Deck 15: Franchising

Question 1

Clark Jensen recently opened a Planet Smoothie franchise. So far, he is very satisfied with Planet Smoothie because in exchange for an initial franchise fee and an ongoing royalty payment, Planet Smoothie has provided Clark a formula for doing business along with training, advertising, and other forms of assistance. Clark purchased a ________ franchise.

A) business extension
B) formula driven
C) sales extension
D) business format
E) product and trademark

Answer 1

D

Question 2

The people who buy franchises from master franchises are typically called:

A) minor franchisees
B) secondary franchisees
C) mini-franchisees
D) subordinate franchisees
E) subfranchisees

Answer 2

E

Question 3

Katherine Collins has been a Chrysler dealer for the past 20 years. Katherine owns a:

A) business format franchise
B) product and trademark franchise
C) business design franchise
D) product plus franchise
E) product and business format franchise

Answer 3

B

Question 4

The Partnering for Success feature in Chapter 15 focuses on how franchise organizations can boost their sales while at the same time reduce their expenses. The technique that the feature recommends to achieve these dual objectives is:

A) strategic alliances
B) joint ventures
C) outsourcing
D) licensing
E) cobranding

Question 5

College Nannies and Tutors, the company profiled in the opening feature for Chapter 15, was started by Joseph Keeley, a student at St. Thomas University in St. Paul, Minnesota. According to the feature, Keeley met Peter Lytle, the angel investor who funded his startup, at:

A) an alumni event for a community college they both attended
B) a Small Business Development Center workshop
C) a Chamber of Commerce event in Minneapolis
D) the awards ceremony for a business plan competition that Keeley won
E) a social event for aspiring entrepreneurs and investors sponsored by the city of St. Paul

Question 6

An individual who owns and operates more than one outlet of the same franchisor, whether through an area or a master franchise agreement, is referred to as a:

A) multifaceted franchisee
B) super franchisee
C) various-unit franchisee
D) compound franchisee
E) multiple-unit franchisee

Question 7

There are two distinctly different types of franchise systems:

A) product trademark franchise, business arrangement franchise
B) product plus franchise, business format franchise
C) business design franchise, product improvement franchise
D) product extension franchise, business design franchise
E) product trademark franchise, business format franchise

Question 8

According to the textbook, one of the first companies in the United States to utilize franchising was:

A) McDonald's
B) Singer Sewing Machine
C) H&R Block
D) Coca-Cola
E) Curves International

Question 9

Which of the following statements is incorrect regarding product and trademark franchises?

A) Rather than obtaining a royalty or franchise fee, the product and trademark franchisor obtains the majority of its income from selling its products to its dealers or distributors at a markup.
B) General Motors establishes product trademark rather than business format franchises.
C) Product trademark franchises are by far more popular than business format franchises.
D) Product and trademark franchisees are typically permitted to operate in a fairly autonomous manner.
E) A product trademark franchise typically connects a single manufacturer with a network of dealers or distributors.

Question 10

________ is a form of business ownership in which a firm that already has a successful product or service licenses its trademark and method of doing business to other business in exchange for an initial franchise fee and an ongoing royalty.

A) Licensing
B) Joint Venturing
C) Contracting
D) Subcontracting
E) Franchising

Question 11

A(n) ________ involves the sale of a single franchise for a specific location.

A) individual franchise agreement
B) one-of-a-kind franchise agreement
C) pinpoint franchise agreement
D) specific franchise agreement
E) precise franchise agreement

Question 12

Which of the following statements is incorrect regarding franchising?

A) Franchising is growing in popularity in the U.S.
B) There are some instances in which franchising is not appropriate.
C) New technologies are often introduced through franchise systems.
D) Franchising, by its very nature, involves the sharing of knowledge between a franchisor and a franchisee.
E) The failure rate for franchise systems is relatively high.

Question 13

A ________ franchise is an arrangement under which the franchisor grants to the franchisee the right to buy its products and use its trade name.

