Question 1

To reduce costs, a franchise consultant can substitute for a licensed attorney experienced in the evaluation of legal documents related to franchising agreements.

Accepted Answer

A franchise consultant can provide helpful guidance and advice regarding franchising agreements, but they cannot substitute for a licensed attorney when it comes to the evaluation of legal documents. A licensed attorney with experience in franchising law is necessary to ensure that the franchise agreement is legally sound and protects the interests of both parties. Cutting corners in this area can lead to costly legal issues down the line.

Question 2

One of the benefits of becoming a franchisee is sharing profits with the franchiser.

Accepted Answer

Sharing profits with the franchiser is not a benefit; it is a requirement. Franchisees pay fees or royalties to the franchiser, which is a cost of operating the franchise.

Question 3

The franchiser being evaluated should be a primary source of information about a franchise.

Accepted Answer

The franchiser being evaluated is the best source of information about a franchise as they can provide detailed information about the franchise system, support, and track record, among other things.

Question 4

One of the disadvantages of purchasing a franchise is that franchisers seldom provide adequate training programs.

Accepted Answer

This statement is not true. Franchisers typically provide comprehensive training programs to ensure that franchisees are able to successfully operate the business. However, the quality and effectiveness of the training can vary by franchise system.

Question 5

A franchise is typically attractive because it offers training, financial assistance, and operating benefits.

Accepted Answer

Franchises often provide comprehensive training programs, as well as ongoing support and access to resources for financial assistance and marketing. The established brand recognition and proven business model can also provide advantages for operating a franchise.

Question 6

The potential value of any franchise arrangement is defined by the rights outlined in the franchise contract.

Accepted Answer

The rights and obligations outlined in the franchise contract determine the potential value of a franchise arrangement. These can include the right to use the franchisor's trademarks, operating systems, business processes, and other intellectual property, as well as support and training from the franchisor. The terms of the contract can also impact the financial obligations and restrictions placed on the franchisee.

Question 7

The entrepreneur who enters into a franchising agreement does not acquire the right to use the franchiser's trademark or brand name.

Accepted Answer

The entrepreneur who enters into a franchising agreement does acquire the right to use the franchiser's trademark or brand name.

Question 8

In many cases, a franchiser will receive payments in the form of royalties that are based on a percentage of the franchisee's gross income.

Accepted Answer

This is a common payment structure in franchising where the franchiser receives a percentage of the franchisee's gross income as royalty payments in exchange for the right to use the franchiser's brand and business model.

Question 9

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

Accepted Answer

The term "chewing" is not used to describe this practice. The correct term is "churning."

Question 10

Existing franchisees are a valuable source of information about franchises.

Accepted Answer

Existing franchisees have firsthand experience and knowledge about the franchise system and can provide insights and advice to potential franchisees.

Question 11

Business publications such as The Wall Street Journal and Entrepreneur are excellent sources of advertising from franchisers.

Accepted Answer

Business publications are often targeted towards entrepreneurs and investors, making them a great platform for franchisers to advertise their franchise opportunities. The Wall Street Journal and Entrepreneur are both popular business publications that franchisers may utilize for advertisement.

Question 12

One drawback of becoming a franchiser relates to the increase in required operating support.

Accepted Answer

As a franchiser, you will have to provide ongoing support to your franchisees, which can become a significant commitment and cost.

Question 13

The Coca-Cola Company is an example of a product and trade name franchiser.

Accepted Answer

The Coca-Cola Company is a prime example of a product and trade name franchiser as it franchises the right to use its brand name and products to bottlers and distributors around the world.

Question 14

Because the offering and sale of a franchise are more intensely regulated by state and federal laws than is the establishment of a new business, individuals and/or firms involved in negotiating a franchise arrangement have limited need for legal counsel.

Accepted Answer

The statement is false. Due to the intense regulation of franchising by state and federal laws, individuals and firms involved in negotiating a franchise arrangement should consult with legal counsel to ensure compliance with these regulations.

Question 15

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.

Accepted Answer

This is the correct definition of an area developer strategy.

Question 16

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

Accepted Answer

When purchasing a franchise, the buyer is essentially buying the rights to use and operate a business model that has already been tested and successfully implemented by the franchisor. Therefore, the purchaser has access to a proven business system.

Question 17

Burger King is an example of a company that uses business format franchising.

Accepted Answer

Burger King is a company that uses business format franchising, where the franchisee operates under the franchisor's established business model, including marketing, operations, and management.

Question 18

A comprehensive listing of franchisers can be found in Franchise Opportunities Guide, which is published by the International Franchise Association.

Accepted Answer

The statement is stating a fact that can be verified, and the source given, so it is true that a comprehensive listing of franchisers can be found in Franchise Opportunities Guide, which is published by the International Franchise Association.

Question 19

Franchising is typically defined as a marketing system revolving around a two-party legal agreement whereby a franchiser is granted the privilege to conduct business as an individual owner according to the methods and terms specified by the franchisee.

Accepted Answer

Franchising involves a franchisee being granted the privilege to conduct business according to the methods and terms specified by the franchiser, not the other way around.

Question 20

The Federal Trade Commission's "franchise rule" of 2008 prescribes that franchisers must disclose to prospective franchisees information such as bankruptcies, business experience of the principals, and litigation in which the firm is involved.

Accepted Answer

The Federal Trade Commission's "franchise rule" of 2008 does require franchisers to disclose certain information to prospective franchisees, including bankruptcies, business experience of the principals, and litigation in which the firm is involved.

Quiz 4: Franchises and Buyouts