Deck 4: Franchising and Buyouts

Question 1

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

Answer 1

True

Question 2

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

Answer 2

True

Question 3

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.

Answer 3

True

Question 4

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

Question 5

Zuki 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.

Question 6

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

Question 7

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

Question 8

The Coca-Cola Company, trading throughout Africa is an example of a product and trade name franchisor.

Question 9

To control costs when purchasing a business, an attorney at the closing can represent both sides.

Question 10

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

Question 11

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

Question 12

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

Question 13

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

Question 14

In general obtaining finance is easier if the franchising organisation is registered in South Africa with the Franchising Association of South Africa.

Question 15

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.

Question 16

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

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.

Question 18

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

Question 19

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

Question 20

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

Question 21

The franchising strategy whereby an individual or organisation is granted the legal right to own more than one unit of a franchised business is known as:

A)multi-brand franchising.
B)multiple-unit ownership.
C)piggyback franchising.
D)aggregate ownership.

Question 22

Spur Corporation operates several different restaurant franchises including Spur Steak Ranches, RocoMamas, Captain DoRegos, and several others.Spur Corporation has its own corporate structure and shareholders.This corporation is an example of:

A)master licensing.
B)multi-brand franchising.
C)piggyback franchising.
D)co-branding.

Question 23

An entrepreneur would choose a franchise over an independent start-up most likely because of the:

A)freedom in decision making.
B)guidance provided for organisational structure.
C)probability of success.
D)opportunities to meet and share ideas with other executives.

Question 24

JKL Corporation grants another party the right to conduct business according to specified methods and terms.JKL is a:

A)franchisor.
B)franchisee.
C)franchise.
D)licenser.

Question 25

Christina signed a contract with David allowing her to provide services using David's trademark, logo and business model.This business is a/an:

A)franchise.
B)franchisor.
C)franchisee.
D)independent business.

Question 26

Ed signed a contract allowing Fran to sell products using his brand name so long as the product meets Ed's quality standards.Ed is a/an:

A)franchise.
B)franchisor.
C)franchisee.
D)independent business owner.

Question 27

Linda signed a _____________ that is a legal agreement between two parties in a franchise arrangement.

A)master license.
B)franchise contract.
C)requirements contract.
D)franchise consent draft.

Question 28

Business format franchising is best illustrated by the system offered by:
a.Goodyear Tyres.
b.First National Bank.
c.KFC.
d.Mr Price Sport.

Question 29

Gerhald owns a well-known brand and allows Henry to sell products with that brand name.Gerhard has agreed to:

A)product and trade name franchising.
B)business format franchising.
C)master licensing.
D)co-branding

Question 30

KFC and Spur help select the location for a new restaurant and provides financial assistance, training, marketing and products.McDonald's engages in:

A)product and trade name franchising.
B)business format franchising.
C)master licensing.
D)area development.

Question 31

Mandla was so successful with his Sweets from Heaven franchise that he opened several other Sweets from Heaven locations.Mandla could best be described as:

A)a franchisor.
B)a franchisee.
C)a master licensee.
D)a multiple-unit owner.

Question 32

Wimpy has partnered with the management of Engen to operate some restaurants in the Engen 1-Stops on main routes.This arrangement is an example of:

A)master licensing.
B)piggyback franchising.
C)area development.
D)multi-brand franchising.

Question 33

A Starbucks franchise located inside another store, such as Exclusive Books, is called ______ franchising.

A)folded
B)internalised
C)cooperative
D)piggyback

Question 34

Martha's franchise agreement allows her to open up to seven new stores within a 100 kilometre radius of the first one.Martha is best described as:

A)a master licensee.
B)a franchisee.
C)a franchisor.
D)an area developer.

Question 35

Lunga's job is to identify potential business people in South Africa (his home country) who might want to do business using a particular brand name.When the contract is signed, Lunga then provides training to the business person.Lunga is most likely:

A)a franchisee.
B)a franchisor.
C)a master licensee.
D)a warehouser.

Question 36

Molefi signed a contract allowing him to use Brian's business model and sell products approved by Brian.Molefi is a/an:

A)franchise.
B)franchisor.
C)franchisee.
D)independent business operator.

Question 37

Matshepo is an individual acting as a sales agent with the responsibility for finding new franchisees within a specified territory.Matshepo is a(n):

A)multiple-unit franchisor.
B)area developer.
C)franchisor representative.
D)master licensee.

