Small Business Management An Entrepreneur’s Guidebook 8th Edition By Mary Jane Byrd – Test Bank

Complete Test Bank With Answers

 

 

Sample Questions Posted Below

 

Chapter 05

Create, Buy, or Franchise a Small Business

Multiple Choice Questions

1. _____ is the process of finding a small—but profitable—demand for something and

producing a custom-made product for that market.

2. A. Lead

marketing

B. Challenge

marketing

C. Content

marketing

D. Niche

marketing

John wants to start his own business. After doing some research, he has decided to

specialize in cleaning kitchens since most homemakers are not satisfied with the

quality of the service offered by the residential cleaning companies. This process of

finding a small—but profitable—demand for something and producing a custom-

made product or service is known as _____.

3. A. out-of-home

advertising

B. niche

marketing

C. sales

promotion

D. visual

merchandising

Which of the following refers to a group of retired—but active—managers from all

walks of life who help people develop their business ideas?

A. Service Corps of Retired

Executives

B. Federal Small Business

Administration

C. State Economic Development

Agency

D. Small Business Development

Center

5-1

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.4. The website of the Federal Small Business Administration has a self-help program

called the _____, which helps prospective entrepreneurs focus on some of the factors

they need to consider before starting their own business.

5. A. Market Research

Questionnaire

B. Directory of

Entrepreneurship

C. Small Business Startup

Kit

D. Test Marketing

Tool

Which of the following is a good source of information through which prospective

business owners get help and advice?

6. A. Business Committee for the

Arts

B. State Economic Development

Agencies

C. Federal Trade

Commission

D. Business Council for International

Understanding

_____ are private associations of local (or regional) business and professional people

who are familiar with an area’s needs.

7. A. Offices of International

Trade

B. Chambers of

commerce

C. Directory of Trade Associations in the United

States

D. State Economic Development

Agencies

_____ is the system of gathering, recording, classifying, analyzing, and interpreting

data related to merchandising of goods and services.

A. Market

research

B. Operational

research

C. Drip

marketing

D. Global

marketing

5-2

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.8. Prospective entrepreneurs can access data from _____ to obtain information on

subjects such as population, business, and housing.

9. A. MIT Enterprise

Forum

B. International Franchise

Association

C. Census

Bureau

D. Federal Trade

Commission

Which of the following statements is true of market research in the context of small

businesses?

A. Formal research programs are a valuable but an expensive way to obtain

guidance.

B. The district offices of the U.S. Department of Education have good libraries that

can be helpful to small businesses.

C. The Business Committee for the Arts has publications on organizing small

businesses.

D. Market research consists of granting a franchisee the right to sell

a product.

10.While working in a fast food outlet, Harold observed that most of the customers were

working in offices in the neighborhood. Sensing a profitable opportunity, he decided

to open a catering business. He offered to deliver lunch directly to the offices so that

the businesspeople would not have to interrupt their meetings to go out for lunch. In

the context of the above scenario, which of the following was the reason for Harold to

start his own business?

A. To obtain fresh

inventory

B. To take advantage of the latest technology to

fill a void

C. To select a competitive

environment

D. To have a free hand in selecting

personnel

5-3

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.11.Which of the following is a reason for starting a new business?

A. The owner has the freedom to select his or her own competitive

environment.

B. It is easy to find the right

business.

C. The chances of succeeding is not as high in a franchise as in a small

business start-up.

D. The owner does not have to experience problems in establishing basic

management systems and controls when starting his or her own business.

12.Catherine, who loves dogs, wants to offer dog-walking services in her neighborhood.

Her research leads her to a small professional pet care store operating in the area,

which she decides to buy. Which of the following is a good reason for Catherine to

buy the pet care store?

A. The latest technology can be used to fill a

service gap.

B. A fresh inventory can be

obtained.

C. A competitive environment may be

selected.

D. The facilities are already

available.

13.Jane, who wants to start her own business, considers buying an Internet café which is

up for sale in her neighborhood. However, Jane discovers that Internet connectivity

tends to be erratic in the store since she lives in a remote town and decides against

it. Which of the following is most likely the reason for Jane’s refusal to buy the

business?

A. Lack of an established product

line

B. Lack of an established channel of

distribution

C. Problems due to old and obsolete

facilities

D. Problems associated with workforce

availability

5-4

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.14.Which of the following is a benefit of buying a franchise?

A. The franchisee can identify his or her market

niche.

B. The franchisee can select his or her own sales

activities.

C. The franchiser brings proven methods of operation to aid the

franchisee.

D. The franchiser gives complete independence to run the

franchise.

15.Which of the following is a drawback of buying a franchise?

A. Franchisers do not provide any guidance to the

franchisee.

B. Franchises are not available in a wide range of

endeavors.

C. Franchisers have to identify their market niche and conduct their own

sales activities.

D. Franchisees face issues in understanding their role in the responsibilities of

operating the franchise.

16.In franchising, which of the following is a benefit to the franchisee?

A. Share in local or national

promotion

B. Low operating

costs

C. Fast expansion and penetration of

business

D. Increase in royalty

fees

17.In a franchise, which of the following is an advantage for a franchiser?

A. Brand

recognition

B. Low operating

costs

C. Financial

assistance

D. Share in national

promotion

5-5

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.18._____ is a marketing system based on a legal arrangement that permits one party to

conduct business as an individual owner while abiding by the terms and conditions

set by the second party.

