Question 1

Each month Tomas must report his gross sales and pay a percentage of that amount to his franchisor.  This percentage is:

Accepted Answer

The percentage that Tomas must pay to his franchisor each month is a royalty fee. This fee is set by the franchisor and is typically non-negotiable. It is not a finance charge or an investment cost.

Question 2

A franchise is able to control costs because:

Accepted Answer

Franchise networks often have greater buying power because they are able to purchase supplies and products in larger quantities, which can result in discounted prices. This allows franchises to control costs and maintain profitability.

Question 3

Cheryl is on vacation across the country from her hometown and she's hungry.  Ahead she sees the familiar Golden Arches and knows she can find her favorite hamburger.  These Golden Arches are:

Accepted Answer

The Golden Arches are a well-known logo and symbol of the fast-food chain McDonald's, therefore they serve as a trademark to distinguish their brand from others in the market.

Question 4

Besides the up-front money required of a franchisee, Stuart will have to pay building costs and purchase inventory and equipment.  This type of expense is called:

Accepted Answer

Building costs, inventory expenses, and equipment purchases are all considered investment costs, as they are necessary expenses for starting and operating the franchise. The initial franchise fee is a separate fee paid to the franchisor for the right to use their brand and business model, while royalty payments and marketing fees are ongoing expenses paid to the franchisor based on a percentage of sales or a set fee.

Question 5

Nardell's franchise contract contains language that prohibits him from opening a similar business under his own brand.  Nardell considers this to be:

Accepted Answer

The language in Nardell's franchise contract that prohibits him from opening a similar business under his own brand is considered a restraint of trade. This means that the contract is limiting Nardell's ability to compete in the same market, which can be seen as anti-competitive and against free market principles.

Question 6

The cost of a franchise may include

Accepted Answer

Royalty payments are a common cost associated with owning a franchise. Franchisees usually need to pay a percentage of their gross revenue to the franchisor in exchange for the right to use the franchise brand and its resources. Higher operational costs, one-time federal franchise tax, and higher labor costs are not necessarily a given for all franchises and may vary based on the industry or specific franchise agreement.

Question 7

RST, Inc., a franchisor, is requiring its franchisee, Raymond, to make significant changes to the equipment and interior appearance of his business as a condition of renewing the contract.  RST claims this is necessary because:

Accepted Answer

The answer of RST, Inc., a franchisor, is requiring its...

Question 8

The Franchise Registry maintained by the U.S. Small Business Administration

Accepted Answer

The Franchise Registry maintained by the U.S. Small Business Administration speeds up loan processing for small business franchisees.

Question 9

Stuart is interested in opening a QRS franchise. QRS requires up-front payment of $150,000.  This amount represents:

Accepted Answer

The up-front payment of $150,000 is the initial franchise fee, which is a common requirement for franchise businesses. This fee grants Stuart the right to use the QRS brand name, products, and services.

Question 10

Consider this quote: "If you can't follow somebody else, don't buy a franchise." Which characteristic of a franchise does this quote describe?

Accepted Answer

This quote describes the characteristic of loss of entrepreneurial independence in a franchise. Franchise owners are required to follow the operational procedures and business models set by the franchisor, limiting their freedom to run the business in their own way.

Question 11

RST, Inc., a franchisor, is requiring its franchisee, Raymond, to make significant changes to the equipment and interior appearance of his business as a condition of renewing the contract.  Raymond suspects:

Accepted Answer

The answer of RST, Inc., a franchisor, is requiring its...

Question 12

If a franchisor is guilty of encroachment of a franchisee, which agreement is it most likely to be in violation of?

Accepted Answer

The answer of If a franchisor is guilty of encroachment...

Question 13

Which source of franchise information is produced by a federal agency?

Accepted Answer

"Buying a Franchise: A Consumer Guide" is produced by the Federal Trade Commission (FTC), which is a federal agency. The other options are produced by private companies or organizations.

Question 14

Martin operates an ABC franchise.  Recently the franchisor has attempted to make changes to the contract that would increase Martin's costs so as to make the business unprofitable.  The franchisor is engaging in:

Accepted Answer

Churning in the context of franchising refers to the practice by some franchisors of repeatedly reselling a franchise location to make profits from initial franchise fees and other startup costs, rather than focusing on the long-term success of the franchisee. When a franchisor attempts to make changes to the contract that would increase the franchisee's costs and potentially make the business unprofitable, it could be seen as an attempt to churn the franchise by setting the stage for the franchisee's failure and a subsequent resale of the franchise.