Question 38

Anna has been granted the right to conduct business according to specified methods and terms of another party.Anna is a:

A)franchisor
B)franchisee
C)franchise
D)licensee.

Question 39

The agreement Irma signed with Nando's that allows her to open a restaurant using the Nando's name is:

A)a master license.
B)an area development plan.
C)a lend-lease agreement
D)a franchise contract.

Question 40

Individuals or organisations that possess the legal right to open multiple outlets in a given area are referred to as

A)development franchisees.
B)area developers.
C)piggyback franchisees.
D)multiple-unit owners.

Question 41

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:

A)master licensing.
B)encroachment.
C)due diligence.
D)churning.

Question 42

A franchise is able to control costs because:

A)franchise networks have greater buying power.
B)suppliers prefer to sell to franchises.
C)franchises generally pay only minimum wages.
D)franchisees are locked into long-term contracts with vendors.

Question 43

Nomsa has operated a successful franchise for a few years and would now like to open another similar business under her own brand.The contract Nomsa signed prohibits her from doing so.The contract contains:
a.a non-compete clause.
b.a co-branding clause.
c.a piggyback franchise provision.
d.an area development provision.

Question 44

A disadvantage of franchising is:

A)reduced risk of failure.
B)access to a proven system.
C)restricted sales territories.
D)immediate economies of scale.

Question 45

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

A)the restrictions on business operations.
B)unlimited company growth.
C)the expectation to work more than a 40-hour work week.
D)an increase in entrepreneurial independence.

Question 46

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

A)investment costs.
B)the initial franchise fee.
C)royalty payments.
D)marketing fees.

Question 47

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

A)High success rate.
B)Restrictions on growth.
C)Loss of entrepreneurial independence.
D)Location problems.

Question 48

In addition to the regular monthly payment of a percentage of gross sales to her franchisor, Lee is required to submit a smaller percentage for advertising costs.She is willing to do this because:

A)otherwise she cannot operate her franchise.
B)she receives a discount on the cost of her inventory.
C)Lee's budget is too small for her advertising to be effective.
D)the franchisor promotes the business both locally and nationally, reinforcing the brand name.

Question 49

The cost of a franchise may include:

A)royalty payments.
B)higher operational costs.
C)a one-time federal franchise tax.
D)higher labour costs.

Question 50

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

A)Most franchisors are located near the franchisee.
B)The franchisees are technically employees of the franchisor.
C)The franchisee is bound by the terms of the franchise contract.
D)The franchisee is completely dependent on the franchisor for funding.

Question 51

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)master licensing.
B)encroachment.
C)due diligence.
D)churning.

Question 52

Joe is interested in opening a Burger-Place franchise.Burger-Place requires up-front payment of R650 000.This amount represents:

A)Joe's investment costs.
B)the initial franchise fee.
C)royalty payments.
D)marketing fees.

Question 53

One possible disadvantage of becoming a franchisor is:

A)complying with all the government regulations.
B)the cost of franchising exceeds the franchise fee.
C)the cost of screening prospective franchisees.
D)providing training to new franchisees.

Question 54

Nomfundo has established a successful business and would like to expand.She is considering becoming a franchisor.Before taking that step, Nomfundo should:

A)make sure her business model is reproducible.
B)have a technical writer create an owner's manual.
C)partner with a lender to offer franchisee financing.
D)hire a master licensee to locate prospective franchisees.

Question 55

Mavis is on vacation in the north, far away from her hometown in the Eastern Cape and she is hungry.Ahead she sees the familiar Golden Arches and knows she can find her favourite hamburger.These Golden Arches are:

A)a patent.
B)a trade promotion.
C)yellow to attract attention.
D)a trademark.

Question 56

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:

A)these changes will benefit his bottom line.
B)he will be less competitive after the changes are made.
C)the franchisor wants to sell the franchise to someone else.
D)his customers will object to the changes.

Question 57

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

A)negotiable every month.
B)finance charges.
C)royalty fees.
D)an investment cost.

Question 58

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

A)​Non-disclosure agreement
B)​Franchise Rule
C)​Franchise Disclosure Document
D)​Non-compete agreement

Question 59

Mohammed is meeting with a representative of GHI, a franchisor.He has received information about the franchisor's finances, experience, size and involvement in litigation.Mohammed has been given:

A)a master license.
B)a non-disclosure statement.
C)a franchise rule.
D)a franchise disclosure document.