A. Joint

venture

B. Wholesalin

g

C. Wholly owned

subsidiary

D. Franchisin

g

19.Which of the following statements is true of franchising?

A. The parties in a franchising arrangement usually compete with each other

for success.

B. The franchisee is the company that owns the franchise’s name and distinctive

elements and grants others the right to sell its product.

C. A franchise is an agreement whereby an independent businessperson is given

exclusive rights to sell a specified good or service.

D. A franchiser is usually an independent local businessperson who agrees with the

franchise owner to operate the business on a local or regional basis.

20.What does a franchiser do?

A. Owns the company’s name and licenses others to sell its

products

B. Provides a licensing fee to the owner of the

business

C. Runs the day-to-day operations of the local

business

D. Agrees to sell the product according to the franchisee’s

requirements

21.Burger’s Inc. owns a number of fast food stores across the country. Ryan, who wants

to start his own business, decides to open a store under the Burger’s Inc. trademark.

He has to sell and market the fast food products according to the terms of the

licensing agreement. In this scenario, Ryan is a:

A. venture

capitalist.

B. franchise

r.

C. franchise

e.

D. manufacturing

agent.

5-6

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.22.Product and trademark franchising:

A. grants the franchisee the right to sell a widely

recognized brand.

B. is the systematic gathering, recording, and analyzing of data related to the

marketing of goods and services.

C. is a partnership in which each partner actively participates as an equal in

managing the business.

D. grants a franchisee the right to market the brand and trademark and to use a

complete operating system.

23.Which type of franchising system grants the franchisee the right to market the

product and trademark and use a complete operating system?

A. Product format

franchising

B. Business format

franchising

C. Trademark

franchising

D. International

franchising

24.Which of the following is true of business format franchising?

A. The franchiser exercises very little control over the franchisee’s business

operations.

B. Gasoline service stations and truck dealerships use this form of

franchising.

C. The franchiser provides assistance to the franchisee to train franchise

personnel.

D. Franchisees concentrate on handling the franchiser’s product line and identify their

business with that firm.

25.What is due diligence?

A. The research and analysis of the company that is done before a business

transaction

B. The efforts of managers from all walks of life to help people develop their

business ideas

C. The process of producing a custom-made product for

that market

D. The arrangement under which employees may schedule their own hours around

a core time

5-7

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.26.Which of the following is true of a franchise fee?

A. It is a fee paid to the franchiser at regular intervals

of time.

B. It is a fee based on the percentage of a franchisee’s gross

revenue.

C. It is a one-time fee paid to the

franchiser.

D. It is a continuous fee paid by the franchiser to the

franchisee.

27.The continuous fee paid by the franchisee to the franchiser based on a percentage of

the franchisee’s gross revenue is termed:

A. royalty

fee.

B. start-up

fee.

C. licensing

fee.

D. franchise

fee.

28.Which document provides information to possible new franchisees on 20 items

required by the Federal Trade Commission?

A. Business plan

agreement

B. Disclosure

statement

C. Marketing

statement

D. Buy-sell

agreement

29._____ is the concept that two or more people, working together in a coordinated way,

can accomplish more than the sum of their independent efforts.

A. Dualit

y

B. Due

diligence

C. Equity

investment

D. Synerg

y

5-8

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.30.Which of the following is true of combination franchising?

A. It is opposed to the concept of

synergy.

B. Cultural clashes can lead to the breakup of this

arrangement.

C. Firms involved in this arrangement should be competing against

each other.

D. This type of merger weakens the

participating firms.

31._____ is the most important professional assistance one needs before investing in a

franchise.

A. Technological

advice

B. Legal

advice

C. Medical

advice

D. Communication

advice

32.The _____ in the United States has a code of ethics that covers a franchiser’s

obligations to its franchisees.

A. International Franchise

Association

B. Franchising Code of

Conduct

C. Business Format

Franchising

D. Product and Trademark

Franchising

True / False Questions

33.When a person wants to start a new business, the first step is to decide whether to

start a new business, buy an existing one, or buy a franchise.

True False

34.Planning to start one’s own business begins with searching for or identifying a good

or service to sell.

True False

5-9

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.35.Niche marketing is the systematic gathering, recording, and analyzing of data related

to the marketing of goods and services.

True False

36.Reintroducing an old product is a good business idea since customer tastes run in

cycles.

True False

37.The Small Business Administration is a group of retired managers who help people

develop their business ideas.

True False

38.The Small Business Administration in the United States is a particularly effective

source of local information for prospective business owners because it is familiar with

an area’s needs.

True False

39.Small businesses never select one product niche because they usually have sufficient

resources to cover the whole market.

True False

40.The Service Corps of Retired Executives publishes many useful books on planning

and organizing small businesses.

True False

41.In a given market area, the fact that a high number of similar firms have gone out of

business usually signals market weakness.

True False

42.Small businesses must strive for low overhead, use no-frills assets, and look for

better real estate deals.

True False

43.Lack of an established product line does not typically stop a person from starting a

new business.

True False

44.One should buy an existing business even if the physical facilities of the firm are old

or obsolete.

True False

45.Even if an established or an existing business is in a desirable location, it is not a

good idea to buy it.

True False

5-10

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.46.An advantage of buying a franchise is that it already has many of the requirements

for success.

True False

47.In the context of small businesses, franchises tend to fail because they lack sufficient

funds to cover all needs.

True False

48.In the context of small businesses, franchises tend to fail because of unsuccessful

marketing.

True False

49.One way to help avoid franchise scams is to carefully review the franchiser’s

disclosure document.