A) product and trademark
B) product extension
C) business format
D) production plus
E) business design

Question 14

A master franchisee, in addition to having the right to open and operate a specific number of locations in a particular area, also has the right to:

A) stop making royalty payments if its sales decline
B) sell products made by companies other than the franchisor
C) offer and sell the franchise to other people in its area
D) use its own operating manuals to run its franchise outlets
E) stop making royalty payments if it is losing money

Question 15

Franchising is appropriate when:

A) a firm's business methods are not polished, it has a desire to grow, and it is trying to commercialize a technology product
B) a firm has a strong trademark, a desire to grow, and a well-designed business method
C) a firm is trying to commercialize a technology product, it is well-funded, and it has a desire to grow
D) a firm has a weak trademark, it is well-funded, and it has a desire to grow
E) a firm has a desire to grow, it has a well-designed business method, and it is well funded

Question 16

According to the textbook, in 2005 nearly ________ individual franchise outlets were operating in the United States.

A) 590,000
B) 765,000
C) 910,000
D) 1.2 million
E) 2.0 million

Question 17

Which of the following companies would not be suitable for franchising?

A) College Nannies & Tutors
B) Smoothie King
C) McDonald's
D) H&R Block
E) Lowe's

Question 18

Phil Atkinson recently entered into an agreement with Quizno's Subs to open seven Quizno's Subs franchises. According to the agreement that Phil entered into, he has the right to open up to six Quizno's Subs franchises within the city limits of Stillwater, Oklahoma. Phil has entered into an:

A) individual franchise agreement
B) area franchise agreement
C) locality franchise agreement
D) district franchise agreement
E) neighborhood franchise agreement

Question 19

Franchising is a form of business ownership in which a firm that already has a successful product or service licenses its trademark and method of doing business to other business in exchange for:

A) an initial franchise fee and an ongoing royalty
B) an initial franchise fee
C) an equity position in the new business
D) an ongoing royalty
E) an initial franchise fee and an equity position in the new business

Question 20

Which of the following statements is incorrect regarding business format franchises?

A) Arby's sells business format franchises.
B) A business format franchises can be very rigid and demanding.
C) Automotive services and convenience stores are well-known examples of business format franchises.
D) In a business format franchise, the franchisor provides a formula for doing business to the franchisee along with training and other forms of support.
E) The business format franchisor obtains the majority of its income from selling its products to its dealers at a markup.

Question 21

According to a concept called ________ theory, it is more effective for the units of a growing chain to be run by franchises than by managers, because managers are usually paid a salary, and may not be as committed to the success of their individual units as franchisees, who are in effect the owners of the units they manage.

A) agency
B) stimulus
C) control
D) leadership
E) motivation

Question 22

Franchisors are required by law to disclose all their costs in a document called the:

A) Fairness in Franchising Certificate
B) Consistent Franchise Offering Code
C) Standardized Franchise Code
D) Franchise Disclosure Document
E) Franchise Code of Conduct

Question 23

Which of the following statement is incorrect regarding the franchisor-franchisee relationship?

A) A franchisee may be charged a fee for additional training.
B) Some franchisors require a new franchisee to pay a "grand opening" fee.
C) Franchisees are often required to pay into a national or regional advertising fund.
D) Weekly or monthly royalty fees are usually around 2% of net income.
E) Franchisees may have to pay a monthly royalty even if the business is losing money.

Question 24

In the majority of cases, a franchisee pays the franchisor a royalty based on:

A) a predetermined fixed weekly or monthly amount
B) weekly or monthly net income
C) the size of the franchise outlet
D) weekly or monthly gross income
E) the age of the franchise outlet

Question 25

There are two primary advantages to buying a franchise over other forms of business ownership. First, franchising provides an entrepreneur the ability to own a business using tested and refined business methods, and second:

A) franchising is almost a sure way of making a profit
B) a franchise agreement is typically easy to exit if expectations aren't met
C) franchisors typically encourage creativity on the part of franchisees
D) the franchisor typically provides training, technical expertise, and other forms of support
E) franchise organizations are consistently more profitable than non- franchise organizations in the same industry

Question 26

According to our textbook, which of the following is not a quality to look for in prospective franchisees?

A) individual, rather than team-oriented
B) ability to follow instructions
C) experience in the industry in which the franchisee operates
D) ability to operate with minimal supervision
E) adequate financial resources and a good credit history

Question 27

The Franchise Disclosure Document is accepted in (or by):

A) 11 states
B) all 50 states, all of Canada, and parts of Mexico
C) 39 states and all of Canada
D) all 50 states and parts of Canada
E) all nations participating in the North America Free Trade Agreement

Question 28

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

A) cost of the franchise
B) duration and nature of the commitment
C) restrictions on creativity
D) availability of financing
E) potential for failure

Question 29

Which of the following was not identified in the textbook as one of the disadvantages of franchising a business?

