Question 1

A ________ is the share of profits or percentage of sales a franchisee pays to a franchisor.
A) royalty
B) dividend
C) premium
D) co-pay

Accepted Answer

A royalty is the payment made by a franchisee to a franchisor for the right to use their brand name, products, and services. It is typically a percentage of the franchisee's sales or profits, and is paid regularly as long as the franchise agreement is in place. Dividends are payments made to shareholders of a company, and are not related to franchising. Premiums refer to the price of an insurance policy, and co-pays are payments made by patients for medical services.

Question 2

Franchisors may send reverse royalties to franchisees who
A) have not yet created their own website.
B) feel their sales have been hurt by the franchisor's online sales.
C) are using e-commerce to expand their sales territory.
D) desire to streamline their communication with employees, customers, and vendors.

Accepted Answer

Reverse royalties are payments made by the franchisor to the franchisee as compensation for any negative impact the franchisor's actions or policies have on the franchisee's business. In this scenario, franchisees who feel that their sales have been hurt by the franchisor's online sales may be eligible for reverse royalties.

Question 3

Qiang is ready to become a franchise owner and open one of the 50 Southwest Diners, a very successful fast food chain specializing in dishes from the American Southwest. Which of the following problems is Qiang most likely to encounter if she agrees to become a franchisee?
A) High initial costs and fees
B) Poor name recognition and visibility
C) Lack of financing
D) Lack of managerial assistance

Accepted Answer

While franchisors often provide franchisees with financial and managerial assistance, they typically demand a fee just to obtain the rights to the franchise. The fees charged by successful franchisors can be quite high. In addition, most franchisors also require franchisees to pay a fee, called a royalty, based on profits or sales.

Question 4

Zach is a franchisee with Digger's Doggies, a chain of hotdog shops. He was doing well until several other Digger's Doggies franchisees got in trouble and were forced to close their shops. Soon afterward, Zach's business declined and was also forced to close. This is an example of
A) an economic shakeout at work.
B) the coattail effect.
C) the law of diminishing returns.
D) management by exception.

Accepted Answer

Coattail effects refer to situations where the actions of other franchisees can have an impact on the success or failure of a particular franchisee's business.

Question 5

One important consideration when prospecting for a good franchise business is
A) the saturation rate of the franchise. The more saturation the better.
B) the market potential for the product or service, at the prices you need to charge.
C) the population level of the area where you will operate. Large populations are too overwhelming, often needlessly increasing demand.
D) a limited disclosure statement, and being mindful that any disclosure statement may limit your success.

Accepted Answer

The market potential is very important. Your goal should be to establish yourself with a franchisor whose product or service has increasing demand in the area where you will operate. You do not want your idea to be saturated in your territory. You will want the franchisor to offer full disclosure of rules, policies, and procedures.

Question 6

An evaluation of franchising would conclude that this type of arrangement
A) has become the dominant form of business organization in the United States because it has many advantages and almost no disadvantages.
B) appeals to people who want to own a business, but are not comfortable starting a company from scratch.
C) has a much higher risk of failure than independent companies.
D) has little chance of success outside the United States because many foreign countries do not allow such arrangements.

Accepted Answer

An advantage of franchising is that it allows franchisees to own their business while taking advantage of an established name and product.

Question 7

Franchised businesses are successful (both domestically and internationally) because
A) they require very little start-up revenue.
B) people prefer the owners and employees of franchised businesses.
C) laws require franchisors to provide the same level of service to franchisees.
D) customers like the predictability of the product and/or service.

Accepted Answer

Franchised businesses are successful because customers like the predictability of the product and/or service. Franchises offer consistent branding, marketing, and customer experience across locations, which attracts customers who know what to expect from the business. This helps to build customer loyalty and brand recognition, making a franchise more likely to be successful than an independent business.

Question 8

Lucy is preparing to invest in a new online franchise, Notable Moments. The franchisor provides the exclusive software and training for designing invitations and cards for special occasions such as weddings, graduations, and birth announcements. In return, the franchisee is required to pay a monthly fee to the franchisor. Lucy will use the Notable Moments software to create her own special designs that she will ultimately feature on her website. Order turnaround time must be fast. She can only take on as many clients as she can make good on delivery. An advantage of Lucy's online franchise is that she
A) has a limited territory.
B) has a narrow product offering.
C) does not need name recognition or marketing assistance.
D) has an unlimited territory.