True False

50.A franchisee owns a franchise’s name and distinctive elements and licenses others to

sell its products.

True False

51.Product and trademark franchising is usually observed in the restaurant industry.

True False

52.A franchiser exercises complete control over a franchisee’s business operations.

True False

53.The industry group with the largest volume of sales in a business format franchising

is automobile and truck dealerships.

True False

54.A disadvantage of franchising is the voluminous paperwork needed to provide

disclosure documents to potential franchisees.

True False

55.Due diligence is the concept that two or more people, working together in a

coordinated way, can accomplish more than the sum of their independent efforts.

True False

56.The disclosure agreement is a document that provides information on 20 items

required by the Federal Trade Commission.

True False

5-11

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.57.In the context of franchising, a disclosure statement provides demographic

information to the Federal Trade Commission.

True False

58.A problem area faced by franchisees is the high price of supplies that must be bought

from the franchiser.

True False

59.In the context of franchising, the success of fast food restaurants is related to the

increasing number of women working outside the home.

True False

60.Combination franchising is the ideal arrangement for big-name franchise operations

to avoid cultural clashes.

True False

61.Some franchisers prefer franchisees who own a large number of franchise outlets

because it speeds their growth.

True False

62.Small businesses in the United States are moving away from synergy as they are

trying to reengineer themselves.

True False

Essay Questions

63.How would a potential entrepreneur use market research to obtain information about

the market?

5-12

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.64.What are the three things that a potential entrepreneur should follow when

estimating sales and market share?

65.What are the reasons for starting a new business and for not starting a new

business?

66.What are the advantages and disadvantages of purchasing an existing small

business?

67.What are the benefits and drawbacks of buying a franchise?

5-13

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.68.What is franchising?

69.Describe the two types of franchising systems.

70.Define the terms franchisee fees and royalty fees.

71.What is a disclosure statement?

5-14

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.72.Describe some industries in the United States where franchising is expected to grow.

5-15

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.Chapter 05 Create, Buy, or Franchise a Small Business Answer

Key

Multiple Choice Questions

1. _____ is the process of finding a small—but profitable—demand for something and

producing a custom-made product for that market.

A. Lead

marketing

B. Challenge

marketing

C. Content

marketing

D. Niche

marketing

Learning Objective: 05-03 Describe how to search for and identify a product needed by the public—that is, how

Accessibility: Keyboard Navigation

Difficulty: 1 Easy

to find your niche.

2. John wants to start his own business. After doing some research, he has decided to

specialize in cleaning kitchens since most homemakers are not satisfied with the

quality of the service offered by the residential cleaning companies. This process

of finding a small—but profitable—demand for something and producing a custom-

made product or service is known as _____.

A. out-of-home

advertising

B. niche

marketing

C. sales

promotion

D. visual

merchandising

Learning Objective: 05-03 Describe how to search for and identify a product needed by the public—that is, how

Accessibility: Keyboard Navigation

Difficulty: 2 Medium

to find your niche.

5-16

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.3. Which of the following refers to a group of retired—but active—managers from all

walks of life who help people develop their business ideas?

A. Service Corps of Retired

Executives

B. Federal Small Business

Administration

C. State Economic Development

Agency

D. Small Business Development

Center

Learning Objective: 05-03 Describe how to search for and identify a product needed by the public—that is, how

Accessibility: Keyboard Navigation

Difficulty: 1 Easy

to find your niche.

4. The website of the Federal Small Business Administration has a self-help program

called the _____, which helps prospective entrepreneurs focus on some of the

factors they need to consider before starting their own business.

A. Market Research

Questionnaire

B. Directory of

Entrepreneurship

C. Small Business Startup

Kit

D. Test Marketing

Tool

Learning Objective: 05-03 Describe how to search for and identify a product needed by the public—that is, how

Accessibility: Keyboard Navigation

Difficulty: 1 Easy

to find your niche.

5. Which of the following is a good source of information through which prospective

business owners get help and advice?

A. Business Committee for the

Arts

B. State Economic Development

Agencies

C. Federal Trade

Commission

D. Business Council for International

Understanding

Learning Objective: 05-03 Describe how to search for and identify a product needed by the public—that is, how

Accessibility: Keyboard Navigation

Difficulty: 2 Medium

to find your niche.

5-17

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.6. _____ are private associations of local (or regional) business and professional

people who are familiar with an area’s needs.

A. Offices of International

Trade

B. Chambers of

commerce

C. Directory of Trade Associations in the United

States

D. State Economic Development

Agencies

Learning Objective: 05-03 Describe how to search for and identify a product needed by the public—that is, how

Accessibility: Keyboard Navigation

Difficulty: 2 Medium

to find your niche.

7. _____ is the system of gathering, recording, classifying, analyzing, and interpreting

data related to merchandising of goods and services.

A. Market

research

B. Operational

research

C. Drip

marketing

D. Global

marketing

Learning Objective: 05-03 Describe how to search for and identify a product needed by the public—that is, how

Accessibility: Keyboard Navigation

Difficulty: 1 Easy

to find your niche.

8. Prospective entrepreneurs can access data from _____ to obtain information on

subjects such as population, business, and housing.

A. MIT Enterprise

Forum

B. International Franchise

Association

C. Census

Bureau

D. Federal Trade

Commission

Learning Objective: 05-03 Describe how to search for and identify a product needed by the public—that is, how

Accessibility: Keyboard Navigation

Difficulty: 2 Medium

to find your niche.

