Deck 4: Franchising and Buyouts

Question 1

One of the drawbacks of becoming a franchisor is the reduction in control.

Answer 1

True

Question 2

One of the benefits of becoming a franchisor is the sharing of profits.

Answer 2

False

Question 3

Goodwill is the difference between the higher price paid for an existing business over the value of its assets.

Answer 3

True

Question 4

A "vendor take-back" loan exists when the seller loans the buyer the difference between the selling price and the amount of conventional financing available.

Question 5

When purchasing a business the potential buyer should always question why the owner is trying to get rid of it.

Question 6

Tim Hortons franchisees must receive training in areas such as doughnut making,accounting,and merchandising.

Question 7

Financial qualifications are the only relevant criterion when a franchisor evaluates potential franchisees.

Question 8

A master franchisor is a firm or individual having a continuing contractual relationship with a franchisor to sell its franchises.

Question 9

Franchisors always select the site.

Question 10

Buying the shares of an existing business means buying everything including the liabilities and potential lawsuits.

Question 11

The cash flow-based valuation approach to determine the value of a business identifies the amount of cash on hand and values that cash based on the average US currency exchange rate over the previous 12 months.

Question 12

Most franchisors are highly selective when granting a franchise,which helps explain the lower failure rate.

Question 13

The market-based valuation approach to determine the value of a business is based on the sale prices of comparable firms.

Question 14

Accountants and consultants are considered the two most valuable sources of assistance when evaluating the purchase of an existing business.

Question 15

Reputable franchisors usually do not require franchisees have legal counsel.

Question 16

The modified-book-value approach to determine the value of a business identifies differences in book value to historical cost.

Question 17

A benefit of becoming a franchisee is the increased freedom and flexibility to operate the business.

Question 18

A disclosure document is a detailed statement of such information as the franchisor's finances,experience,size,and involvement in litigation.

Question 19

Roger owns a Tim Hortons franchise and a Molly Maid Franchise.This is called multiple-unit ownership.

Question 20

An appraisal or valuation of the firm is one of two basic stages in evaluating the financial health of a firm.

Question 21

A drawback of becoming a franchisor is the decrease in operating assistance.

Question 22

Offer and sale of a franchise remain unregulated in Alberta and in Ontario.

Question 23

Determining the value of a business based on its book value is used in the replacement-value approach.

Question 24

Countries with an expanding middle class,with disposable income to spend on retail items and fast food,are attractive growth prospects.

Question 25

The costs of starting an independent business is often high and the typical entrepreneur's capital sources are quite limited.

Question 26

A restaurant franchise doing business inside a department store is an example of piggyback franchising.

Question 27

The potential value of any franchising arrangement is defined by the rights contained in an agreement.

Question 28

Franchising lets a business enter many more markets much more quickly than it could by using only its own resources.

Question 29

A franchisee is an entrepreneur whose power is unlimited by a contractual relationship with a franchising organization.

Question 30

Car dealerships are typical examples of product and trade name franchises.

Question 31

Quebec and Manitoba are the only provinces that regulate franchising.

Question 32

Buying assets of a business leaves the liabilities with the seller but potential liabilities become the responsibility of the purchaser.

Question 33

The failure rate for independent small businesses is comparable to that for franchised businesses.

Question 34

The term commonly used to describe a relationship between franchisor and franchisee is business partnership.

Question 35

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

Question 36

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

Question 37

Existing franchisees are a valuable source of information about franchises.

Question 38

Even if a franchising organization considers the applicant to be a suitable prospect with high probability of success,it rarely extends a helping hand financially.

Question 39

Normalized earnings are earnings adjusted for inflation.

Question 40

Only Canada and the United States have franchises.

Question 41

Purchasing assets provides the buyer with more flexibility versus purchasing shares because the buyer can identify specific productive assets that will be purchased.

Question 42

James is determining the value of a company by researching the selling prices of its assets.Which valuation method is James using?

A) modified-book-value approach
B) replacement-value approach
C) asset-based valuation approach
D) liquidation-value approach

Question 43

Why is the sharing of profits a limitation to becoming a franchisor?

A) The franchisee will not share profits.
B) Only part of the profits from the operation belong to the franchisor.
C) The franchisor must spend those profits on training the franchisees.
D) The sharing of profits reduces the franchisor's control.

Question 44

Malcolm is deciding whether to open a brand-new business or purchase a franchise.Which characteristic of a franchise would influence Malcolm toward a brand-new business?

A) financial assistance
B) royalty payments
C) managerial assistance
D) marketing concept

Question 45

The buyer of an existing business acquires inventories and physical facilities but often must replace all personnel.

Question 46

One reason for buying an existing business is to receive a bargain price below what it would cost to start a new business.

Question 47

Kelly is interested in purchasing a daycare franchise because the business model allows her to immediately begin operating.What is likely to interest Cheryl most about a franchise?

A) turnkey operation
B) branch operation
C) independent operation
D) subsidiary operation

Question 48

A franchising strategy whereby a single franchisee owns more than one unit in a given area is typically referred to as a multiple-unit ownership strategy.

Question 49

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

Question 50

Franchisees typically pay an initial fee upon signing the franchise agreement,and a royalty fee (percentage of sales)thereafter.

Question 51

What are the two basic stages in evaluating the financial health of a firm?

A) an audit of the inventory's value and an evaluation of accounts receivable
B) a review of the personal assets of the owner of the business and a business valuation
C) a review of financial information and an appraisal of the firm
D) a review of profit trends for the past five years and a search of any lawsuits against the business

Question 52

Typical components of franchising include royalty payments,advertising expenditures,and the franchise fee.

