Deck 40: Franchises and Special Forms of Business

Question 1

Typically a franchisee is a subsidiary of the franchisor.

Answer 1

False

Question 2

The cost of supplies purchased from the franchisor is usually not a franchise fee payable to the franchisor.

Answer 2

False

Question 3

An automobile dealership is an example of a distributor franchise.

Answer 3

True

Question 4

A franchisee is also a licensee.

Question 5

The Lanham Trademark Act allows franchisors as well as others to register their trademarks and service marks with the Patent and Trademark Office in Washington,D.C.

Question 6

State franchise administrators developed a uniform disclosure document called the Uniform Franchise Offering Circular.

Question 7

Most fast-food franchises are chain-style franchises.

Question 8

Franchisors are not permitted to make sales projections to hypothetical franchisees.

Question 9

One advantage of franchising is that the different franchise outlets can have similar quality goods.

Question 10

An assessment fee is a fee for the continued use of the franchisor's trade name,property,and assistance.

Question 11

Two or more companies in the same industry who agree to ally themselves to accomplish a set objective would be considered to be a strategic alliance.

Question 12

Franchisors are never the owners of product formulas.

Question 13

Licensing occurs when the owner of intellectual property contracts to permit another party to use intellectual property.

Question 14

A company that has a franchise to manufacture and distribute Coca-Cola has a processing plant franchise.

Question 15

The FTC mandates that franchisors make full presale disclosure nationwide to prospective franchisees.

Question 16

A franchisor who violates FTC disclosure rules is subject to an injunction and civil fines.

Question 17

Joint ventures are usually formed to pursue ongoing business operations rather than to focus on a single project or transaction.

Question 18

Franchise agreements frequently include training requirements for franchisees and their employees.

Question 19

A franchise agreement will normally contain capital requirements for the franchisee.

Question 20

A franchisee is usually free to set its own cleanliness and quality standards.

Question 21

Franchises account for approximately what percent of total retail sales in the United States?

A) 15
B) 25
C) 40
D) 50
E) 65

Question 22

Richard Manufacturing Co.manufactures a product and licenses retail dealers to sell that product to the public.Richard does not sell to the public.This type of franchise is called a(n):

A) distributorship franchise
B) processing plant franchise
C) chain-style franchise
D) area franchise
E) agency franchise

Question 23

Which of the following is not part of the FTC franchise rule?

A) Franchisors must make certain additional disclosures if sales projections are included in materials.
B) The Uniform Franchise Offering Circular meets the requirements of the FTC franchise rule.
C) The rule contains certain minimum disclosures that must be made to prospective franchisees.
D) The disclosure materials must be filed with the FTC.
E) Franchisors in violation are subject to civil fines of up to $10,000 per violation.

Question 24

Which of the following is true in a typical franchise situation?

A) Trademarks and service marks are sold to the franchisee.
B) A franchisee granted a license to use a trademark cannot be found guilty of trademark infringement.
C) A franchisee can be found liable for misappropriating trade secrets even if the item has no patent or trademark protection.
D) Trade secrets are generally protected under federal law.

Question 25

A snowmobile manufacturer would franchise its dealers under which form of franchise?

A) distributorship franchise
B) processing plant franchise
C) chain-style franchise
D) area franchise
E) agency franchise

Question 26

A soft drink company would franchise its bottling plants under which form of franchise?

A) distributorship franchise
B) processing plant franchise
C) chain-style franchise
D) area franchise
E) agency franchise

Question 27

Which of the following is not one of the common general forms of franchises?

A) distributorship
B) processing plant
C) manufacturing
D) chain-style
E) area

Question 28

Which of the following is true about the FTC franchise rule with respect to earnings projections made by a franchisor in materials provided to prospective franchisees?

A) Because they are inherently misleading,financial projections cannot be made.
B) Any earnings projections must be based on the actual results of an existing franchisee.
C) Any earnings projections cannot be based on an actual franchisee and must be based on a hypothetical franchisee and be relevant to the franchisee receiving the information.
D) The franchisor can provide projections based on either actual or hypothetical franchisees,but if projections are provided,certain additional disclosures must be made.
E) The franchisor can provide projections based on either actual or hypothetical franchisees,but can be liable for damages to the franchisee if the results are not reasonably achievable.

Question 29

Which of the following is not an advantage of franchising?

A) The franchisor can reach new markets.
B) The franchisor gets major tax advantages.
C) The franchisee has access to the franchisor's knowledge and resources.
D) Consumers are assured of uniform product quality.

Question 30

What type of law is franchise law?

A) state law only
B) federal law only
C) both federal and state law
D) state law,based only on common law

Question 31

The most important assets of a franchisor are its:

A) physical plant and property
B) right to receive franchise fees
C) right to terminate franchises at will
D) business name and reputation
E) right to set and maintain retail prices

Question 32

Which of the following items are generally not found in a franchise agreement?

A) quality control standards
B) secret formulas
C) training requirements
D) covenants not to compete
E) agreements as to franchise fees

Question 33

The federal requirement related to franchisor disclosure to prospective franchisees is found in the:

A) Multiple-Outlet Sales Disclosure Act
B) FTC Franchise Rule
C) Fair Trade Commission Act
D) Truth-in-Advertising Act

Question 34

A strategic alliance partner is also a potential competitor.