5-18

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.9. Which of the following statements is true of market research in the context of

small businesses?

A. Formal research programs are a valuable but an expensive way to obtain

guidance.

B. The district offices of the U.S. Department of Education have good libraries that

can be helpful to small businesses.

C. The Business Committee for the Arts has publications on organizing small

businesses.

D. Market research consists of granting a franchisee the right to sell

a product.

Learning Objective: 05-03 Describe how to search for and identify a product needed by the public—that is, how

Accessibility: Keyboard Navigation

Difficulty: 2 Medium

to find your niche.

10. While working in a fast food outlet, Harold observed that most of the customers

were working in offices in the neighborhood. Sensing a profitable opportunity, he

decided to open a catering business. He offered to deliver lunch directly to the

offices so that the businesspeople would not have to interrupt their meetings to go

out for lunch. In the context of the above scenario, which of the following was the

reason for Harold to start his own business?

A. To obtain fresh

inventory

B. To take advantage of the latest technology to

fill a void

C. To select a competitive

environment

D. To have a free hand in selecting

personnel

11. Accessibility: Keyboard Navigation

Difficulty: 3 Hard

Learning Objective: 05-04 Decide whether to start a new business, buy an existing one, or buy a franchise.

Which of the following is a reason for starting a new business?

A. The owner has the freedom to select his or her own competitive

environment.

B. It is easy to find the right

business.

C. The chances of succeeding is not as high in a franchise as in a small

business start-up.

D. The owner does not have to experience problems in establishing basic

management systems and controls when starting his or her own business.

Accessibility: Keyboard Navigation

Difficulty: 2 Medium

Learning Objective: 05-04 Decide whether to start a new business, buy an existing one, or buy a franchise.

5-19

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.12. Catherine, who loves dogs, wants to offer dog-walking services in her

neighborhood. Her research leads her to a small professional pet care store

operating in the area, which she decides to buy. Which of the following is a good

reason for Catherine to buy the pet care store?

A. The latest technology can be used to fill a

service gap.

B. A fresh inventory can be

obtained.

C. A competitive environment may be

selected.

D. The facilities are already

available.

13. Accessibility: Keyboard Navigation

Difficulty: 3 Hard

Learning Objective: 05-04 Decide whether to start a new business, buy an existing one, or buy a franchise.

Jane, who wants to start her own business, considers buying an Internet café which

is up for sale in her neighborhood. However, Jane discovers that Internet

connectivity tends to be erratic in the store since she lives in a remote town and

decides against it. Which of the following is most likely the reason for Jane’s

refusal to buy the business?

A. Lack of an established product

line

B. Lack of an established channel of

distribution

C. Problems due to old and obsolete

facilities

D. Problems associated with workforce

availability

14. Accessibility: Keyboard Navigation

Difficulty: 3 Hard

Learning Objective: 05-04 Decide whether to start a new business, buy an existing one, or buy a franchise.

Which of the following is a benefit of buying a franchise?

A. The franchisee can identify his or her market

niche.

B. The franchisee can select his or her own sales

activities.

C. The franchiser brings proven methods of operation to aid the

franchisee.

D. The franchiser gives complete independence to run the

franchise.

Accessibility: Keyboard Navigation

Difficulty: 2 Medium

Learning Objective: 05-04 Decide whether to start a new business, buy an existing one, or buy a franchise.

5-20

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.15. Which of the following is a drawback of buying a franchise?

A. Franchisers do not provide any guidance to the

franchisee.

B. Franchises are not available in a wide range of

endeavors.

C. Franchisers have to identify their market niche and conduct their own

sales activities.

D. Franchisees face issues in understanding their role in the responsibilities of

operating the franchise.

16. Accessibility: Keyboard Navigation

Difficulty: 2 Medium

Learning Objective: 05-04 Decide whether to start a new business, buy an existing one, or buy a franchise.

In franchising, which of the following is a benefit to the franchisee?

A. Share in local or national

promotion

B. Low operating

costs

C. Fast expansion and penetration of

business

D. Increase in royalty

fees

17. Accessibility: Keyboard Navigation

Difficulty: 1 Easy

Learning Objective: 05-05 Describe the growing opportunities in franchising.

In a franchise, which of the following is an advantage for a franchiser?

A. Brand

recognition

B. Low operating

costs

C. Financial

assistance

D. Share in national

promotion

Accessibility: Keyboard Navigation

Difficulty: 1 Easy

Learning Objective: 05-05 Describe the growing opportunities in franchising.

5-21

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.18. _____ is a marketing system based on a legal arrangement that permits one party

to conduct business as an individual owner while abiding by the terms and

conditions set by the second party.

A. Joint

venture

B. Wholesalin

g

C. Wholly owned

subsidiary

D. Franchisin

g

19. Accessibility: Keyboard Navigation

Difficulty: 1 Easy

Learning Objective: 05-05 Describe the growing opportunities in franchising.

Which of the following statements is true of franchising?

A. The parties in a franchising arrangement usually compete with each other

for success.

B. The franchisee is the company that owns the franchise’s name and distinctive

elements and grants others the right to sell its product.

C. A franchise is an agreement whereby an independent businessperson is given

exclusive rights to sell a specified good or service.

D. A franchiser is usually an independent local businessperson who agrees with

the franchise owner to operate the business on a local or regional basis.

Accessibility: Keyboard Navigation

Difficulty: 1 Easy

Learning Objective: 05-05 Describe the growing opportunities in franchising.

