Deck 4: Franchises and Buyouts

Question 1

To reduce costs, a franchise consultant can substitute for a licensed attorney experienced in the evaluation of legal documents related to franchising agreements.

Answer 1

False

Question 2

One of the benefits of becoming a franchisee is sharing profits with the franchiser.

Answer 2

False

Question 3

The franchiser being evaluated should be a primary source of information about a franchise.

Answer 3

True

Question 4

One of the disadvantages of purchasing a franchise is that franchisers seldom provide adequate training programs.

Question 5

A franchise is typically attractive because it offers training, financial assistance, and operating benefits.

Question 6

The potential value of any franchise arrangement is defined by the rights outlined in the franchise contract.

Question 7

The entrepreneur who enters into a franchising agreement does not acquire the right to use the franchiser's trademark or brand name.

Question 8

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

Question 9

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

Question 10

Existing franchisees are a valuable source of information about franchises.

Question 11

Business publications such as The Wall Street Journal and Entrepreneur are excellent sources of advertising from franchisers.

Question 12

One drawback of becoming a franchiser relates to the increase in required operating support.

Question 13

The Coca-Cola Company is an example of a product and trade name franchiser.

Question 14

Because the offering and sale of a franchise are more intensely regulated by state and federal laws than is the establishment of a new business, individuals and/or firms involved in negotiating a franchise arrangement have limited need for legal counsel.

Question 15

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 16

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

Question 17

Burger King is an example of a company that uses business format franchising.

Question 18

A comprehensive listing of franchisers can be found in Franchise Opportunities Guide, which is published by the International Franchise Association.

Question 19

Franchising is typically defined as a marketing system revolving around a two-party legal agreement whereby a franchiser is granted the privilege to conduct business as an individual owner according to the methods and terms specified by the franchisee.

Question 20

The Federal Trade Commission's "franchise rule" of 2008 prescribes that franchisers must disclose to prospective franchisees information such as bankruptcies, business experience of the principals, and litigation in which the firm is involved.

Question 21

A franchise organization that is registered with the U.S. Small Business Administration will greatly speed up loan processing for a franchisee.

Question 22

When purchasing a business you should always have an attorney at the closing who represents both sides.

Question 23

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

Question 24

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

Question 25

The advice of lawyers and accountants, if employed, should be strictly followed.

Question 26

Legal commitments of an existing business are not a factor that needs to be evaluated by a prospective buyer.

Question 27

Subway is the franchisee and the local owner is the franchiser?

Question 28

The UFOC replaced the Franchise Disclosure Document (FDD) in May, 2008.

Question 29

All of the following are considered attractive characteristics of franchising except

A) higher success rates than for alternative methods.
B) entrepreneurial independence.
C) financial and training assistance.
D) operating benefits.

Question 30

The UFOC is the Uniform Franchise Offering Circular.

Question 31

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

Question 32

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

Question 33

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

Question 34

All of the following are considered advantages of franchising except

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

Question 35

While reading Inc. magazine, you come across an advertisement for a franchise opportunity that matches your interests; you should first look for independent, third-party sources of information to verify that the opportunity is legitimate.

Question 36

Valuing a company is an easy task that results in a precise figure.

Question 37

Aside from consulting an attorney, a potential franchisee should avoid using other sources of assistance.

Question 38

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

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

Question 39

A firm's financial statements should not be adjusted because they conform with generally accepted accounting principles.

Question 40

Franchising offers both a proven line of business and product/service identification.

Question 41

Investment costs related to franchising include all of the following except

A) insurance premiums and legal fees.
B) inventory and supply costs.
C) building and equipment costs.
D) royalty payments.

Question 42

Business format franchising is best illustrated by the system offered by

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

Question 43

A Krispy Kreme franchise located inside of the local Wal-Mart store is a type of franchise operation referred to as

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

Question 44

A legal agreement between two parties in a franchise arrangement is referred to as a

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

Question 45

Which of the following is an excellent source of information about franchisers?

A) Any state funded university
B) Friends and neighbors
C) Advertisements in the Wall Street Journal
D) FranchiseAmerica.com

Question 46

Which source of information is not recommended to help a potential franchisee investigate a franchising opportunity?

A) The franchisers themselves
B) The franchiser's suppliers
C) Existing and previous franchisees
D) Independent, third-party sources

Question 47

The term franchising was derived from

A) a Gallic word meaning "to sell or bargain for another."
B) the archaic Norman form of "franshen" meaning "to trade with strangers."
C) a French word meaning "freedom" or "exemption from duties."
D) the Dutch trading term meaning "to drive a fair bargain."

Question 48

An entity or individual that grants another party the right to conduct business according to specified methods and terms is known as a

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

Question 49

Products and trade name franchising is best illustrated by the system offered by

A) ExxonMobil.
B) Mail Boxed Etc.
C) Burger King.
D) Holiday Inn.

Question 50

An entity or individual granted the right to conduct business according to specified methods and terms of another party is known as a

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

Question 51

Johnny Berrins is considering an investment in a nationally known franchise. With which source of information should he be most concerned?

A) The franchiser itself
B) The franchiser's suppliers
C) Other independent business people he knows
D) "Infomercials" on the subject

Question 52

A _____ is an independent firm or individual acting as a sales agent with the responsibility for finding new franchisees within a specified territory.

