Question 1

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 2

The registry maintained by the U.S. Small Business Administration

Accepted Answer

The registry maintained by the U.S. Small Business Administration speeds up loan processing for franchisees, but does not list warnings about franchisors, rate franchisors according to a four-star rating, or register all franchisors operating in the United States.

Question 3

Royalty fees typically range between _____ and _____ percent of the gross income that the franchisee receives from customers for selling the franchised products and services.

Accepted Answer

Royalty fees for franchises typically range between 5 and 9 percent of the gross income that the franchisee receives from customers for selling the franchised products and services. This range can vary based on the industry and specific franchise agreement.

Question 4

H&R Block was sued by a franchisee for selling Internet services within the franchisee's territory without offering any compensation. This is an example of

Accepted Answer

This is an example of encroachment because H&R Block was selling services in a territory that belonged to a franchisee without compensating or consulting them. Encroachment occurs when a franchisor opens a new location or offers new services in an existing franchisee's territory without their permission and without compensation.

Question 5

Which of the following is NOT one of the most common restrictions imposed on franchisees?

Accepted Answer

Imposing requirements on the level of community involvement is not one of the most common restrictions imposed on franchisees. The most common restrictions include imposing requirements regarding outlet appearance, limiting sales territories, and limiting advertising and hours of operation.

Question 6

Franchisors support their franchisees by doing all of the following EXCEPT

Accepted Answer

Franchisors do not typically hire employees for their franchisees. However, they may provide assistance with recruiting and training employees.

Question 7

Which of the following companies is credited with being the first franchisor in the United States?

Accepted Answer

Singer Sewing Machine is credited with being the first franchisor in the United States, starting in the mid-1800s.

Question 8

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

Accepted Answer

The $150,000 payment represents QRS's initial franchise fee, which is a common requirement for buying into a franchise system. This fee is separate from ongoing royalty payments and marketing fees.

Question 9

Which of the following statements about the International Franchise Association (IFA) is NOT true?

Accepted Answer

The answer of Which of the following statements about the...

Question 10

A franchise contract

Accepted Answer

A franchise contract is typically drafted by the franchisor and will generally favor their interests. It is important for franchisees to have the contract reviewed by their own attorney before signing to ensure that their rights are protected.

Question 11

Membership of the International Franchise Association (IFA) comprises over _____ percent of all registered franchisors _____.

Accepted Answer

The International Franchise Association (IFA) is a major organization representing the interests of franchisors, franchisees, and suppliers in the franchise industry, primarily in the United States. Over 70 percent of all registered franchisors in the United States are members of the IFA, making it a significant entity in the U.S. franchise industry.

Question 12

Owners of nearly 7,000 7-Eleven franchise locations formed the National Coalition of Associations of 7-Eleven Franchisees and sued the franchisor, 7-Eleven, Inc., when they did not see the financial returns they expected. They attributed this to the franchisor

Accepted Answer

The franchisees sued 7-Eleven, Inc. because they believed the franchisor was misleading about earning opportunities, which affected their financial returns.

Question 13

A _____ may be the single most valuable tool provided to a franchisee.

Accepted Answer

The operations manual provides detailed information about how to run the franchise and serves as a reference guide for franchisees. It covers everything from hiring employees to accounting procedures to customer service protocols. Having this resource can be essential for ensuring consistency and success in running a franchise. While the other options may be important, the operations manual is specifically tailored to the franchise system and its operations.

Question 14

The franchise contract that 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 Company is guilty of encroachment, which refers to the franchisor opening a corporate-owned store or granting another franchise within the exclusive territory of an existing franchisee. This is a breach of the franchise contract and can negatively impact the sales of the existing franchisee.

Question 15

In what way is a franchisee's freedom to run the business greatly reduced?

Accepted Answer

Franchisees are bound to the terms of the franchise contract, which outlines specific guidelines for how the business should be run, including product offerings, pricing, marketing, and more. Failure to comply with these guidelines can result in penalties, fines, or even termination of the franchise agreement. Therefore, the franchisee's freedom to make independent decisions is greatly reduced.

Question 16

Kelly is interested in opening an XYZ franchise. In addition to an up-front payment of $100,000, Kelly will have to pay building costs and purchase inventory and equipment. This type of expense is called

Accepted Answer

Investment costs refer to the expenses associated with starting a business, such as building costs, inventory purchases, and equipment expenses. The initial franchise fee is a specific fee paid to the franchisor for the rights to use their brand, while royalty payments are ongoing fees based on the franchisee's revenue. Marketing fees may be a separate fee or included in the initial franchise fee.

Question 17

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 18

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

Accepted Answer

The fact that Tomas must report his gross income and pay a percentage every month to his franchisor suggests that this is a royalty fee required by the franchisor for the use of their brand, trademarks, products, and services. Royalty fees are not negotiable every month, but they can be negotiable on an annual or longer-term basis depending on the agreement between the franchisor and the franchisee. Finance charges and investment costs are not relevant in this scenario.

Question 19

Which of the following is considered an advantage of franchising?

Accepted Answer

A) Franchising allows existing companies to expand and diversify their business without taking on the financial risks and burdens of full ownership.

B) Franchisees benefit from using established brand names and trademarks that are already familiar and trusted by consumers, which may make it easier to attract customers.

C) Some franchisors offer financing options to help franchisees cover the initial costs of starting their business, which can be a significant advantage for new entrepreneurs who may not have access to other types of funding.

Therefore, all of the options listed are considered advantages of franchising.

Question 20

All of the following are components of franchise costs EXCEPT

Accepted Answer

The other three options (royalty payments, advertising costs, investment costs) are all common components of franchise costs, but there is no such thing as a one-time federal franchise tax.

Quiz 4: Franchises and Buyouts