20. What does a franchiser do?

A. Owns the company’s name and licenses others to sell its

products

B. Provides a licensing fee to the owner of the

business

C. Runs the day-to-day operations of the local

business

D. Agrees to sell the product according to the franchisee’s

requirements

Accessibility: Keyboard Navigation

Difficulty: 2 Medium

Learning Objective: 05-05 Describe the growing opportunities in franchising.

5-22

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.21. Burger’s Inc. owns a number of fast food stores across the country. Ryan, who

wants to start his own business, decides to open a store under the Burger’s Inc.

trademark. He has to sell and market the fast food products according to the

terms of the licensing agreement. In this scenario, Ryan is a:

A. venture

capitalist.

B. franchise

r.

C. franchise

e.

D. manufacturing

agent.

Accessibility: Keyboard Navigation

Difficulty: 1 Easy

Learning Objective: 05-05 Describe the growing opportunities in franchising.

22. Product and trademark franchising:

A. grants the franchisee the right to sell a widely

recognized brand.

B. is the systematic gathering, recording, and analyzing of data related to the

marketing of goods and services.

C. is a partnership in which each partner actively participates as an equal in

managing the business.

D. grants a franchisee the right to market the brand and trademark and to use a

complete operating system.

23. Accessibility: Keyboard Navigation

Difficulty: 1 Easy

Learning Objective: 05-05 Describe the growing opportunities in franchising.

Which type of franchising system grants the franchisee the right to market the

product and trademark and use a complete operating system?

A. Product format

franchising

B. Business format

franchising

C. Trademark

franchising

D. International

franchising

Accessibility: Keyboard Navigation

Difficulty: 1 Easy

Learning Objective: 05-05 Describe the growing opportunities in franchising.

5-23

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.24. Which of the following is true of business format franchising?

A. The franchiser exercises very little control over the franchisee’s business

operations.

B. Gasoline service stations and truck dealerships use this form of

franchising.

C. The franchiser provides assistance to the franchisee to train franchise

personnel.

D. Franchisees concentrate on handling the franchiser’s product line and identify

their business with that firm.

Accessibility: Keyboard Navigation

Difficulty: 1 Easy

Learning Objective: 05-05 Describe the growing opportunities in franchising.

25. What is due diligence?

A. The research and analysis of the company that is done before a business

transaction

B. The efforts of managers from all walks of life to help people develop their

business ideas

C. The process of producing a custom-made product for

that market

D. The arrangement under which employees may schedule their own hours around

a core time

Accessibility: Keyboard Navigation

Difficulty: 1 Easy

Learning Objective: 05-06 Explain how to tell if a franchise is right for you.

26. Which of the following is true of a franchise fee?

A. It is a fee paid to the franchiser at regular intervals

of time.

B. It is a fee based on the percentage of a franchisee’s gross

revenue.

C. It is a one-time fee paid to the

franchiser.

D. It is a continuous fee paid by the franchiser to the

franchisee.

Accessibility: Keyboard Navigation

Difficulty: 2 Medium

Learning Objective: 05-06 Explain how to tell if a franchise is right for you.

5-24

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.27. The continuous fee paid by the franchisee to the franchiser based on a percentage

of the franchisee’s gross revenue is termed:

A. royalty

fee.

B. start-up

fee.

C. licensing

fee.

D. franchise

fee.

28. Accessibility: Keyboard Navigation

Difficulty: 1 Easy

Learning Objective: 05-06 Explain how to tell if a franchise is right for you.

Which document provides information to possible new franchisees on 20 items

required by the Federal Trade Commission?

A. Business plan

agreement

B. Disclosure

statement

C. Marketing

statement

D. Buy-sell

agreement

29. Accessibility: Keyboard Navigation

Difficulty: 1 Easy

Learning Objective: 05-06 Explain how to tell if a franchise is right for you.

_____ is the concept that two or more people, working together in a coordinated

way, can accomplish more than the sum of their independent efforts.

A. Dualit

y

B. Due

diligence

C. Equity

investment

D. Synerg

y

Accessibility: Keyboard Navigation

Difficulty: 1 Easy

Learning Objective: 05-07 Explain the future of franchising.

5-25

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.30. Which of the following is true of combination franchising?

A. It is opposed to the concept of

synergy.

B. Cultural clashes can lead to the breakup of this

arrangement.

C. Firms involved in this arrangement should be competing against

each other.

D. This type of merger weakens the

participating firms.

31. Accessibility: Keyboard Navigation

Difficulty: 2 Medium

Learning Objective: 05-07 Explain the future of franchising.

_____ is the most important professional assistance one needs before investing in a

franchise.

A. Technological

advice

B. Legal

advice

C. Medical

advice

D. Communication

advice

32. Accessibility: Keyboard Navigation

Difficulty: 1 Easy

Learning Objective: 05-06 Explain how to tell if a franchise is right for you.

The _____ in the United States has a code of ethics that covers a franchiser’s

obligations to its franchisees.

A. International Franchise

Association

B. Franchising Code of

Conduct

C. Business Format

Franchising

D. Product and Trademark

Franchising

Accessibility: Keyboard Navigation

Difficulty: 1 Easy

Learning Objective: 05-06 Explain how to tell if a franchise is right for you.

True / False Questions

5-26

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.33. When a person wants to start a new business, the first step is to decide whether to

start a new business, buy an existing one, or buy a franchise.

FALSE

Accessibility: Keyboard Navigation

Difficulty: 1 Easy

Learning Objective: 05-02 Describe the steps involved in the procedure recommended for going into business.