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

Question 53

The rights conveyed by a franchising agreement are referred to as

A) franchising rights.
B) franchise claims.
C) franchise interests.
D) the franchise.

Question 54

Tom Jones is a college student with no business experience. Jones is most likely to worry about his decision to become a franchisee primarily because of the

A) restrictions on business operations.
B) restrictions on company growth.
C) requirement to work at least 40 hours per week.
D) increase in entrepreneurial independence.

Question 55

Government publications offering information about franchises include

A) Buying a Franchise: a Consumer Guide.
B) Successful Franchising.
C) Franchising Today.
D) The Wall Street Journal.

Question 56

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) development franchising.
B) multiple-unit ownership.
C) piggyback franchising.
D) aggregate ownership.

Question 57

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 58

One primary source of information for a potential franchisee should be

A) the franchiser being evaluated.
B) the franchiser's suppliers.
C) other parties considering the same franchiser.
D) other franchisers.

Question 59

The cost of a franchise may include

A) royalty payments.
B) high executive salaries.
C) a one-time federal franchise tax.
D) higher-than-usual labor costs.

Question 60

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

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

Question 61

Why would a businessperson wish to become a franchiser?

A) Reduction of capital requirements
B) Reduction in control
C) Sharing of profits
D) Increase in operating support

Question 62

The disclosure statement provided to a prospective franchisee must contain all of the following information Except:

A) franchiser's finances.
B) experience in the market.
C) involvement in litigation.
D) strategic plans for future expansion.

Question 63

The following are considered disadvantages of franchising except

A) requiring adherence to the operations manual.
B) requiring site approval and outlet appearance.
C) restricting goods and services offered for sale.
D) restricting advertising and hours of operation.

Question 64

The offer and sale of a franchise are regulated by

A) state laws exclusively.
B) federal laws exclusively.
C) both state and federal laws.
D) Federal Trade Commission laws exclusively.

Question 65

Most franchise experts recommend that the FDD be examined carefully by

A) regulators that specialize in such documents.
B) a franchise attorney and an accountant.
C) everyone associated with the potential startup.
D) suppliers that may be used if the startup is successful.

Question 66

The U.S. Small Business Administration has introduced the Franchise Registry which

A) lists warnings about certain franchise systems.
B) verifies a franchise system's lending eligibility.
C) rates franchise systems according to a four star rating.
D) registers all franchise systems operating in the U.S.

Question 67

You are considering becoming a franchisee with the Pots-R-Us franchise. You will only be able to determine whether this is a legitimate franchise opportunity or a fraudulent operator by

A) carefully investigating the company and its product(s).
B) finding out whether the company has an operational Web site.
C) researching the industry in which the franchiser is involved.
D) following your instincts-there is no substitute for intuition.

Question 68

In addition to consulting an attorney, a potential franchisee should consider using the services of

A) a trusted friend.
B) a financial advisor.
C) as many sources of help as would be practical.
D) an experienced administrator.

Question 69

The following are considerations which must be well thought out before deciding to franchise your business except

A) is the business model replicable?
B) what will be included in the operations manual?
C) how will the growth be financed?
D) what proprietary information will be included in the FDD?

Question 70

Why is the sharing of profits a drawback to becoming a franchiser?

A) The franchisee will not share profits.
B) Only part of the profits from the franchise operation belongs to the franchiser.
C) There are usually no profits to share.
D) The sharing of profits reduces the franchiser's control.

Question 71

Which of the following typically is not found in a disclosure document?

A) The franchiser's involvement in litigation
B) Key features of the franchiser's experience
C) Details of the franchiser's proprietary technology
D) The franchiser's size

Question 72

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

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

Question 73

The several components of franchise costs include all of the following except

A) advertising costs.
B) investment costs.
C) royalty payments.
D) churning costs.

Question 74

Items covered in the new FDD include all of the following except

A) litigation.
B) bankruptcy.
C) investment requirements.
D) marketing goals.

Question 75

Which of the following is not a part of the definition of Franchising?

A) Two party legal agreement
B) One party obtains the right to sell a specific product or service
C) The two parties are brought together by a facilitator
D) One party allows another to do business as it specifies to gain certain benefits

Question 76

All of the following are benefits of becoming a franchisee except

A) reduced risk of failure.
B) detailed operating manual.
C) management training.
D) reduction in control.

Question 77

One of the most important features of the franchise contract is the provision related to

A) the sale or transfer of the franchise to a government entity.
B) changes in management.
C) termination and transfer of the franchise.
D) termination of contracts with suppliers.

Question 78

A document called the _____ is the accepted format for satisfying franchise disclosure requirements.

A) Franchise Disclosure Document
B) Franchise Offering Circular
C) Franchise Circular Agreement
D) Uniform Franchise Circular Agreement

Question 79

The FDD disclosure must include information on

A) litigation and bankruptcy history
B) investment requirements
C) conditions that would affect renewal, termination, or sale of the franchise.
D) all of these.

Question 80

Anil Yadav is the largest Jack-in-the-Box franchisee in the U.S. His first step on the road to multi-unit franchising was

A) getting a loan from his father.
B) writing a business plan.
C) a part time job.
D) securing investments from family and friends.