Accepted Answer

A distinct advantage of online franchising is the unlimited territory regulations. The franchisee can sell to anyone, anywhere. This makes for an instant global business.

Question 9

Which of the following statements best summarizes the experience of American franchisors in foreign countries?
A) Very few American franchisors of any size have had success in international markets.
B) Large franchisors have had success in other nations, but newer and smaller franchisors have lacked the financial strength and reputation to succeed in global markets.
C) The only nations in which American franchisors have achieved any success are Great Britain and Mexico.
D) Both large and small franchises have found success in foreign countries by providing convenience and a predictable level of service and quality.

Accepted Answer

U.S.-based franchisors have many outlets in foreign countries. Even new and relatively small franchisors are finding success in other countries. The key to international success in franchising is the same as the key to success in the United States: providing the customer with convenience and a predictable level of service and quality.

Question 10

One reason franchises have become so popular is that this arrangement provides the franchisee with
A) a nationally recognized name and product.
B) a low-cost way to start a business.
C) limited liability.
D) the right to retain all profits earned by their franchise.

Accepted Answer

Franchises offer the franchisee the advantage of operating under a nationally recognized name and product, which can attract customers and provide immediate brand recognition.

Question 11

Global franchising offers
A) few opportunities for American investors.
B) opportunities for large franchise systems, but not small ones.
C) opportunities for both large and small franchises.
D) American firms the opportunity to market goods overseas without any need to adjust for cultural differences.

Accepted Answer

Global franchising does offer opportunities for both large and small franchises. This is because franchising allows for the replication of a successful business model in different markets, and there are a variety of industries and services that can be franchised. Large, well-established franchisors may have a greater ability to expand globally due to their resources and brand recognition, but smaller franchises can also find success with the right strategy and support.

Question 12

Ivy is investing in a home cleaning franchise called HomeKeepers. At her first interview with the franchisor's selling agent, she was told the parent company expects 5% royalties. What are royalties?
A) The initial investment, also known as the franchise fee paid to the franchisor
B) The cost of supplies that she will purchase one time each month from the parent company
C) The milestones that the parent company expects her to reach. With each milestone, she will be rewarded with commissions
D) The share of the profits or a percentage share of revenues (net sales)

Accepted Answer

Franchisors usually require a royalty fee which can be a portion of the profits of each franchised operation, or a percentage of the revenues (net sales) of each operation. These are typically collected on a monthly basis.

Question 13

Midwest Auto Experts, Inc. sells franchises to prospective businesspersons who want to use the Midwest Auto Experts name and offer its products. In a franchise arrangement, Midwest Auto Experts would be the ________, and the buyer of the franchise is the ________.
A) owner; limited partner
B) co-signer; co-signee
C) franchisor; franchisee
D) franchisee; franchisor

Accepted Answer

In a franchising arrangement, the person or company that sells the right to use the name and product is the franchisor, and the person who buys the rights is known as the franchisee.

Question 14

The most popular type of business for franchising is
A) consumer wholesale firms.
B) restaurants.
C) specialty steel manufacturing.
D) medical services.

Accepted Answer

Restaurants are the most popular type of business for franchising as they have a proven business model and recognized brand name, providing a better chance for success for the franchisee. Additionally, the franchisor often provides support with things like inventory management, marketing, and training, which can be especially helpful for first-time business owners.

Question 15

Opening and operating a franchise in a different country
A) is illegal according to the Clayton Antitrust Act.
B) is no different than setting up a franchise in the domestic market.
C) may require the owner to adapt to social and cultural differences.
D) is much less risky than owning a domestically based franchise.

Accepted Answer

Operating a franchise in a different country may require the owner to adapt to social and cultural differences. These differences could include language barriers, different consumer behaviors, legal and regulatory requirements, and varying cultural norms. Therefore, it is important for franchise owners to do thorough research and adapt their business practices to meet the demands of the foreign market.

Question 16

Which of the following statements about buying a franchise is most accurate?
A) One of the advantages of buying a franchise is that franchisors are so closely regulated that there is virtually no chance for scams to succeed.
B) Before purchasing a franchise, the buyer should carefully evaluate the franchise, the franchisor, his or her own situation, and the nature of the market.
C) Franchise agreements are simple to evaluate, since federal law requires that all such agreements must be written in plain English with all fees and terms clearly explained.
D) Buying a franchise is the simplest and least expensive way to set up a business, since the franchisor has already worked out all of the details for setting up and running the business.

