Deck 4: Franchises and Buyouts

Question 1

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.

Answer 1

True

Question 2

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

Answer 2

False

Question 3

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

Answer 3

True

Question 4

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

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

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

Question 7

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 8

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

Question 9

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

Question 10

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

Question 11

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

Question 12

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 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

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 15

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 16

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

Question 17

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

Question 18

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

Question 19

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 20

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.

Question 21

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 22

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

Question 24

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 25

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 26

Business format franchising is best illustrated by the system offered by

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

Question 27

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 28

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

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

Question 29

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 30

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 31

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 32

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 33

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 34

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 35

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

Question 36

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 37

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 38

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 39

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 40

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 41

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 42

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 43

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 44

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 45

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 46

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 47

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 48

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

A) lists warnings about certain franchise systems.
B) speeds up loan processing for small business franchisees.
C) rates franchise systems according to a four star rating.
D) registers all franchise systems operating in the U.S.

Question 49

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.

Question 50

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 51

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 52

If a franchisor is guilty of encroachment of a franchisee, which agreement is it most likely to be in violation of?

A) Nondisclosure agreement
B) Franchise Rule
C) Franchise Disclosure Document
D) Noncompete agreement

Question 53

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 54

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 55

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 56

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 57

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 58

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 59

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 him from 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 60

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 61

Fred's company specializes in bringing together buyers and sellers of businesses.  Fred is:

A) a business broker.
B) a master licensee.
C) an area developer.
D) a real estate agent.

Question 62

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) a non-disclosure statement.
C) a franchise rule.
D) a franchise disclosure document.

Question 63

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 non-compete agreement.

Question 64

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 65

Susan is considering buying the local franchisee of Pots-R-Us . The owners would probably state this reason for selling when in actuality the other three reasons may be more likely.

A) desire to locate to a different part of the country
B) unprofitable
C) loss of an exclusive sales franchise
D) lack of growth potential

Question 66

What question 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 67

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 68

Which of the following reasons for buying a business is also a reason for purchasing a franchise?

A) Reduction of uncertainty
B) Acquiring goodwill
C) Bargain price
D) Quick start

Question 69

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

A) Understated 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 70

The seller of an existing business placed a high value on his experienced employees.  The buyer should be wary of this because:

A) their skills may be obsolete.
B) the seller wants a higher price for his business.
C) the workers may decide to leave after the sale.
D) the buyer will want to bring in his own people.

Question 71

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 72

Darin is assembling a team of experts to help him through the process of evaluating a franchise opportunity.  This team should include:

A) a union representative, a lawyer, 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 73

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 74

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 75

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:

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

Question 76

Before making an offer for a business, Garland will want to

A) talk to the customers.
B) check the business's website.
C) perform due diligence.
D) hire a broker.

Question 77

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 model is reproducible.
B) have a technical writer create an owner's manual.
C) partner with a lender to offer franchisee financing.
D) hire a master licensee to locate prospective franchisees.

Question 78

When is a bargain price for an existing business not a good deal for the buyer?

A) When the seller intends to open a competing business in the same locality
B) When the business is losing money
C) When the neighborhood is deteriorating
D) all of the above

Question 79

One possible disadvantage of becoming a franchisor is:

A) complying with all the government regulations.
B) the cost of franchising exceeds the franchise fee.
C) the cost of screening prospective franchisees.
D) providing training to new franchisees.

Question 80

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
D) non-disclosure agreement