A) loss of control
B) friction with franchisees
C) franchisee motivation
D) differences in required business skills
E) legal expenses

Question 30

To avoid making a hasty judgment, a franchisee may not purchase a franchise for ________ from the time the Franchise Disclosure Document is received.

A) one day
B) three days
C) 10 days
D) 14 days
E) 30 days

Question 31

The statute that regulates franchising at the federal level is:

A) Federal Trade Commission Rule 436
B) Congressional Statute 399
C) SEC Statute 23
D) Congressional Amendment 442
E) SEC Fairness in Franchising Act

Question 32

The FDD contains ________ categories of information.

A) 6
B) 18
C) 23
D) 32
E) 40

Question 33

Which of the following statement is not correct regarding the costs associated with purchasing a franchise?

A) The franchisee typically pays a royalty based on a percentage of weekly or monthly net income.
B) Capital costs vary by franchisor, but may include the cost of buying land and building a building.
C) Additional fees may be charged for activities such as training staff, providing management expertise when needed, and providing computer assistance.
D) Franchisees are often required to pay into a national or regional advertising fund.
E) The initial franchise fee varies, depending on the franchisor.

Question 34

Which of the following is not an advantage of buying a franchise?

A) a proven product or service within an established system
B) franchisor ongoing support
C) availability of financing
D) potential for business growth
E) duration and nature of the commitment

Question 35

The document that consummates the sale of a franchise is called the:

A) Franchise Disclosure Document
B) franchise agreement
C) license agreement
D) Uniform Franchise Licensing Code
E) franchise circular

Question 36

According to the textbook, a franchisee's weekly or monthly royalty fees are typically around ________ of gross income.

A) 1%
B) 3%
C) 5%
D) 7%
E) 9%

Question 37

According to the textbook, the main disadvantage of buying a franchise is:

A) franchise organizations typically grow slower than non-franchise organizations in the same industry
B) franchisors typically provide poor levels of support
C) the cost involved
D) the service sector of the U.S. economy is waning in importance
E) franchising is waning in its popularity

Question 38

According to the textbook, which of the following is not a cost that is typically associated with buying a franchise?

A) intellectual capital fees
B) capital requirements
C) continuing royalty payment
D) advertising fees
E) initial franchise fee

Question 39

According to the textbook, from the franchisor's point of view, the primary disadvantage of franchising is that:

A) it is not legal in 11 states
B) an organization allows others to profit from its trademark and business method
C) franchise organizations consistently makes less money than alternative forms of business ownership
D) it typically takes longer to grow an organization via franchising than company-owned stores
E) the franchisees, rather than the franchisor, typically makes most of money

Question 40

Because franchisees put their personal capital at risk, they are highly motivated to make their franchise outlets successful. According to the textbook, this advantage of franchising a business is referred to as:

A) franchisee owner-incentive
B) franchisee impulse
C) agency theory
D) institutional theory
E) franchisee motivation

Question 41

The What Went Wrong? boxed feature in Chapter 15 focuses on things that can go wrong in opening franchise outlets overseas. The specific obstacle or obstacles involved with franchising overseas, focused on in the feature, are:

A) finding attractive markets to operate in
B) shipping and transportation costs
C) finding qualified franchise owners overseas
D) exchange rates
E) differences in language and customs

Question 42

In regard to international franchising, under a(n) ________, the U.S. franchisor grants the rights to an individual or company (the developer) to develop multiple franchised businesses within a country or territory.

A) indirect franchise agreement
B) global franchise agreement
C) concurrent franchise agreement
D) direct franchise agreement
E) express franchise agreement

Question 43

Kim Baker just purchased the rights to develop multiple Curves International franchises in Australia. Kim just purchased a:

A) concurrent franchise arrangement
B) indirect franchise arrangement
C) lateral franchise arrangement
D) direct franchise arrangement
E) subordinate franchise arrangement

Question 44

International opportunities for franchising are becoming:

A) less prevalent
B) neither more nor less prevalent
C) more prevalent for product and trademark franchise systems and less prevalent for business format franchise systems
D) more prevalent
E) less prevalent for product and trademark franchise systems and more prevalent for business format franchise systems

Question 45

Despite its advantages, franchising is not a popular form of business growth.