34. Planning to start one’s own business begins with searching for or identifying a

good or service to sell.

TRUE

Accessibility: Keyboard Navigation

Difficulty: 1 Easy

Learning Objective: 05-02 Describe the steps involved in the procedure recommended for going into business.

35. Niche marketing is the systematic gathering, recording, and analyzing of data

related to the marketing of goods and services.

FALSE

Learning Objective: 05-03 Describe how to search for and identify a product needed by the public—that is, how

Accessibility: Keyboard Navigation

Difficulty: 1 Easy

to find your niche.

36. Reintroducing an old product is a good business idea since customer tastes run in

cycles.

TRUE

Learning Objective: 05-03 Describe how to search for and identify a product needed by the public—that is, how

Accessibility: Keyboard Navigation

Difficulty: 2 Medium

to find your niche.

37. The Small Business Administration is a group of retired managers who help people

develop their business ideas.

FALSE

Learning Objective: 05-03 Describe how to search for and identify a product needed by the public—that is, how

Accessibility: Keyboard Navigation

Difficulty: 1 Easy

to find your niche.

38. The Small Business Administration in the United States is a particularly effective

source of local information for prospective business owners because it is familiar

with an area’s needs.

FALSE

Learning Objective: 05-03 Describe how to search for and identify a product needed by the public—that is, how

Accessibility: Keyboard Navigation

Difficulty: 2 Medium

to find your niche.

5-27

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.39. Small businesses never select one product niche because they usually have

sufficient resources to cover the whole market.

FALSE

Learning Objective: 05-03 Describe how to search for and identify a product needed by the public—that is, how

Accessibility: Keyboard Navigation

Difficulty: 2 Medium

to find your niche.

40. The Service Corps of Retired Executives publishes many useful books on planning

and organizing small businesses.

FALSE

Learning Objective: 05-03 Describe how to search for and identify a product needed by the public—that is, how

Accessibility: Keyboard Navigation

Difficulty: 2 Medium

to find your niche.

41. In a given market area, the fact that a high number of similar firms have gone out

of business usually signals market weakness.

TRUE

Learning Objective: 05-03 Describe how to search for and identify a product needed by the public—that is, how

Accessibility: Keyboard Navigation

Difficulty: 2 Medium

to find your niche.

42. Small businesses must strive for low overhead, use no-frills assets, and look for

better real estate deals.

TRUE

Learning Objective: 05-03 Describe how to search for and identify a product needed by the public—that is, how

Accessibility: Keyboard Navigation

Difficulty: 1 Easy

to find your niche.

43. Lack of an established product line does not typically stop a person from starting a

new business.

FALSE

44. Accessibility: Keyboard Navigation

Difficulty: 1 Easy

Learning Objective: 05-04 Decide whether to start a new business, buy an existing one, or buy a franchise.

One should buy an existing business even if the physical facilities of the firm are

old or obsolete.

FALSE

Accessibility: Keyboard Navigation

Difficulty: 1 Easy

Learning Objective: 05-04 Decide whether to start a new business, buy an existing one, or buy a franchise.

5-28

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.45. Even if an established or an existing business is in a desirable location, it is not a

good idea to buy it.

FALSE

46. Accessibility: Keyboard Navigation

Difficulty: 1 Easy

Learning Objective: 05-04 Decide whether to start a new business, buy an existing one, or buy a franchise.

An advantage of buying a franchise is that it already has many of the

requirements for success.

TRUE

47. Accessibility: Keyboard Navigation

Difficulty: 2 Medium

Learning Objective: 05-04 Decide whether to start a new business, buy an existing one, or buy a franchise.

In the context of small businesses, franchises tend to fail because they lack

sufficient funds to cover all needs.

TRUE

48. Accessibility: Keyboard Navigation

Difficulty: 2 Medium

Learning Objective: 05-04 Decide whether to start a new business, buy an existing one, or buy a franchise.

In the context of small businesses, franchises tend to fail because of unsuccessful

marketing.

TRUE

49. Accessibility: Keyboard Navigation

Difficulty: 2 Medium

Learning Objective: 05-04 Decide whether to start a new business, buy an existing one, or buy a franchise.

One way to help avoid franchise scams is to carefully review the franchiser’s

disclosure document.

TRUE

50. Accessibility: Keyboard Navigation

Difficulty: 2 Medium

Learning Objective: 05-04 Decide whether to start a new business, buy an existing one, or buy a franchise.

A franchisee owns a franchise’s name and distinctive elements and licenses others

to sell its products.

FALSE

51. Accessibility: Keyboard Navigation

Difficulty: 1 Easy

Learning Objective: 05-05 Describe the growing opportunities in franchising.

Product and trademark franchising is usually observed in the restaurant industry.

FALSE

Accessibility: Keyboard Navigation

Difficulty: 2 Medium

Learning Objective: 05-05 Describe the growing opportunities in franchising.

5-29

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.52. A franchiser exercises complete control over a franchisee’s business operations.

FALSE

53. Accessibility: Keyboard Navigation

Difficulty: 1 Easy

Learning Objective: 05-05 Describe the growing opportunities in franchising.

The industry group with the largest volume of sales in a business format

franchising is automobile and truck dealerships.

FALSE

54. Accessibility: Keyboard Navigation

Difficulty: 2 Medium

Learning Objective: 05-05 Describe the growing opportunities in franchising.

A disadvantage of franchising is the voluminous paperwork needed to provide

disclosure documents to potential franchisees.

