Deck 8: Franchising and the Entrepreneur

Question 1

A major advantage of a franchise contract is the national advertising campaign that most franchisors provide free of charge for their franchisees.

Answer 1

False

Question 2

Pure franchising involves the right to use all the elements of a fully integrated business operation.

Answer 2

True

Question 3

Franchisors generally do which of the following regarding financial assistance to franchisees?

A)Provide direct financing.
B)Assist in finding financing and occasionally provide direct assistance in a specific area.
C)Waive royalty fees for franchisees not making an adequate profit.
D)Franchisors provide no assistance because having or finding financing is a requirement for qualifying for a franchise.

Answer 3

B

Question 4

McDonald's is an example of a ________ franchise.

A)conversion forms
B)trade name
C)product distribution
D)pure

Question 5

Before entering a franchise contract, a potential investor should ask, "What can a franchise do for me that I cannot do for myself?"

Question 6

Trade name franchising is a system of franchising in which a franchisee purchases the right to use the franchisor's trade name without distributing particular products under that name.

Question 7

When a franchisee buys a franchise, (s)he is purchasing the expertise and the business of the franchisor.

Question 8

When it comes to purchasing products, equipment, and incurring other expenses, the franchisor ________.

A)cannot require the franchisees to buy from the franchise company
B)can set prices franchisees pay for the products but cannot set the retail price the franchisees charge
C)is permitted to set the retail price for the franchisee
D)cannot require franchisees to buy from an "approved" supplier

Question 9

Examples of some benefits franchise systems offer include management training, brand appeal, standardization of goods and services, national advertising, proven business formats, centralized buying power, and site selection assistance.

Question 10

Benefits of involvement in a franchise experience include ________.

A)management training and support
B)brand name appeal and standardization of goods and services
C)national advertising exposure and financial assistance
D)All of the above

Question 11

Define franchising. Explain the three types of franchising. Which is the fastest-growing segment?

Question 12

A significant advantage a franchisee has over an independent business is the participation in the franchisor's ________ largely due to the ________ the franchise offers.

A)centralized buying power; buying insight
B)centralized buying power; brand protection
C)centralized buying power; economies of scale
D)economies of scale; territorial protection

Question 13

Some franchisors offer ________ to give existing franchisees the right to exclusive distribution of brand name goods or services within a particular geographic area.

A)territorial protection
B)exclusive rights
C)guaranteed protection
D)exclusivity

Question 14

A franchise is a system of distribution in which semi-independent business owners pay ________ and ________ to a parent company in return for the right to become identified with its trademark, to sell its product or services, and often to use its business format and system.

A)a percentage of sales; royalties
B)upfront costs; incremental costs
C)royalties; monthly consulting charges
D)fees; royalties

Question 15

Pure franchising involves a system of franchising in which a franchisor sells a franchisee a complete business format and system.

Question 16

Franchises total annual sales represent more than ________ and employ nearly ________ workers in the Unities Sates in more than 300 industries.

A)$17 billion; 17 million
B)$120 billion; 8.2 million
C)$710 billion; 7.8 million
D)$225 billion; 21 million

Question 17

A recent study reports that the success rate of franchisees increases when a franchise system ________.

A)requires franchisees to have prior industry experience
B)requires franchisees to actively manage their operations
C)has built a strong brand name with training programs to improve knowledge and skills
D)All of the above increase the rate of success.

Question 18

A franchise is an arrangement in which semi-independent business owners pay fees and royalties to a parent company in return for the right to sell its products or services and often to use its business format and system.

Question 19

________ franchising involves providing the franchisee with a complete business system, with an established name, the building layout and design, accounting systems, and other elements while ________ franchising allows the franchisee to use the franchisor's trade name without distributing the products exclusively under the franchisor's name.

A)Product distribution; trade name
B)Trade name; pure
C)Pure; trade name
D)Pure; product distribution

Question 20

Franchise royalty fees typically range from ________ to ________ percent with an average of 6.7 percent.

A)3; 13
B)1; 21
C)1; 11
D)3; 11

Question 21

Outline the benefits and drawbacks of buying a franchise.

Question 22

It is illegal for a franchisor to require franchisees to purchase products only from "approved suppliers."

Question 23

The failure rate for franchises is below that for other types of new businesses.

Question 24

Most franchisors provide extensive financial help such as loans and low-rate financing for their franchises.

Question 25

The bigger the franchise, the more successful the franchisees will be.

Question 26

By signing the franchise contract, a franchisee typically surrenders some freedom and autonomy in operating her/his business.

Question 27

The franchise contract defines the rights and the obligations of both parties and sets the guidelines that govern the franchise relationship.

Question 28

Which of the following is not a potential advantage of franchising for the franchisee?