Question 46

A business format franchise typically connects a single manufacturer with a network of dealers or distributors.

Question 47

In the context of international franchising, under a ________ franchise arrangement, the U.S. firm grants the rights to an individual or company (the master franchisee) to develop one or more franchise businesses and to license others to develop one or more franchise businesses within the country.

A) master
B) direct
C) subordinate
D) concurrent
E) multinational

Question 48

Target is an example of an organization that is perfectly suited for franchising, but it doesn't franchise.

Question 49

Which of the following statements is incorrect regarding the future of franchising?

A) Franchise organizations represent a large and growing segment of the retail and service sectors of U.S. businesses.
B) The future of franchising appears to be dim.
C) More and more college graduates are choosing careers in industries that are heavily dominated by franchising.
D) According to the International Franchise Association, franchising represents about $880 billion in annual retail sales in the United States.
E) The International Franchise Association estimates that franchise organizations provide jobs for more than 11 million Americans.

Question 50

An area franchise agreement allows a franchisee to own and operate a specific number of outlets in a particular geographic area.

Question 51

While franchise agreements vary, each agreement typically contains two sections:

A) the statutory agreement and the purchase agreement
B) the franchise agreement and the buy agreement
C) the buy agreement and the membership agreement
D) the procurement agreement and the statutory agreement
E) the purchase agreement and the franchise agreement

Question 52

In a business format franchise, the franchisor provides a formula for doing business to the franchisee along with training, advertising, and other forms of assistance.

Question 53

While franchise agreements vary, each agreement typically contains the franchise agreement and:

A) the legal agreement
B) the procurement agreement
C) the purchase agreement
D) the sell agreement
E) the conversion agreement

Question 54

According to a recent FTC report, instances of problems between franchisors and their franchisees tend to be:

A) prevalent practices
B) isolated occurrences
C) there have been no reported problems between franchisors and their franchisees
D) prevalent practices for product and trademark franchise systems and isolated occurrences for business format franchise systems
E) isolated occurrences for product and trademark franchise systems and prevalent practices for business format franchise systems

Question 55

An individual who is team oriented is typically a good candidate to be a franchisee.

Question 56

Business format franchises typically allow franchisees substantial flexibility in how they run their individual franchise units.

Question 57

Franchising is a form of business organization in which a firm that already has a successful product or service licenses its trademark and method of doing business to other businesses in exchange for an initial franchise fee and an ongoing royalty.

Question 58

The business product and trademark franchise is a more popular approach to franchising than the business format franchise.

Question 59

The people who buy franchises from master franchisees are typically called subfranchisees.

Question 60

In addition to FTC disclosure requirements, ________ states have laws providing additional protection to franchisees.

A) 6
B) 10
C) 15
D) 33
E) 47

Question 61

The majority of franchisors are highly ethical individuals who are interested only in making a fair return on their investment.

Question 62

One of the most important questions a prospective franchisor should consider is whether the fees and royalties charged by a franchisor are consistent with the franchise's value or worth.

Question 63

Franchisors are required by law to disclose all their costs in a document called the Franchise Disclosure Document.

Question 64

In the majority of cases, a franchisee pays a royalty based on a percentage of weekly or monthly net income.

Question 65

The royalty fees a franchisee pays are usually around 10 percent of gross income.

Question 66

What is the difference between a product and trademark franchise and a business format franchise? Which type of franchise is most common for entrepreneurial firms?

Question 67

What are the primary advantages and disadvantages to establishing a franchise system (from the franchisor's point of view)?

Question 68

Franchisees are often required to pay into a national or regional advertising fund, even if the advertisements are directed at goals other than promoting the franchisor's product or service.

Question 69

How can a person tell if franchising is right for them?

Question 70

A management concept called agency theory refutes the value of franchising for organizations with multiple units, like restaurant chains.

Question 71

When is franchising appropriate (from the business owner's point of view). Provide an example of when franchising is appropriate and when it is inappropriate.

Question 72

List and explain three of the common misconceptions about franchising.

Question 73

The Franchise Disclosure Document contains a total of 23 categories of information that give a prospective franchisee a broad base of information about the background and financial health of the franchisor.

Question 74

The primary disadvantage of franchising is that an organization allows others to profit from its trademark and business method.

Question 75

The franchise agreement, or contract, is the document that consummates the sale of a franchise.