TRUE

55. Accessibility: Keyboard Navigation

Difficulty: 2 Medium

Learning Objective: 05-05 Describe the growing opportunities in franchising.

Due diligence is the concept that two or more people, working together in a

coordinated way, can accomplish more than the sum of their independent efforts.

FALSE

56. Accessibility: Keyboard Navigation

Difficulty: 1 Easy

Learning Objective: 05-06 Explain how to tell if a franchise is right for you.

The disclosure agreement is a document that provides information on 20 items

required by the Federal Trade Commission.

TRUE

57. Accessibility: Keyboard Navigation

Difficulty: 1 Easy

Learning Objective: 05-06 Explain how to tell if a franchise is right for you.

In the context of franchising, a disclosure statement provides demographic

information to the Federal Trade Commission.

FALSE

58. Accessibility: Keyboard Navigation

Difficulty: 1 Easy

Learning Objective: 05-06 Explain how to tell if a franchise is right for you.

A problem area faced by franchisees is the high price of supplies that must be

bought from the franchiser.

TRUE

Accessibility: Keyboard Navigation

Difficulty: 2 Medium

5-30

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.59. Learning Objective: 05-06 Explain how to tell if a franchise is right for you.

In the context of franchising, the success of fast food restaurants is related to the

increasing number of women working outside the home.

TRUE

60. Accessibility: Keyboard Navigation

Difficulty: 2 Medium

Learning Objective: 05-07 Explain the future of franchising.

Combination franchising is the ideal arrangement for big-name franchise

operations to avoid cultural clashes.

FALSE

61. Accessibility: Keyboard Navigation

Difficulty: 2 Medium

Learning Objective: 05-07 Explain the future of franchising.

Some franchisers prefer franchisees who own a large number of franchise outlets

because it speeds their growth.

TRUE

62. Accessibility: Keyboard Navigation

Difficulty: 1 Easy

Learning Objective: 05-07 Explain the future of franchising.

Small businesses in the United States are moving away from synergy as they are

trying to reengineer themselves.

FALSE

Accessibility: Keyboard Navigation

Difficulty: 1 Easy

Learning Objective: 05-07 Explain the future of franchising.

Essay Questions

5-31

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.63. How would a potential entrepreneur use market research to obtain information

about the market?

There are many ways to identify a market, and all can be generally classified as

marketing research. Market research is the systematic gathering, recording, and

analyzing of data related to the marketing of goods and services. Formal research

programs can be very valuable in giving direction, but they can also be expensive.

Computers are helping to increase the amount of information gathered while

reducing the cost.

Another means of collecting data is a search of existing literature. The first places

to look in a library are the “technical section” and the “government documents

section.” One should examine Census Bureau data on subjects such as population,

business, and housing.

The U.S. Department of Commerce is another good source of information, as its

district offices have well-stocked libraries of census data. The department

publishes many useful books on planning and organizing small businesses.

Learning Objective: 05-03 Describe how to search for and identify a product needed by the public—that is, how

Difficulty: 2 Medium

to find your niche.

64. What are the three things that a potential entrepreneur should follow when

estimating sales and market share?

There are three things that a potential entrepreneur needs to do when estimating

his or her sales and market share. First, one must determine the size of the

industry and market segment one wants to enter. Second, one must estimate the

competition and determining how to stack up against it. Finally, estimate one’s

own share of the market.

In studying the market area, the number of similar businesses that have gone out

of business or merged with a competitor should be determined. A high number of

these activities usually signals market weakness. Analysis of competitors’ activities

may also indicate how effectively a new company can compete.

While the biggest worry for small businesses is their large national or global

competitors, the natural advantage goes to the “excellent” companies—large or

small—that strive for low overhead, use no-frills assets, and look for a better real

estate deal. Small, growing companies should stay out of the path of focused

market leaders and deliver unprecedented value to the chosen customers in their

market niche.

In order to estimate one’s share of the market, one must determine the

geographic boundaries of the market area and estimate how much of one’s

product might be purchased. Finally, one must make an educated guess as to

what part of this market one might attract as one’s share.

Learning Objective: 05-03 Describe how to search for and identify a product needed by the public—that is, how

Difficulty: 3 Hard

to find your niche.

5-32

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.65. What are the reasons for starting a new business and for not starting a new

business?

Some reasons for starting a new business lie in the owner’s freedom to define the

nature of the business; create the preferred type of physical facilities; obtain fresh

inventory; have a free hand in selecting and developing personnel; take advantage

of the latest technology, equipment, materials, and tools to cover a void in

acceptable products available; and select a competitive environment.

Some reasons for not starting a new business are problems in finding the right

business; problems associated with assembling the resources, including the

location, building, equipment, materials, and workforce; lack of an established

product line; production problems associated with starting a new business; lack of

an established market and channels of distribution; and problems in establishing

basic management systems and controls. Also, the risk of failure is higher in small

business start-ups than in acquiring a franchise or even buying an existing

business.

66. Difficulty: 1 Easy

Learning Objective: 05-04 Decide whether to start a new business, buy an existing one, or buy a franchise.

What are the advantages and disadvantages of purchasing an existing small

business?

There are reasons to buy an existing business which include factors like the

personnel of the existing business are already working; the facilities are already

available; the product is already being produced for an existing market; the

location may be desirable; relationships may have been established with banks

and trade creditors; and revenues and profits are being generated, and goodwill

exists.

