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.

Accepted Answer

When buying an existing business, the buyer typically acquires all the assets and liabilities associated with the business, including its personnel, inventories, physical facilities, established banking connections, and ongoing relationships with trade suppliers.

Question 2

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

Accepted Answer

Franchisors may face new restrictions or requirements when renewing their contracts with franchisees, which can be a disadvantage of the franchising model.

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.

Accepted Answer

This statement is true. An area developer strategy involves a single franchisee owning and operating multiple units in a specific geographic area, allowing for greater control and coordination between locations.

Question 4

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

Accepted Answer

While the franchisor typically provides marketing and advertising support, the franchisee is also responsible for local marketing efforts to promote their specific location.

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.

Accepted Answer

It is always necessary to verify the legitimacy of any franchise opportunity before pursuing it. Looking for independent, third-party sources of information is a good first step in this process.

Question 6

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

Accepted Answer

A nondisclosure agreement (NDA) is primarily intended to protect confidential information and does not necessarily indicate an intention to purchase; it's a common step in due diligence before making a decision.

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.

Accepted Answer

While the franchisor is a primary source of information, it is always a good idea to do your due diligence and research the franchise thoroughly before making any commitments. This can include investigating the franchisor's track record, talking to current and former franchisees, and consulting with a franchise attorney or other expert.

Question 8

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

Accepted Answer

The Coca-Cola Company operates as a product and trade name franchisor, licensing its brand and formula to bottlers and distributors throughout Africa and the world.

Question 9

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

Accepted Answer

It is a conflict of interest for an attorney to represent both sides in a business purchase, as their duty is to protect and advocate for their client's best interests. Each party should have their own independent legal representation to ensure a fair and equitable transaction.

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.

Accepted Answer

A Franchise Disclosure Document (FDD) is a legal document that provides detailed information about the franchisor, including their finances, experience, size, and involvement in litigation, among other things. Franchisees are required to receive and review the FDD before signing a franchise agreement.

Question 11

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

Accepted Answer

Evaluating the legal commitments of an existing business is an important aspect of due diligence for a wise buyer. This includes examining contracts, leases, licenses, permits, and any legal or regulatory issues that could impact the business's operations or value.

Question 12

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

Accepted Answer

The practice of putting one franchise right next to another is referred to as co-branding or dual branding, not piggyback franchising.

Question 13

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

Accepted Answer

Franchising typically involves purchasing the rights to operate a business that has already been established and proven successful, thereby reducing the risk of starting a completely new venture from scratch.

Question 14

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

Accepted Answer

Being registered with the Franchising Association of South Africa can provide potential lenders with an added sense of security and credibility, making it easier to obtain finance.

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.

Accepted Answer

The answer of The unscrupulous actions by franchisors to void...

Question 16

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

Accepted Answer

Financial statements can be manipulated or incomplete, and may not provide a complete picture of a company's financial health. Other factors such as market trends, competition, and management expertise should also be considered when valuing a business.

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.

Accepted Answer

This is a common type of payment structure in franchising, where the franchisor receives ongoing royalties based on the franchisee's sales or revenue.

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.

Accepted Answer

Due diligence is also necessary when acquiring a sole proprietorship to ensure that the business has no outstanding debts or legal issues, and to examine the financial statements and tax returns of the business.

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.

Accepted Answer

It is important for a buyer to scrutinize the seller's balance sheet to ensure that the asset book values are realistic, as this can affect the overall valuation and price paid for the business. If book values are inflated, it could lead to potential future write-downs or impairments that could negatively impact the buyer's investment.

Question 20

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

Accepted Answer

When purchasing a franchise, the purchaser is buying into a pre-existing business model that has been proven to be successful by the franchisor. This provides the new franchisee with a blueprint for how to operate the business and increases their chances of success.

Quiz 4: Franchising and Buyouts