A)Management training and assistance
B)National advertising program
C)Centralized buying power
D)Limited product line

Question 29

The failure rate for franchises is ________.

A)higher than the average rate for new businesses
B)no different from the rate for new businesses
C)lower than the average rate for new businesses
D)indeterminable because of the Right to Privacy Act

Question 30

The Uniform Franchise Disclosure Document (UFDD)is a document that every franchisor is required by law to give prospective franchisees before any offer or sale of a franchise.

Question 31

A franchise myth is that ________.

A)once the franchise is open, the franchisee has autonomy to run the business in whatever way (s)he sees fit
B)the owner needs to be hands on
C)the franchise will only expect to be paid when the franchisee is profitable
D)franchises fail at a rate higher than independently owned businesses

Question 32

In addition to other fees, franchisees must also pay royalties but only on net profits; in other words, no profits, no royalties.

Question 33

Franchisees in fast-growing systems reap the benefits of the franchisor's expanding reach, but they also may encounter the downside of a franchisor's aggressive growth strategy - market saturation.

Question 34

Quality is so important in franchising that most franchisors retain the right to terminate the franchise contract and to repurchase the outlet if a franchisee fails to maintain quality standards.

Question 35

Which of the following is not a potential disadvantage of a franchise?

A)Unsatisfactory training program.
B)Limited product line.
C)Less freedom.
D)All of the above are potential disadvantages of a franchise.

Question 36

The FTC's philosophy regarding the Uniform Franchise Disclosure Document (UFDD)focuses on ________.

A)catching and prosecuting abusers of franchise laws
B)verifying the accuracy of FDD information
C)providing information to prospective franchisees and helping them make wise decisions
D)licensing prospective franchisors

Question 37

Absentee franchise owners are consistently successful.

Question 38

Mini-Case 8-1: Pipe Dreams
Ralph Emerson thought he'd been a librarian long enough, and when the opportunity arose to open a small tobacco, pipe, and cigar shop in the newly-renovated downtown business district, he was ready to act. Pipe Dreams is a franchisor of smoke shops, and was founded eight years ago by a noted tobacconist in New York City. The concept for the shops is simple, yet sophisticated. It is simple in the sense that the shops sell only tobacco-related products, but sophisticated in the breadth and quality of the inventory they carry. Each franchise, depending on size, is stocked with inventory selected by the company's founder. The franchisor finances the shop's initial inventory. The franchisee is expected to create a decor within predetermined standards that Pipe Dreams established. Each franchisee must attend a three-day workshop, outlining the fundamentals of tobacco blending, the merchandising of pipes and cigars, and the techniques of successful business operation.
The franchise contract requires the franchisee to contribute 1.5 percent of gross revenue to a national advertising campaign. According to the contract, Pipe Dreams will finance the required fixtures for the store for ten years. In addition, the franchisor supplies all inventory at very favorable prices because it purchases in large quantities.
Ralph knows he can buy tobacco products from a variety of wholesalers. He also has some ideas on what would make a tobacco shop successful in this town. Ralph knows that Pipe Dreams franchisees have had a high success rate in the past.
Help Ralph make a decision by outlining the advantages and the disadvantages of a franchise arrangement.

Question 39

Which of the following is an indication of a dishonest franchisor?

A)A high-pressure sale.
B)A "get-rich-quick" scheme.
C)Attempts to discourage you from getting an attorney to review the contract.
D)All of the above

Question 40

Having an attorney review and evaluate a franchise contract is unnecessary since the FTC requires all franchisors to offer a "standard" franchise contract.

Question 41

Most franchisees are better educated, more sophisticated, have more business acumen, and are more financially secure than those of just 20 years ago.

Question 42

The principle of putting a franchise's products or services directly in the paths of potential customers with smaller, less expensive outlets is called ________.

A)cobranding
B)intercept marketing
C)area development
D)master franchise

Question 43

A good method for evaluating a franchisor's reputation is to interview existing franchise owners about the operation.

Question 44

The principle of placing smaller franchise units directly in the paths of potential customers is referred to as intercept marketing.

Question 45

Which of the following should make a potential franchisee suspicious about a franchisor's honesty?

A)Claims that the franchise contract is a standard agreement and that there is no need to read it or have an attorney look it over.
B)An offer of direct financing of a specific element of the franchise package.
C)Not providing detailed operational information until 10 days before signing the contract.
D)Requiring franchisees to spend a certain percentage of profits on advertising.

Question 46

What are some indicators that a potential franchisee might be dealing with a dishonest franchise? What steps can a potential franchisee take to avoid becoming a victim of a dishonest franchise?

Question 47

A study by the International Franchises Association reports that minorities own more than ________ percent of all franchises and women own ________ percent of franchises.