Question 35

The federal agency that covers franchise law is:

A) the Interstate Commerce Commission
B) the Justice Department
C) the Federal Trade Commission
D) the Patent and Trademark Office

Question 36

Which of the following remedies is generally available for breach of a franchise agreement?

A) rescission
B) restitution
C) damages
D) A or B only
E) A,B,or C

Question 37

Once a franchisee has been given a franchise,she may:

A) use the relevant trademark in any way she wants
B) use the trademark only as provided in the franchise agreement
C) buy needed products from any supplier without regard to what the franchise agreement says
D) sell additional franchises to other interested parties
E) A and B only

Question 38

Which of the following is not one of the fees typically found in a franchise agreement?

A) initial license fee
B) royalty fee
C) assessment fee
D) lease fee
E) termination fee

Question 39

A standard form disclosure document used by franchisors seeking franchises is:

A) the prospectus
B) the Uniform Franchise Offering Circular
C) the Standard Franchisee Operating Agreement
D) the Standard Franchisor Disclosure Form

Question 40

A Ford Motor Company dealership is an example of what type of franchise?

A) distributorship
B) processing plant
C) service
D) chain-style

Question 41

The Squirrel Tail Ale Microbrewery has granted a franchise to Jimmy to run a Squirrel Tail Ale Brewpub in Chicago.Jimmy opens the brewpub,but has started purchasing a less expensive beer and selling it in this brewpub as Squirrel Tail Ale.Jimmy has most likely:

A) breached the franchise agreement,but nothing more
B) infringed the trademark of Squirrel Tail Ale
C) not done anything wrong because requiring the sale of Squirrel Tail Ale would be an illegal tying arrangement
D) perhaps done something wrong,but he could not lose his franchise because it is against public policy to unilaterally terminate a franchise

Question 42

Mike is considering opening a barbecue restaurant.He can either design his own,or obtain a franchise for a "Bubba's Roadkill Barbecue House," which does not actually serve roadkill.What factors should Mike consider in deciding which course of action to take?

Question 43

Jonathon has a business that he has franchised to 10 franchisees over the last 6 years.In seeking additional franchises,which of the following is true about financial disclosures to potential new franchisees?

A) He must include income statements and balance sheets for each franchisee that has been in operation for 3 years or more.
B) He must include financial forecasts and appropriately label them.
C) He must include hypothetical examples and appropriately label them.
D) He must include aggregate income statements and balance sheets,which combine amounts for all franchises that have been in business 3 years or more.
E) He must include 3 years of income statements and balance sheets for the franchisor.

Question 44

Bob obtains a franchise to operate a "Tofu Sweets" retail dessert store.All of the store's desserts are tofu-based.Each dessert treat has a trademarked name,and is made using a secret formula and process.As a franchisee,Bob purchases some of the items ready to sell,but others must be individually prepared in the store.After operating the store for a few months,Bob starts buying the tofu for the items made in the store from another source because it is less expensive.The quality is not as high,but most customers do not seem to notice the difference.The franchisor terminates Bob's franchise,but he immediately opens his own store under the name "Sweet Tofu Treats" and begins selling products identical to those that were prepared at the "Tofu Sweets" store.What claims could the "Tofu Sweets" franchisor bring against Bob? Discuss each of them.

Question 45

Rachel has a business that she has franchised to hundreds of franchisees over the last twenty years.In seeking additional franchisees,which of the following is true about financial disclosures to potential new franchisees?

A) She must include income statements and balance sheets for each existing franchisee.
B) She must include income statements and balance sheets for each franchisee that has been operating for 3 years or more,and if none,she must use hypothetical examples.
C) She can choose whether to include actual income statements and balance sheets of existing franchisees or use hypothetical examples,but she must do one or the other.
D) She is not required to make any financial disclosures about franchisees,but if she chooses to make such disclosures,she can make them in any way she chooses.
E) She is not required to make any financial disclosures about franchisees,but if she chooses to make such disclosures,she must make certain additional disclosures,with the specific required disclosures depending on whether she provides actual results of existing franchisees or hypothetical examples.

Question 46

What are the ethical issues involved in franchising businesses in foreign nations when doing so puts local businesses out of business and may cause cultural disruptions?

Question 47

Which statute would a franchisee be violating if she continued to use the trademark of a franchisor after the franchise had been terminated?

A) the Domestic Corrupt Practices Act
B) the Franchisor Trademark Protection Act
C) the Lanham Trademark Act
D) the Franchise Investment Law

Question 48

Why has the federal government chosen to regulate the activities of franchisors? Why are parties to franchise agreements not given the same flexibility and freedoms as in most other contracts?

Question 49

Richard wants to franchise his pastry business.However,he has no knowledge of what laws govern franchises.Richard comes to you for advice.Which laws govern franchises of this type?

A) state contract law
B) Federal Agency law
C) state statutes covering franchises
D) A,B,and C
E) B and C only

Question 50

Gloria wants to franchise her carpet cleaning business.Under the Federal Trade Commission rules on disclosure,which of the following items does Gloria not need to disclose?

A) a description of the franchisor's business
B) a listing of the grounds for termination of the franchise
C) a disclosure as to restrictions on the franchisee's inventory
D) how much Gloria will profit from each franchise
E) recent financial statements of the franchisor