Deck 4: Franchises and Buyouts

Question 1

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

Answer 1

False

Question 2

A franchising strategy whereby a single franchisee owns more than one unit of the franchised business is typically referred to as a multiple-unit ownership strategy.

Answer 2

True

Question 3

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

Answer 3

True

Question 4

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

Question 5

As part of the valuation process, a buyer should scrutinize the seller's bank statements, supplier invoices, and customer receipts to validate the accuracy of the company's financial statements.

Question 6

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

Question 7

Perhaps the most fundamental argument against the franchise model is that it increases the level of risk for business owners.

Question 8

One of the benefits of a franchise agreement for the franchisee is that the franchisor is solely responsible for advertising the franchise.

Question 9

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

Question 10

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 11

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

Question 12

A franchisor that sells another franchise location within the market area of an existing franchisee is using a piggybacking franchising strategy.

Question 13

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

Question 14

One of the advantages of buying a franchise is that the purchaser has access to a business model with a proven track record.

Question 15

Due to a decrease in the number of franchises over the past decade, the task of selecting an appropriate franchise has become more difficult.

Question 16

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

Question 17

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 18

Coca-Cola soft drink bottlers are an example of a product and trade name franchisor.

Question 19

Business brokers specialize in the sale of business firms and business properties.

Question 20

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

Question 21

Belinda signed a _____, which is a legal agreement between the franchisor and franchisee that spells out the relationship and obligations between the two parties.

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

Question 22

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

Question 23

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

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

Question 24

Individuals or firms that obtain the legal right to open several franchised businesses in a given area are referred to as

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

Question 25

All of the following are examples of companies that engage in business format franchising EXCEPT

A) Choice Hotels.
B) Carl's Jr.
C) Goodyear Tires
D) Jani-King.

Question 26

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

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

Question 27

Ford automobile dealers and Chevron convenience stores are examples of companies that engage in

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

Question 28

Starbucks operates outlets inside some grocery stores, such as Safeway and Kroger. This is an example of

A) product and trade name franchising.
B) piggyback franchising.
C) multibrand franchising.
D) area development.

Question 29

Jeffrey's job is to identify potential businesspeople 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 businessperson. Jeffrey is most likely a

A) franchisee.
B) franchisor.
C) master licensee.
D) co-brander.

Question 30

The two primary forms of franchising are _____ franchising and _____ franchising.

A) product; service
B) co-branding; multibrand
C) product and trade name; business format
D) individual; business

Question 31

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) franchisee.
C) master licensee.
D) multiple-unit owner.

Question 32

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

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

Question 33

Quality Dining, Inc., operates several different restaurant franchises including Burger King and Chili's. 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 34

The legal agreement Irma signed with McDonald's that allows her to open a restaurant using the McDonald's name is a(n)

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

Question 35

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 36

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 37

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 38

A Subway restaurant located inside a Walmart is an example of _____ franchising.

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

Question 39

To control costs when purchasing a business, the buyer's attorney or the seller's attorney can be used as the closing agent.

Question 40

Edward signed a contract allowing Francine to sell products using his trade name so long as the product meets Edward's quality standards. Edward is a(n)

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

Question 41

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 42

The registry maintained by the U.S. Small Business Administration

A) lists warnings about certain franchisors.
B) speeds up loan processing for franchisees.
C) rates franchisors according to a four-star rating.
D) registers all franchisors operating in the United States.

Question 43

Royalty fees typically range between _____ and _____ percent of the gross income that the franchisee receives from customers for selling the franchised products and services.

A) 5; 9
B) 3; 5
C) 1; 2
D) 10; 15

Question 44

H&R Block was sued by a franchisee for selling Internet services within the franchisee's territory without offering any compensation. This is an example of

A) churning.
B) co-branding.
C) encroachment.
D) multibrand franchising.

Question 45

Which of the following is NOT one of the most common restrictions imposed on franchisees?

A) Imposing requirements regarding outlet appearance
B) Limiting sales territories
C) Imposing requirements on the level of community involvement
D) Limiting advertising and hours of operation

Question 46

Franchisors support their franchisees by doing all of the following EXCEPT

A) hiring employees.
B) reducing purchasing costs.
C) designing promotional campaigns.
D) providing training.

Question 47

Which of the following companies is credited with being the first franchisor in the United States?

A) Singer Sewing Machine
B) McDonald's
C) H&R Block
D) Nathans's Famous Inc.

Question 48

Stuart is interested in opening a QRS franchise. QRS requires an 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.

Question 49

Which of the following statements about the International Franchise Association (IFA) is NOT true?

A) The IFA maintains a registry of franchisors who have gone through an eligibility review service.
B) Firms joining the IFA today are required to adhere to a code of ethics, the value of which are "trust, truth, and honesty."
C) The IFA demands adherence to laws and offers conflict resolution services for franchisees and franchisors.
D) The IFA encourages franchisors to recruit minorities and veterans as franchisees by offering financial incentives.

Question 50

A franchise contract

A) should be drafted by both the franchisee and franchisor.
B) is drafted by, and most likely favors, the franchisee.
C) should be drafted by the franchisee's attorney.
D) is drafted by, and most likely favors, the franchisor.

Question 51

Membership of the International Franchise Association (IFA) comprises over _____ percent of all registered franchisors _____.

A) 70; in the United States
B) 85; in the United States
C) 70; around the world
D) 85; around the world

Question 52

Owners of nearly 7,000 7-Eleven franchise locations formed the National Coalition of Associations of 7-Eleven Franchisees and sued the franchisor, 7-Eleven, Inc., when they did not see the financial returns they expected. They attributed this to the franchisor

A) not performing due diligence.
B) being misleading about earning opportunities.
C) burdening outlets with restrictive practices.
D) opening too many outlets.

