) Raymond's customers have complained about the appearance of his facility.

Question 65

The cost of a franchise may include

A) royalty payments.
B) higher operational costs.
C) a one-time federal franchise tax.
D) higher labor costs.

Question 66

Nardell has operated a successful franchise for a few years and would now like to open another similar business under his own brand. The contract Nardell signed prohibits his doing so. The contract contains:

A) a non-compete clause.
B) a co-branding clause.
C) a piggyback franchise provision.
D) an area development provision.

Question 67

Having worked professionally for 10 years, Tom and Kate have decided to start a new franchise. Considering their background, a disadvantage for them becoming franchisees is

A) the restrictions on business operations.
B) unlimited company growth.
C) the expectation to work more than a 40 hour work week.
D) an increase in entrepreneurial independence.

Question 68

A franchise is able to control costs because:

A) franchise networks have greater buying power.
B) suppliers prefer to sell to franchises.
C) franchises generally pay only minimum wages.
D) franchisees are locked into long-term contracts with vendors.

Question 69

In addition to the regular monthly payment of a percentage of gross sales to her franchisor, Wilma is required to submit a smaller percentage for advertising costs. She is willing to do this because:

A) otherwise she cannot operate her franchise.
B) she receives a discount on the cost of her inventory.
C) Wilma's budget is too small for her advertising to be effective.
D) the franchisor promotes the business both locally and nationally, reinforcing the brand name.

Question 70

Which source of franchise information is produced by a federal agency?

A) Buying a Franchise: A Consumer Guide
B) Website of Entrepreneur magazine
C) Francorp
D) Franchise list for the International Franchise Association

Question 71

Each month Tomas must report his gross sales and pay a percentage of that amount to his franchisor. This percentage is:

A) negotiable every month.
B) finance charges.
C) royalty fees.
D) an investment cost.

Question 72

RST, Inc., a franchisor, is requiring its franchisee, Raymond, to make significant changes to the equipment and interior appearance of his business as a condition of renewing the contract. Raymond suspects:

A) these changes will benefit his bottom line.
B) he will be less competitive after the changes are made.
C) the franchisor wants to sell the franchise to someone else.
D) his customers will object to the changes.

Question 73

Besides the up-front money required of a franchisee, Stuart will have to pay building costs and purchase inventory and equipment. This type of expense is called:

A) investment costs.
B) the initial franchise fee.
C) royalty payments.
D) marketing fees.

Question 74

The Franchise Registry maintained by the U.S. Small Business Administration

A) lists warnings about certain franchise systems.
B) attests that the SBA has reviewed the franchise agreement.
C) rates franchise systems according to a four star rating.
D) registers all franchise systems operating in the U.S.

Question 75

Cheryl is on vacation across the country from her hometown and she's hungry. Ahead she sees the familiar Golden Arches and knows she can find her favorite hamburger. These Golden Arches are:

A) a patent.
B) a trade promotion.
C) yellow to attract attention.
D) a trademark.

Question 76

Consider this quote: "If you can't follow somebody else, don't buy a franchise." Which characteristic of a franchise does this quote describe?

A) High success rate
B) Restrictions on growth
C) Loss of entrepreneurial independence
D) Location problems

Question 77

An entrepreneur would choose a franchise over an independent startup most likely because of the

A) freedom in decision making.
B) guidance provided for organizational structure.
C) probability of success.
D) opportunities to meet and share ideas with other executives.

Question 78

Nardell's franchise contract contains language that prohibits him from opening a similar business under his own brand. Nardell considers this to be:

A) due diligence.
B) restraint of trade.
C) restrictive practice.
D) encroachment.

Question 79

A disadvantage of franchising is

A) reduced risk of failure.
B) access to a proven system.
C) restricted sales territories.
D) immediate economies of scale.

Question 80

Stuart is interested in opening a QRS franchise. QRS requires up-front payment of $150,000. This amount represents:

A) Stuart's investment costs.
B) the initial franchise fee.
C) royalty payments.
D) marketing fees.