Accepted Answer

Before purchasing a franchise, it is important to evaluate various factors such as the franchise, the franchisor, personal situation, and the market. This requires careful research and analysis to make an informed decision. The other options are inaccurate, as franchisors are not free from scams, franchise agreements can be complex, and buying a franchise is not necessarily the simplest and least expensive way to start a business.

Question 17

________ is by far the most popular target for American franchisors seeking to establish franchises in other countries.
A) Canada
B) Mexico
C) Great Britain
D) Japan

Accepted Answer

Canada is the most popular target for American franchisors seeking to establish franchises in other countries due to its close proximity, similar culture and legal systems, and ease of conducting business.

Question 18

The Sandwich Emporium, Inc. sells the rights to use its name and sell its signature sandwiches in a given market area to those willing to pay agreed-upon fees and meet specific contractual terms. The Sandwich Emporium is
A) offering investors the opportunity to form limited partnerships.
B) a franchisor.
C) creating private subsidiary companies.
D) offering a tax-free investment potential.

Accepted Answer

A franchisor is someone with a good idea for a business who sells the rights to use the business name and to sell its products or services in a given territory.

Question 19

Enok, a prospective franchise owner, is looking to keep his monthly costs as low as possible. The franchisor he is checking out is advertising that royalty payments of 8% of sales could be as high as $300,000 per month. The franchisor is claiming that a franchisee can expect monthly sales to be as high as
A) $3,125,000.
B) $3,000,000.
C) $3,750,000.
D) $300,000.

Accepted Answer

Royalties are monthly fees collected by the franchisor. These fees are a percentage of the total monthly sales. If the franchisee generates $3,750,000 in sales, he/she will pay 8% of that amount to the franchisor. 8% of $3,750,000 = $300,000. The mathematical question is: 8% of what revenue amount = $300,000? 8% of X = $300,000. X = $300,000/.08. X = $3,750,000.

Question 20

Which of the following is an advantage of franchises?
A) Shared profit
B) Management regulation
C) Management and marketing assistance
D) Coattail effects

Accepted Answer

Franchises offer management and marketing assistance to franchisees, which can help new businesses establish themselves more easily. The franchisor typically provides support in areas such as training, advertising, and site selection. This assistance can be particularly valuable to first-time business owners who may not have a lot of experience running their own company.

Quiz 5: How to Form a Business

A ________ is the share of profits or percentage of sales a franchisee pays to a franchisor.

Franchisors may send reverse royalties to franchisees who

Qiang is ready to become a franchise owner and open one of the 50 Southwest Diners, a very successful fast food chain specializing in dishes from the American Southwest. Which of the following problems is Qiang most likely to encounter if she agrees to become a franchisee?

Zach is a franchisee with Digger's Doggies, a chain of hotdog shops. He was doing well until several other Digger's Doggies franchisees got in trouble and were forced to close their shops. Soon afterward, Zach's business declined and was also forced to close. This is an example of

One important consideration when prospecting for a good franchise business is

An evaluation of franchising would conclude that this type of arrangement

Franchised businesses are successful (both domestically and internationally) because

Which of the following statements best summarizes the experience of American franchisors in foreign countries?

One reason franchises have become so popular is that this arrangement provides the franchisee with

Global franchising offers

Ivy is investing in a home cleaning franchise called HomeKeepers. At her first interview with the franchisor's selling agent, she was told the parent company expects 5% royalties. What are royalties?

Midwest Auto Experts, Inc. sells franchises to prospective businesspersons who want to use the Midwest Auto Experts name and offer its products. In a franchise arrangement, Midwest Auto Experts would be the , and the buyer of the franchise is the .

The most popular type of business for franchising is

Opening and operating a franchise in a different country

Which of the following statements about buying a franchise is most accurate?

________ is by far the most popular target for American franchisors seeking to establish franchises in other countries.

The Sandwich Emporium, Inc. sells the rights to use its name and sell its signature sandwiches in a given market area to those willing to pay agreed-upon fees and meet specific contractual terms. The Sandwich Emporium is

Which of the following is an advantage of franchises?