Question 1

Which of the following data must a franchisor disclose if the franchisor makes sales or earnings projections for a potential franchise location that are based on the actual sales, income, or profit figures of an existing franchise?

Accepted Answer

If the franchisor makes sales or earnings projections based on actual figures of an existing franchise, they must disclose the number and percentage of its actual franchises that have obtained such results. This is to ensure that potential franchisees have a clear understanding of the likelihood of achieving similar results. The other options are not directly relevant to the disclosure requirements in this scenario.

Question 2

A(n)________ is an amount paid by the franchisee to the franchisor for the continued use of the franchisor's trade name, property, and assistance that is often computed as a percentage of the franchisee's gross sales.

Accepted Answer

A royalty fee is a fee paid by the franchisee to the franchisor for the use of the franchisor's name, property, and assistance. This fee is usually a percentage of the franchisee's gross sales.

Question 3

The area franchisee is also called a ________.

Accepted Answer

The term "area franchisee" and "subfranchisor" are often used interchangeably in the franchise industry to refer to a franchisee who is given the right to develop and operate multiple franchise units within a specific territory. "Joint venturer" and "limited partner" are not typically used to describe area franchisees, and "strategic partner" is a more general term that does not necessarily refer specifically to the context of franchising.

Question 4

Which of the following is true of the liabilities of a franchisor and a franchisee?

Accepted Answer

Franchisees are generally only liable for their own contracts and obligations, while franchisors are not automatically liable for the torts of their franchisees. However, franchisors may be held liable if they exercise significant control over the franchisee's operations or if they fail to adequately train or supervise the franchisee. Therefore, option C is the most accurate statement.

Question 5

Where should the FTC franchise notice appear?

Accepted Answer

The FTC franchise notice should appear on the cover of a franchisor's required disclosure statement, known as the Franchise Disclosure Document (FDD). This document is provided to prospective franchisees and includes details about the franchise opportunity, including the franchise fee, royalties, and other fees, as well as information about the franchisor's background, financial performance, and other important details. The notice should include the following statement: "This franchise is registered with the state, and no offer or sale of a franchise can be made until the state's registration requirements have been met."

Question 6

Which of the following documents sets forth the terms and conditions of a franchise?

Accepted Answer

The franchise agreement is the document that sets forth the terms and conditions of a franchise. The FTC disclosure document provides information about the franchise, but it does not establish the terms and conditions. The articles of incorporation and articles of organization are legal documents that are filed with the state and establish a corporation or limited liability company, respectively, but they do not detail the terms and conditions of a franchise.

Question 7

The ________ is a uniform disclosure document that requires a franchisor to make specific presale disclosures to prospective franchisees.

Accepted Answer

The Uniform Franchise Offering Circular (UFOC) is the uniform disclosure document required by the Federal Trade Commission (FTC) that franchisors must provide to potential franchisees. It outlines specific information about the franchise, including fees, financial performance of other franchises, and franchisor obligations. The UFOC was superseded by the Franchise Disclosure Document (FDD) in 2007, but many states still refer to it as the UFOC.

Question 8

If a franchisor makes sales or earnings projections based on hypothetical examples, the franchisor must ________.

Accepted Answer

The franchisor must disclose the assumptions underlying the estimates if they make sales or earnings projections based on hypothetical examples. This is to ensure that franchisees have a clear understanding of how the projections were made and can assess the accuracy of the projections.

Question 9

Rio-Werner Corporation owns Rio's Sandwiches, a fast-food restaurant in New Jersey.It wants to operate in five cities on the west coast by means of franchisees which make and sell all menu items from Rio's Sandwiches.Which of the following would best suit the Rio-Werner Corporation's franchise plan?

Accepted Answer

The chain-style franchise would be the best choice for Rio-Werner Corporation's plan to expand to five cities on the west coast. With this type of franchise, Rio's Sandwiches would maintain control over the brand and menu, while the franchisees would be responsible for making and selling the food. This would allow for consistency across all locations and maintain the quality of the food and service.

Question 10

Which of the following types of clauses, in a franchise agreement, provides that any claim or controversy arising from the franchise agreement or an alleged breach thereof will be settled outside the courts?