Question 60

What question is the least important when developing a franchise from an independent business?

A)Who will develop the operations manual?
B)Is the business replicable?
C)How will growth be financed?
D)What expert assistance will be needed for legal matters?

Question 61

When is a bargain price for an existing business not a good deal for the buyer?

A)When the seller intends to open a competing business in the same locality.
B)When the business is losing money.
C)When the neighbourhood is deteriorating.
D)All of the above.

Question 62

The purchase price of a business is determined by negotiation between:

A)lender and seller.
B)seller and broker.
C)buyer and seller.
D)lender and buyer.

Question 63

Which of the following reasons for buying a business is also a reason for purchasing a franchise?

A)Reduction of uncertainty
B)Acquiring goodwill
C)Bargain price
D)Quick start

Question 64

Vihaan was given the chance to examine the tax returns and financial statements of a business he is considering for purchase.The seller asked him to sign a _____________ that prohibits Vihaan from sharing this confidential information with anyone else.

A)franchise contract
B)due diligence document
C)franchise disclosure document
D)non-disclosure agreement

Question 65

Briefly compare and contrast "product and trade name franchising" with "business format franchising".

Question 66

Which factor is a non-quantitative factor of valuing a business?

A)Future community development.
B)Size of the buildings.
C)Number of employees who will stay with the company.
D)Employee salaries.

Question 67

Discuss the advantages of buying a franchise.

Question 68

Susan is considering buying the local franchisee of Pots-R-Us.The owners would probably state this reason for selling when in actuality the other three reasons may be more likely:

A)Desire to locate to a different part of the country.
B)Unprofitable.
C)Loss of an exclusive sales franchise.
D)Lack of growth potential.

Question 69

The seller of an existing business placed a high value on his experienced employees.The buyer should be wary of this because:

A)their skills may be obsolete.
B)the seller wants a higher price for his business.
C)the workers may decide to leave after the sale.
D)the buyer will want to bring in his own people.

Question 70

Fred's company specialises in bringing together buyers and sellers of businesses.Fred is:

A)a business broker.
B)a master licensee.
C)an area developer.
D)a real estate agent.

Question 71

One of the most important features of the franchise contract is the provision related to:

A)the sale or transfer of the franchise to a government entity.
B)changes in management.
C)termination and transfer of the franchise.
D)termination of contracts with suppliers.

Question 72

Union contracts are among the many _____ factors in valuing a business.

A)nominative
B)nonessential
C)non-quantitative
D)non-qualitative

Question 73

Define the terms franchising, franchisor and franchisee.Apply to Steers, Wimpy, Chicken Licken, or ChesaNyama franchise example.

Question 74

Teboho is evaluating a business for possible purchase.She needs to know what a fair offering price should be.One way to do this would be:

A)to ask a business broker for his appraisal.
B)to search the Internet for information about this business.
C)to appraise the value of the assets of this business.
D)to base his offer on the owner's equity on the balance sheet.

Question 75

Zelda reports only half the cash from the vending machines on her cash flow statement and income tax returns.Her purpose in doing so is:

A)to reduce her income tax liability.
B)to increase her net income on the financial statement.
C)to retain the cash for reinvestment in the business.
D)to make the business more attractive to a buyer.

Question 76

Karen is assembling a team of experts to help her through the process of evaluating a franchise opportunity.This team should include:

A)a union representative, a lawyer and a technical writer.
B)an attorney, an accountant and a banker.
C)a banker, an accountant and a contract law consultant.
D)an accountant, another franchisee and a banker.

Question 77

Why is it important for a new franchisee to follow the business plan detailed in the operations manual?

Question 78

Everest is negotiating to purchase an existing business.One provision he should write into the sale contract is:

A)access to the seller's customer list.
B)disclosure of the business's revenues for the last year.
C)a statement of the royalties payable to the seller.
D)a non-compete agreement.

Question 79

Compare and contrast the functions of a master licensee and area developer.

Question 80

When Conrad purchased his business, he purchased it as a total entity.As a result,

A)Conrad got only the liquid assets of the business.
B)Conrad got both liquid assets and the real estate of the business.
C)the seller must pay any outstanding debt held by the business.
D)Conrad assumed responsibility for all outstanding debts incurred by the business.