Question 15

A disadvantage of franchising is

Accepted Answer

One disadvantage of franchising is that the franchisee may be restricted to a specific sales territory, which could limit their potential customer base and growth opportunities. The other options listed are advantages of franchising.

Question 16

An entrepreneur would choose a franchise over an independent startup most likely because of the

Accepted Answer

The probability of success is higher in a franchise because the business model and processes have already been established and tested by the franchisor, and the brand recognition and marketing support are already in place. This reduces the risk of failure for the entrepreneur. While there may be some guidance provided for organizational structure, there are still restrictions on decision making and creativity compared to an independent startup. Opportunities to network with other executives may also be available in both franchise and independent startup settings.

Question 17

In what way is a franchisee's control over the business greatly reduced?

Accepted Answer

The franchisee is bound by the terms of the franchise contract which typically includes strict guidelines regarding operations, marketing, and branding, greatly reducing the franchisee's control over the business. While the franchisor may provide support and resources, ultimately the decisions and actions of the franchisee must align with the franchisor's standards and requirements.

Question 18

The franchise contract Pamela signed with DEF Company specified she would have an exclusive sales territory.  While the contract was still in force, DEF opened a corporate-owned store within her territory.  DEF is guilty of:

Accepted Answer

DEF is guilty of encroachment, which occurs when a franchisor violates the exclusive territory rights of a franchisee. This breach of contract can harm the franchisee's business and profitability.

Question 19

Nardell has operated a successful franchise for a few years and would now like to open another similar business under his own brand.  The contract Nardell signed prohibits him from doing so.  The contract contains:

Accepted Answer

A non-compete clause is a provision in a franchise agreement that prohibits the franchisee from engaging in a similar business for a certain period of time and within a certain geographical area after the termination or expiration of the franchise agreement. This is to protect the franchisor's brand, trade secrets, and market share. Therefore, Nardell cannot open a similar business under his own brand without breaching the non-compete clause in his franchise contract. The other choices do not apply to this scenario.

Question 20

Having worked professionally for 10 years, Tom and Kate have decided to start a new franchise.  Considering their background, a disadvantage for them becoming franchisees is

Accepted Answer

The franchise model comes with certain restrictions on how the business operates, including things like what products or services can be offered, pricing, and marketing. This may be a disadvantage for Tom and Kate, who may be more accustomed to having complete control over these aspects of their business.

Quiz 4: Franchises and Buyouts

Each month Tomas must report his gross sales and pay a percentage of that amount to his franchisor. This percentage is:

A franchise is able to control costs because:

Cheryl is on vacation across the country from her hometown and she's hungry. Ahead she sees the familiar Golden Arches and knows she can find her favorite hamburger. These Golden Arches are:

Besides the up-front money required of a franchisee, Stuart will have to pay building costs and purchase inventory and equipment. This type of expense is called:

Nardell's franchise contract contains language that prohibits him from opening a similar business under his own brand. Nardell considers this to be:

The cost of a franchise may include

RST, Inc., a franchisor, is requiring its franchisee, Raymond, to make significant changes to the equipment and interior appearance of his business as a condition of renewing the contract. RST claims this is necessary because:

The Franchise Registry maintained by the U.S. Small Business Administration

Stuart is interested in opening a QRS franchise. QRS requires up-front payment of $150,000. This amount represents:

Consider this quote: "If you can't follow somebody else, don't buy a franchise." Which characteristic of a franchise does this quote describe?

RST, Inc., a franchisor, is requiring its franchisee, Raymond, to make significant changes to the equipment and interior appearance of his business as a condition of renewing the contract. Raymond suspects:

If a franchisor is guilty of encroachment of a franchisee, which agreement is it most likely to be in violation of?

Which source of franchise information is produced by a federal agency?

Martin operates an ABC franchise. Recently the franchisor has attempted to make changes to the contract that would increase Martin's costs so as to make the business unprofitable. The franchisor is engaging in:

A disadvantage of franchising is

An entrepreneur would choose a franchise over an independent startup most likely because of the

In what way is a franchisee's control over the business greatly reduced?

The franchise contract Pamela signed with DEF Company specified she would have an exclusive sales territory. While the contract was still in force, DEF opened a corporate-owned store within her territory. DEF is guilty of:

Nardell has operated a successful franchise for a few years and would now like to open another similar business under his own brand. The contract Nardell signed prohibits him from doing so. The contract contains:

Having worked professionally for 10 years, Tom and Kate have decided to start a new franchise. Considering their background, a disadvantage for them becoming franchisees is