Accepted Answer

An arbitration clause provides that any claim or controversy arising from the franchise agreement or an alleged breach thereof will be settled outside the courts through arbitration. This clause is commonly found in franchise agreements as a way to avoid costly and time-consuming court proceedings.

Question 11

A franchisor discloses a cautionary statement that reads, "Caution: These figures are only estimates of what we think you may earn.There is no assurance you'll do as well.If you rely upon our figures, you must accept the risk of not doing so well." This is an instance of ________.

Accepted Answer

The cautionary statement provided by the franchisor is disclosing earning projections based on hypothetical data. It clearly states that there is no assurance that the franchisee will do as well as expected and they must accept the risk of not doing so well. This is a common practice to protect the franchisor from any liability if the franchisee does not meet the projected earnings.

Question 12

Which of the following is imposed upon a franchisor that violates the FTC franchise disclosure rule?

Accepted Answer

If a franchisor violates the FTC franchise disclosure rule, the FTC can seek an injunction against further franchise sales until the franchisor complies with the rule. The franchisor may also be subject to fines and penalties. However, loss of intellectual property or criminal action on behalf of the franchisee are not typically imposed as a result of violating the FTC rule, and suspension of all business operations in the area would be an extreme measure in response to such a violation.

Question 13

A franchisor discloses a cautionary statement that reads, "Caution: Some outlets have sold this amount.There is no assurance you'll do as well.If you rely upon our figures, you must accept the risk of not doing so well." This is an instance of ________.

Accepted Answer

This statement is an example of disclosure of earning projections based on actual data, where the franchisor is providing information about past sales outcomes of some outlets while also cautioning that these results are not guaranteed for future franchisees.

Question 14

In a(n)________ franchise, the franchisor authorizes the franchisee to negotiate and sell franchises on behalf of the franchisor.

Accepted Answer

In an area franchise, the franchisor grants the franchisee the right to operate in a specific geographic area and allows them to sell franchises within that territory. This type of franchise agreement often includes the franchisor providing support for finding and securing new franchisees.

Question 15

Which of the following does the FTC franchise rule require from franchisors?

Accepted Answer

The FTC franchise rule requires franchisors to provide full presale disclosures to prospective franchisees nationwide, ensuring they have the necessary information to make informed decisions.

Question 16

Which of the following is true of a franchise agreement?

Accepted Answer

A franchisee typically obtains the license to use the franchisor's intellectual property after entering into a franchise agreement, which outlines the terms and conditions of the franchise relationship.

Question 17

Which of the following is an instance of an area franchise?

Accepted Answer

In an area franchise, a franchisor sells the right to operate franchises within a defined geographic area to a subfranchisor. Burger King hiring a Mexican subfranchisor to sell the franchise on behalf of Burger King in Mexico is an example of an area franchise. The other options are examples of product or trademark franchising.

Question 18

Which of the following is true of intellectual property of a franchisor?

Accepted Answer

Trade secrets of a franchisor do not qualify for patent protection. This is because patents require a public disclosure of the invention or process, whereas trade secrets rely on keeping the information confidential. Trademarks, including words and mottos, do qualify for trademark protection, and service marks can be licensed to franchisees.

Question 19

Which of the following federal agencies is empowered to enforce federal franchising rules?

Accepted Answer

The FTC is responsible for the enforcement of federal franchising rules through the Franchise Rule, which requires franchisors to provide prospective franchisees with a Franchise Disclosure Document (FDD) that includes information about the franchise's performance, fees, and other important details. The FTC also investigates and takes legal action against franchisors who engage in deceptive or fraudulent practices. The other agencies listed have different responsibilities such as regulating securities (SEC), communications (FCC), and commodity futures trading (CFTC).

Question 20

In a ________ franchise, the franchisor licenses the franchisee to make and sell its products or services to the public from a retail outlet serving an exclusive geographical territory.

Accepted Answer

In a chain-style franchise, the franchisor licenses the franchisee to operate a business that provides goods or services under the franchisor's brand and business model, often within an exclusive geographical area.

Quiz 40: Franchises and Special Forms of Businesses