Question 1

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.

Accepted Answer

The term "chewing" is not used to describe the unscrupulous actions by franchisors to void contracts of franchisees. The correct term for such actions is "churning."

Question 2

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

Accepted Answer

Franchisors may impose new restrictions or requirements as a condition for renewing the franchise contract, which can create additional costs and burdens for the franchisee.

Question 3

Conducting a thorough due diligence should always be accomplished if purchasing an existing corporation or franchise,but is unnecessary if acquiring a sole proprietorship.

Accepted Answer

Conducting due diligence is important before acquiring any business, regardless of its legal structure. It helps identify any potential risks, liabilities, or issues that the new owner may face and allows them to make informed decisions. Therefore, due diligence should be conducted when acquiring a sole proprietorship, just like when purchasing an existing corporation or franchise.

Question 4

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

A franchisee owning multiple units in a specific area is called an area developer strategy.

Question 5

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

Accepted Answer

Reviewing the seller's balance sheet is an important part of the valuation process for a buyer. It helps the buyer ensure that the values of the assets listed in the book are accurate and realistic. This is important because it can impact the overall value of the company and affect the buyer's decision to proceed with the purchase or negotiate a different deal.

Question 6

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

Accepted Answer

The practice of putting one franchise right next to another is actually called co-branding or dual branding. Piggyback franchising refers to a situation where a franchisor allows a franchisee to operate a secondary, smaller business alongside their main franchise business.

Question 7

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

Accepted Answer

When a buyer of an existing business acquires the business, they typically acquire its personnel, inventories, physical facilities, established banking connections, and ongoing relationships with trade suppliers.

Question 8

One of the benefits of a franchise agreement for the franchisee is that the franchisor is solely responsible for advert​ising the franchise.

Accepted Answer

While the franchisor may provide advertising support and guidance, ultimately it is up to the franchisee to market and promote their individual franchise location.

Question 9

Jarrod is reading a detailed statement of the franchisor's finances,experience,size,and involvement in litigation.Jarrod is reading a Franchise Disclosure Document.

Accepted Answer

A Franchise Disclosure Document (FDD) contains detailed information about the franchisor, including their finances, experience, size, and any litigation they have been involved in. It is required by the Federal Trade Commission for all franchisors to provide to potential franchisees before any agreement is signed.

Question 10

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

Accepted Answer

The Pepsi-Cola Company grants franchises for both its products and its trade name, making it an example of a product and trade name franchisor.

Question 11

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

Accepted Answer

Financial statements can be misleading if they contain errors or if management intentionally manipulates the numbers to hide weaknesses or inflate the value of the business. Therefore, a potential purchaser should not rely solely on financial statements to develop an accurate business valuation, but should also conduct due diligence, review industry trends and comparable transactions, and consider nonfinancial factors such as customer relationships and intellectual property.

Question 12

The processing of a loan application can be completed more quickly if the franchising organization is registered with the U.S.Small Business Administration.

Accepted Answer

Franchising organizations that are registered with the U.S.Small Business Administration (SBA) are part of the SBA's Franchise Registry, which streamlines the loan application process by reducing the amount of paperwork and due diligence required by lenders. This can result in a quicker processing time for loan applications.

Question 13

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.

Accepted Answer

It is always recommended to do thorough research and verify the legitimacy of a franchise opportunity before pursuing it. Seeking independent, third-party sources of information is a crucial step in this process.

Question 14

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

Accepted Answer

Franchising provides a proven business model that has been successful in multiple locations, reducing the risk compared to starting a new business from scratch.

Question 15

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.

Accepted Answer

The statement is true. The Federal Trade Commission's Franchise Rule requires franchisors to disclose certain information to potential franchisees, including bankruptcies, business experience of the principals, and litigation involvement. This rule has been in place since 2008.

Question 16

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

Accepted Answer

It is important for a buyer to evaluate the legal commitments of an existing business, such as contracts, leases, and any pending lawsuits or legal issues, in order to understand the potential risks and liabilities of the purchase.

Question 17

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.

Accepted Answer

Royalties are a common form of payment for franchisors and are often calculated based on a percentage of the franchisee's gross income.

Question 18

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

Accepted Answer

Buying a franchise means purchasing the right to use a proven business system that has been successful for other franchisees. This includes methods of operations, marketing, training, and more.

Question 19

There is no need to find out more information about a prospective franchise as the franchisor should be the primary source of information.

Accepted Answer

While the franchisor is an important source of information, it is important for prospective franchisees to conduct their own research and due diligence to fully understand the franchise opportunity and make an informed decision. This may include speaking with current and former franchisees, reviewing financial documents and disclosures, and seeking legal and financial advice.

Question 20

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

Accepted Answer

A nondisclosure agreement (NDA) is primarily intended to protect confidential information and does not necessarily indicate an intention to purchase; it's a common step in due diligence before making a decision.

Quiz 4: Franchises and Buyouts

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.

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

Conducting a thorough due diligence should always be accomplished if purchasing an existing corporation or franchise,but is unnecessary if acquiring a sole proprietorship.

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.

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

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

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

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

Jarrod is reading a detailed statement of the franchisor's finances,experience,size,and involvement in litigation.Jarrod is reading a Franchise Disclosure Document.

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

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

The processing of a loan application can be completed more quickly if the franchising organization is registered with the U.S.Small Business Administration.

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.

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

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.

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

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.

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

There is no need to find out more information about a prospective franchise as the franchisor should be the primary source of information.

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

Quiz 4: Franchises and Buyouts

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.

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

Conducting a thorough due diligence should always be accomplished if purchasing an existing corporation or franchise,but is unnecessary if acquiring a sole proprietorship.

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.

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

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

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

One of the benefits of a franchise agreement for the franchisee is that the franchisor is solely responsible for advert​ising the franchise.

Jarrod is reading a detailed statement of the franchisor's finances,experience,size,and involvement in litigation.Jarrod is reading a Franchise Disclosure Document.

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

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

The processing of a loan application can be completed more quickly if the franchising organization is registered with the U.S.Small Business Administration.

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.

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

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.

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

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.

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

There is no need to find out more information about a prospective franchise as the franchisor should be the primary source of information.

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

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