Question 53

A _____ may be the single most valuable tool provided to a franchisee.

A) Franchise Disclosure Document (FDD)
B) marketing plan
C) code of ethics
D) operations manual

Question 54

The franchise contract that 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 55

In what way is a franchisee's freedom to run 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 56

Kelly is interested in opening an XYZ franchise. In addition to an up-front payment of $100,000, Kelly 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 57

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 58

Each month, Tomas must report his gross income 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 59

Which of the following is considered an advantage of franchising?

A) Franchising can be a way for existing companies to diversify.
B) Attractive franchisors offer value because they have names and trademarks that are well known to prospective customers.
C) A number of franchisors provide or facilitate financing for franchisees.
D) All of these are correct.

Question 60

All of the following are components of franchise costs EXCEPT

A) royalty payments.
B) advertising costs.
C) a one-time federal franchise tax.
D) investment costs.

Question 61

Bart is meeting with a representative of GHI, a franchisor. He has received information about the franchisor's finances, experience, size, and involvement in litigation. Bart has been given a

A) master license.
B) nondisclosure statement.
C) franchise rule.
D) Franchise Disclosure Document (FDD).

Question 62

Which of the following is NOT a reason for buying an existing business?

A) Reduction of uncertainty
B) Acquisition of ongoing operations and relationships
C) Ease of obtaining financing
D) A quick start

Question 63

When conducting due diligence on whether to purchase a business, the two most valuable sources of outside assistance are _____ and _____.

A) customers; suppliers
B) customers; bankers
C) accountants; lawyers
D) vendors; lawyers

Question 64

Before signing a franchise contract, a potential franchisee should obtain the services of which of the following

A) A union representative, an attorney, and a technical writer
B) An attorney, an accountant, and a banker
C) A banker, an accountant, and a contract law consultant.
D) An accountant, another franchisee, and a banker

Question 65

The offer and sale of a franchise are

A) regulated by state laws exclusively.
B) regulated by federal laws exclusively.
C) regulated by both state and federal laws.
D) not regulated.

Question 66

Susan is considering buying the local franchisee of Pots-R-Us. Before making the purchase, as part of the due diligence process, she should do all of the following EXCEPT

A) hire a business broker to draft a nondisclosure agreement.
B) verify that the company owns all the assets listed on the balance sheet.
C) make sure all licensing, permits, and zoning requirements are met.
D) review all existing contracts with suppliers and employees.

Question 67

Fred's company specializes in bringing together buyers and sellers of businesses. Fred is a(n)

A) business broker.
B) master licensee.
C) area developer.
D) realtor.

Question 68

Harold was given the chance to examine the tax returns and financial statements of a business he is considering for purchase. The seller asked him to sign a _____ that prohibits Harold from sharing this confidential information with anyone else.

A) franchise contract
B) due diligence document
C) Franchise Disclosure Document (FDD)
D) nondisclosure agreement

Question 69

A potential franchise should be skeptical of a franchisor that

A) owns more than one trade name.
B) pressures him or her to sign a contract without time for proper investigation.
C) is not a member of the International Franchise Association (IFA).
D) is not certified by the government.

Question 70

A potential franchisee should be wary of contract provisions that

A) do not clearly spell out the rights of the franchisee to sell the business to a third party.
B) do not discuss contract renewal after the business has been built up to a successful operating level.
C) contain overly strict or vague cancellation policies.
D) All of these are correct.

Question 71

Where would you suggest Xavier look for information about possible franchise opportunities?

A) Barron's Weekly
B) Inc, Entrepreneur, or the Wall Street Journal
C) The Small Business Administration
D) Local newspapers

Question 72

When evaluating the financial data of a 10-year-old business that is being considered for purchase, which of the following issues will be of least concern?

A) Understated business income in an effort to minimize taxes
B) Unrealistically reduced levels of advertising cost
C) Business expenses related to personal use of vehicles
D) Not having the books for Years 1-5 due to a fire

Question 73

One of the most important features of the franchise contract is the provision relating 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 74

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

A) otherwise she will not be able to operate her franchise.
B) she will receive a discount on the cost of her inventory.
C) she will in turn be charged a lower insurance premium.
D) the franchisor can promote the business more cost-efficiently than Wilma can on her own.

Question 75

Cameron has established a successful business and would like to expand. He is considering becoming a franchisor. Before taking that step, Cameron should

A) make sure his business is replicable.
B) have a technical writer create an operations manual.
C) partner with a lender to offer franchisee financing.
D) hire a master licensee to locate prospective franchisees.

Question 76

A bargain price for an existing business is NOT a good deal for the buyer when the

A) seller intends to open a competing business in the same locality.
B) business is losing money.
C) neighborhood is deteriorating.
D) All of these are correct.

Question 77

Edmond is negotiating to purchase an existing business. One provision he should write into the sale contract is

A) access to the seller's customer list.
B) disclosure of the business's revenues for the last year.
C) a statement of the royalties payable to the seller.
D) a noncompete agreement.

Question 78

Which of the following questions is the least important when developing a franchise from an independent business?

A) Who will develop the operations manual?
B) Is the business replicable?
C) How will growth be financed?
D) What expert assistance will be needed for legal matters?

Question 79

Most franchise experts recommend that the Franchise Disclosure Document (FDD) be reviewed by

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

Question 80

Imelda reports only half the cash from the vending machines on her cash flow statement and income tax returns. Her purpose in doing so is to

A) reduce her income tax liability.
B) increase her net income on the financial statement.
C) retain the cash for reinvestment in the business.
D) make the business more attractive to a buyer.