There are reasons to not buy an existing business which include factors like the

physical facilities may be old and obsolete; the employees may have a poor

production record or attitude; the accounts receivable may be past due or

uncollectible; the location may be bad; the financial condition and relations with

financial institutions may be poor; and the inventory may be obsolete or of poor

quality.

Difficulty: 2 Medium

Learning Objective: 05-04 Decide whether to start a new business, buy an existing one, or buy a franchise.

5-33

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.67. What are the benefits and drawbacks of buying a franchise?

Franchise agreements normally spell out what both the franchiser and franchisee

are responsible for and must do. Each party usually desires the success of the

other. The franchiser brings proven and successful methods of operation and

business images to aid the franchisee.

Another reason for buying a franchise is that it probably has many of the

requirements for success. The market niche has been identified, and sales

activities are in place. Also, the business may already be located, managed, and

running. Most potential small business owners do not have the competencies or

resources to get started successfully. But the franchiser can provide supplemental

help through its experience and concentrated study of the field. These talents

come from both successes and failures in the past.

However, buying a successful franchise is probably beyond the means of the

ordinary entrepreneur, as the best ones are quite costly. Expenses include initial

investments and fees, as well as royalty payments. The costs may outweigh the

benefits from its purchase. It may not fit the owner’s desires or direction, or it may

not give the franchisee enough independence. Finally, overpriced, poorly run,

uninteresting, and “white elephant” franchises are potentially disastrous.

Difficulty: 2 Medium

Learning Objective: 05-04 Decide whether to start a new business, buy an existing one, or buy a franchise.

68. What is franchising?

Franchising is a marketing system whereby an individual owner conducts business

according to the terms and conditions set by the franchiser. The franchise is the

agreement granting the right to do business and specifying the terms and

conditions under which the business will be conducted. The franchiser is the

company that owns the franchise’s name and distinctive elements (such as signs,

symbols, and patents) and that grants others the right to sell its product. The

franchisee is usually an independent local businessperson who agrees with the

franchise owner to operate the business on a local or regional basis. While the

franchisee is given the right to market the franchiser’s designated goods or

services, that marketing must be done according to the terms of the licensing

agreement. The contract specifies what the franchisee can and cannot do and

prescribes certain penalties for noncompliance.

Difficulty: 1 Easy

Learning Objective: 05-05 Describe the growing opportunities in franchising.

5-34

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.69. Describe the two types of franchising systems.

There are two types of franchising systems: product and trademark franchising;

and business format franchising.

Product and trademark franchising is an arrangement under which the franchisee

is granted the right to sell a widely recognized product or brand. Most such

franchisees concentrate on handling one franchiser’s product line and identify

their business with that firm. Familiar examples include automobile and truck

dealerships, gasoline service stations, and soft-drink bottlers. The franchiser

exercises very little control over the franchisee’s operations; what control there is

has to do with maintaining the integrity of the product, not with the franchisee’s

business operations.

Business format franchising is a relationship in which the franchisee is granted the

right to use an entire marketing system, along with ongoing assistance and

guidance from the franchiser. The industry groups with the largest volume of sales

in this type of franchising are restaurants, retailing (nonfood), hotels and motels,

business aids and services, automotive products and services, and convenience

stores.

70. Difficulty: 1 Easy

Learning Objective: 05-05 Describe the growing opportunities in franchising.

Define the terms franchisee fees and royalty fees.

A franchise fee is one-time fee paid by the franchisee to the franchiser for the

business concept, rights to use of trademarks, management assistance, and other

related services from the franchiser.

A royalty fee is continuous fee paid by the franchisee to the franchiser usually

based on a percentage of the franchisee’s gross revenue.

Difficulty: 1 Easy

Learning Objective: 05-06 Explain how to tell if a franchise is right for you.

71. What is a disclosure statement?

The Federal Trade Commission requires that a franchise give prospective

franchisees a formal agreement and a Uniform Franchise Offering Circular (UFOC)

at least 10 days before the contract is executed or before any money is paid. This

prospectus or disclosure statement should provide background on the franchiser

and its financial position; the financial requirements for a franchisee; and the

restrictions, protections, and estimated earnings of the franchise. A franchiser’s

formal offering circular can be downloaded from the World Wide Web.

Difficulty: 1 Easy

Learning Objective: 05-06 Explain how to tell if a franchise is right for you.

5-35

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.72. Describe some industries in the United States where franchising is expected to

grow.

The industries that especially lend themselves to franchising are restaurants;

motels; convenience stores; electronics; and automotive parts, accessories, and

servicing.

The success of restaurants, especially those offering fast foods, is related to many

variables, including demographic factors such as the high percentage of young

adults and singles in the population and the increasing number of women working

outside the home. Other factors that seem to have had a positive influence on

franchised restaurant success are product appeal to a growing segment of the

market, fast service, a sanitary environment, and buildings and signs that are

easily recognizable.

The motel industry has experienced explosive growth since the interstate highway

system began in 1956 and the growing affluence and mobility of Americans

created a market for quality motels. The industry has grown from mom-and-pop

units (with an often questionable image) to one dominated by large corporate

empires. These corporations not only sell franchises to independent

businesspeople but also operate some of the most profitable units themselves.

Best Western is considered to have the largest number of establishments.

With the rapid growth in electronics fields such as music, video, TV, and

computers, franchising has naturally followed. Today most businesses in the

United States own at least one computer which indicates tremendous

opportunities for franchises.

Difficulty: 2 Medium

Learning Objective: 05-07 Explain the future of franchising.

5-36

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.