A)2; 8
B)9; 20
C)12; 25
D)31; 26

Question 48

What is the Franchise Disclosure Document? How can this document be of value to a potential franchisee?

Question 49

Outline the recommended procedure for buying a franchise.

Question 50

If a franchisor encourages you to sign without reading the agreement, or discourages you from "spending the money on an attorney," this is a warning sign that the franchisor might be dishonest.

Question 51

________ is the top international market for U.S. franchisors.

A)Europe
B)Canada
C)Japan
D)China

Question 52

One of the first lessons in franchising is, "Do your homework before you get out your checkbook."

Question 53

The franchisee turnover rate is the rate at which franchisees leave a franchise system.

Question 54

In a ________ franchise, a franchisee has the right to create a semi-independent organization in a particular territory to recruit, sell, and support other franchisees.

A)multiple-unit
B)master
C)conversion
D)cobranding

Question 55

Mini-Case 8-1: Pipe Dreams
Ralph Emerson thought he'd been a librarian long enough, and when the opportunity arose to open a small tobacco, pipe, and cigar shop in the newly-renovated downtown business district, he was ready to act. Pipe Dreams is a franchisor of smoke shops, and was founded eight years ago by a noted tobacconist in New York City. The concept for the shops is simple, yet sophisticated. It is simple in the sense that the shops sell only tobacco-related products, but sophisticated in the breadth and quality of the inventory they carry. Each franchise, depending on size, is stocked with inventory selected by the company's founder. The franchisor finances the shop's initial inventory. The franchisee is expected to create a decor within predetermined standards that Pipe Dreams established. Each franchisee must attend a three-day workshop, outlining the fundamentals of tobacco blending, the merchandising of pipes and cigars, and the techniques of successful business operation.
The franchise contract requires the franchisee to contribute 1.5 percent of gross revenue to a national advertising campaign. According to the contract, Pipe Dreams will finance the required fixtures for the store for ten years. In addition, the franchisor supplies all inventory at very favorable prices because it purchases in large quantities.
Ralph knows he can buy tobacco products from a variety of wholesalers. He also has some ideas on what would make a tobacco shop successful in this town. Ralph knows that Pipe Dreams franchisees have had a high success rate in the past.
Assuming that Ralph has adequate capital, would you recommend that he invest in the franchise or open his own tobacco shop? Why?

Question 56

One of the major trends in franchising is the ________ of American franchise systems.

A)replication
B)conversion
C)internationalization
D)reduction

Question 57

A franchise trend in which owners of independent businesses become franchisees to gain the advantage of name recognition is called ________.

A)area development
B)master franchise
C)conversion franchising
D)cobranding

Question 58

Franchises have experienced three major growth waves since beginning that include a focus on ________.

Question 59

Many franchises have discovered that small outlets in high-traffic, nontraditional locations generate nearly the same sales volume as full-size outlets at a fraction of the cost.

Question 60

In addition to reading the franchisor's UFDD, it would be wise for the potential franchisee to seek a franchise that offers which of the following?

A)A unique concept or marketing approach
B)A registered trademark
C)A positive relationship with franchisees
D)All of the above

Question 61

Explain three trends that are currently shaping the franchising industry.

Question 62

Chris Jaffe, the owner of a small independent doughnut shop, is worried that a large doughnut franchise will open an outlet near her location and take away business. Taking a proactive approach, Jaffe contacts the franchise, and after a few months of negotiations, becomes a franchisee. Jaffe is an example of which trend in franchising?

A)Cobranding
B)Conversion
C)Master
D)Subfranchising

Question 63

When the franchisor has the right to establish a semi-independent organization in a particular territory to recruit, sell, and support other franchises, it is known as a ________ franchise.

A)multi-unit
B)cobranding
C)conversion
D)master

Question 64

Explain the following franchise concepts and give an example of each: area development, intercept marketing, conversion franchising, master franchising and cobranding.

Question 65

McDonald's recently set up several small franchises in nontraditional locations such as a hospital, a college campus, an airport, a subway station, and a sports arena. These locations are based on the principle of ________.

A)conversion franchising
B)intercept marketing
C)multi-unit franchising
D)cobranding

Question 66

A master franchise gives the franchisee the right to create a semi-independent organization in a particular territory to recruit, sell, and support other franchisees within a specific time frame.

Question 67

A method of franchising that gives the right to create a semi-independent organization in a particular territory is a(n)________ franchise.

A)conversion
B)master
C)product distribution
D)area development

Question 68

Establishing a Baskin-Robbins franchise inside a Blimpee's franchise is an example of ________ franchising.

A)multi-unit
B)master
C)cobranding
D)diversionary

Question 69

A conversion franchising arrangement gives a franchisee the right to create a semi-independent organization in a particular territory to recruit, sell, and support other franchisees.