Question 53

It is important for potential franchisees to remember that many financial figures provided by franchisors are only estimates.

Question 54

The most important feature of the franchise contract is the provision relating to termination and transfer of the franchise.

Question 55

In a very successful franchise system,becoming a franchisee guarantees success.

Question 56

Alison has no experience managing staff.For that reason she opens a wine-making franchise.What attracted Alison to purchasing a franchise instead of opening the business under her own name?

A) proven marketing concept
B) training support
C) financial assistance
D) operating assistance

Question 57

Three minuses of franchising include cost,restrictions on growth,and loss of independence.

Question 58

A franchisee has the freedom to add different products and services to the operation.

Question 59

What is the most important feature of a franchise contract?

A) the provision relating to the suppliers that can be used by the franchisee
B) the provision relating to the hiring of staff and their hours of work
C) the provision relating to the franchise fee and royalty payments
D) the provision relating to termination and transfer of the franchise

Question 60

Katie feels the franchisor has overcharged her franchise for its share of advertising costs.What document should Katie review to determine the proper advertising charges?

A) franchise agreement
B) franchise contract
C) franchise manual
D) franchise license

Question 61

When did the rapid growth of franchising begin?

A) the 1950s
B) the 1960s
C) the 1970s
D) the 1980s

Question 62

What is included in the costs of franchising?

A) signage
B) labour
C) taxes
D) depreciation

Question 63

Antonio has an agreement with a shoe operation in Italy to sell its brand and business model to franchisees in Canada.What term best describes Antonio?

A) development franchise
B) area developer
C) piggyback franchise
D) master franchise

Question 64

Nigel has created franchisee relationships with the managers of the multiple clothing stores he owned.He finds there is an increase in operating support.What would cause this?

A) shared advertising
B) accounting and legal services
C) shared profits
D) royalty fees

Question 65

Castro has a cleaning franchise.He would like to offer services to a nearby town but is not allowed to go beyond his territory.Which party in the franchise contract is Castro?

A) franchisor
B) franchisee
C) lessee
D) licensee

Question 66

Which of the following is considered a disadvantage of becoming a franchisee?

A) increase in management motivation
B) speed of expansion
C) reduction of capital requirements
D) loss of independence

Question 67

Why are franchisees more motivated than salaried employees?

A) because of profit incentives and their vested interest in the business
B) because the increasing number of stores is motivating
C) because franchisors tend to have more motivated employees than nonfranchisors
D) because their control is greatly reduced

Question 68

Gillian wishes to expand her health food franchise to countries in the Caribbean and South America.What do these countries likely have in common to make franchising there attractive?

A) expanding middle class
B) smaller populations
C) lack of disposable income
D) public transit

Question 69

Dominic is meeting with a franchisor to sign a written legal agreement that defines their business arrangement.Which document will Dominic be signing?

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

Question 70

Which of the following proclaims to be "the world's premier association dedicated to protecting,enhancing,and promoting franchising"?

A) International Franchise Association (IFA)
B) Canadian Franchise Association (CFA)
C) American Franchise Association (AFA)
D) Global Franchise Association (GFA)

Question 71

Deirdre owns a flower shop franchise and her agreement with the franchisor allows her to open up to three more shops within a specified territory.Which term best describes Deirdre?

A) development franchisee
B) area developer
C) piggyback franchisee
D) multiple-unit owner

Question 72

Paula is about to start her restaurant franchise and is reviewing what she will allow with respect to which suppliers can or cannot be used.Which party in the franchise contract is Paula?

A) franchisor
B) franchisee
C) franchisor's legal council
D) franchisee's legal council

Question 73

What figure is a measure of the riskiness of current earnings and the expected growth rate of future earnings and is used to assess the earnings based value of a business?

A) real interest rate
B) capitalization rate
C) risk rate
D) valuation rate

Question 74

Brandon is interested in becoming a franchisee.He has meetings with his lawyer and bank manager.He has also hired the services of an accounting firm.What is Brandon preparing to do?

A) Check the background of the franchisor.
B) Sign the franchise contract.
C) Compare franchise opportunities.
D) Sign the lease on a franchise location.

Question 75

George is contemplating purchasing franchise.He is reading that the average franchisee reaches sales of $2 million by third year,the franchise has been operating for nine years,and there are 42 franchisees in Eastern Ontario.What is George reading?

A) franchise contract
B) non-disclosure agreement
C) disclosure document
D) news article

Question 76

Janet,feeling the reputation of a business is very strong,pays $2.5 million for the business even though the assets were valued at $2 million.What is the excess amount over the value of the assets called?

A) profit
B) investment
C) risk value
D) goodwill

Question 77

Peter decides to open a painting franchise because he feels he will have immediate customers that recognize the business brand.What attracted Peter to purchasing a franchise instead of opening the business under his own name?

A) proven marketing concept
B) training support
C) financial assistance
D) operating assistance

Question 78

Anthony converts his operation of seven night clubs into a franchise business to free up time for more personal interests.What would one drawback be for Anthony in this new arrangement?

A) shared advertising
B) accounting and legal services
C) shared profits
D) royalty fees

Question 79

Having no business experience at all,Connor is happy he opened a home renovations franchise.What attracted Connor to purchasing a franchise instead of opening the business under his own name?

A) proven marketing concept
B) training support
C) financial assistance
D) operating assistance

Question 80

What are the two methods of purchasing a business that is a corporation?

A) buying the assets or shares of the business
B) buying the assets or inventory and equipment of the business
C) buying the equipment or patents of the business
D) buying the shares or customer list of the business