Small Business Management Entrepreneurship And Beyond 5th Edition By Timothy S. Hatten – Test Bank

Complete Test Bank With Answers

 

 

Sample Questions Posted Below

 

CHAPTER 5

Franchising

True/False Questions

1. T F A disadvantage of the direct ownership system used by early manufacturers in the 1830s like

McCormick and Singer was the lack of direct control and control over quality levels.

Ans: False LO: 1 Page: 109 AACSB: Analytic

2. T F Franchising dominates the fast-food, automobile, and lodging segments of the U.S. economy.

Ans: True LO: 1 Page: 109 AACSB: Analytic

3. T F McCormick and Singer were two of the first franchises in America during the 1800s.

Ans: True LO: 1 Page: 109 AACSB: Analytic

4. T F Franchised businesses directly produce almost 6 million jobs.

Ans: False LO: 1 Page: 110 AACSB: Analytic

5. T F Nearly 50 percent of all U.S. businesses are franchised.

Ans: False LO: 1 Page: 110 AACSB: Analytic

6. T F Most of the franchises in the United States operate in the retail food sector.

Ans: False LO: 1 Page: 111 AACSB: Analytic

7. T F Making products available to consumers through exclusive dealers in a specific geographic region is

the purpose of product-distribution franchising.

Ans: True LO: 2 Page: 111 AACSB: Analytic

8. T F Product-distribution franchising is commonly used in fast-food restaurants and lodging

establishments, such as hotel and motel chains.

Ans: False LO: 2 Page: 111 AACSB: Analytic

9. T F approach to franchising.

Ans: False LO: 2 Page: 111AACSB: Analytic

In comparison to business-format franchising, product-distribution franchising is more of a turnkey

10. T F The biggest advantage of franchising for a franchisee is the marketing expertise that is provided.

Ans: False LO: 3 Page: 112 AACSB: Analytic

11. T F franchise.

Some franchisors prefer that their franchisees not have experience in the particular field of the

Ans: True LO: 3 Page: 113 AACSB: Analytic

12. T F Local franchisees share in the advertising costs spent by the franchisors when advertising nationally

and/or regionally.

Ans: True LO: 3 Page: 112 AACSB: Analytic

13. T F Franchisors seldom provide financial resources for startup and working capital for inventory.

Ans: False LO: 3 Page: 112 AACSB: Analytic

14. T F The primary drawback of franchising to the franchisee is that you must give up some control, some

decision-making power, and some freedom.

Ans: True LO: 3 Page: 113 AACSB: Analytic

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license

distributed with a certain product or service or otherwise on a password-protected website for classroom use.2 Chapter 5: Franchising

15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. T F One advantage of franchising to the franchisee is that it is relatively easy to terminate a franchise

agreement if things are not going well.

Ans: False LO: 3 Page: 115 AACSB: Analytic

T F If a franchisee feels that a product, promotion, or policy may not be appropriate for his/her area, the

franchisee can decide to not participate.

Ans: False LO: 3 Page: 114 AACSB: Analytic

T F A right of first denial states that a franchisee must decline continuing a franchise agreement before

the franchisor can offer the franchise to someone else.

Ans: False LO: 3 Page: 115 AACSB: Analytic

T F From the perspective of the franchisor, one of the biggest advantages of offering franchises is the

expansion of the business happening much faster than if the franchisor were in business alone.

Ans: True LO: 3 Page: 115 AACSB: Analytic

T F Franchisors often have several sources of income built into franchise agreements, including

franchise fees, operating revenue percentages, and product/supplies revenues.

Ans: True LO: 3 Page: 115 AACSB: Analytic

T F One way in which franchisors have dealt with the complexity of serving differing customer tastes

covering large geographic areas is through company owned franchises.

Ans: True LO: 3 Page: 116 AACSB: Analytic

T F Trade associations such as the International Franchise Association can be a good source for

industry-wide data as well as company-specific data.

Ans: True LO: 4 Page: 117 AACSB: Analytic

T F The American Franchise Association is a trade association that provides information and services

about franchising.

Ans: True LO: 4 Page: 117 AACSB: Analytic

T F When individuals have a general idea of the franchise that they are interested in, they should contact

the company and ask for a copy of its disclosure statement.

Ans: True LO: 4 Page: 119 AACSB: Analytic

T F A good question to ask concerning a potential franchise purchase is whether or not the franchise

gives exclusive territory for the length of the agreement.

Ans: True LO: 4 Page: 120 AACSB: Analytic

T F Because franchisors have lawyers look over the franchise agreement, it is not necessary for a

franchisee to pay a lawyer to do the same thing.

Ans: False LO: 4 Page: 120 AACSB: Analytic

T F A potential franchisee may receive only partial use of trademarks, trade names, logos, and other

symbols as detailed in the disclosure statement.

Ans: False LO: 4 Page: 123 AACSB: Analytic

T F Royalty fees that are paid to the franchisor are usually calculated as a percentage of gross profits.

Ans: False LO: 4 Page: 124 AACSB: Analytic

T F If an advertising fee is charged to a franchisee, the franchisor is required by law to spend a

percentage of the collected fees in the franchisee’s market.

Ans: False LO: 4 Page: 124 AACSB: Analytic

T F Franchise agreements are currently written in simple enough language that a lawyer need not be

contacted before signing a franchise agreement.

Ans: False LO: 4 Page: 124 AACSB: Analytic

T F Over the past 25 years, the wording within disclosure statements has gradually become more

“legalese” and complex.

Ans: False LO: 4 Page: 124 AACSB: Analytic

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license

distributed with a certain product or service or otherwise on a password-protected website for classroom use.Chapter 5: Franchising 3

31. 32. 33. 34. T F The issue of exclusive territory is the subject of much controversy in the franchising world.

Ans: True LO: 4 Page: 125 AACSB: Analytic

T F U.S. companies facing increased domestic competition are turning to foreign markets such as

Canada and Mexico for expansion opportunities.

Ans: True LO: 5 Page: 126 AACSB: Diversity

T F When expanding abroad, franchisors must be sensitive to the demographic, cultural, and legal

climates of the host country.

Ans: True LO: 5 Page: 126 AACSB: Diversity

T F With the passage of the North American Free Trade Agreement (NAFTA), franchise opportunities

in South America have become a dominant force in the retailing sector.

Ans: False LO: 5 Page: 126AACSB: Analytic

Multiple-Choice Questions

35. 36. 37. 38. 39. The process of gathering and verifying the accuracy of information included in the franchise agreement and

all other information provided by the franchisor is called

a) Deductive reasoning

b) Preemptory investigation

c) Due diligence

d) Market research

Ans: c LO: 4 Page: 125 AACSB: Analytic

Through the franchise agreement, the ________ gains the benefit of the parent company’s expertise,

experience, management systems, marketing, and financial help.

a) Franchisor

b) Franchisee

c) Leaser

d) Lessee

Ans: b LO: 1 Page: 109 AACSB: Analytic

A contractual license to operate an individually owned business as a part of a larger chain is known as a/an

a) Franchise

b) Small business contract

c) Chain contract

d) Import contract

Ans: a LO: 1 Page: 109 AACSB: Analytic

The parent company that develops a product or business process and sells the rights is known as the

a) Franchisor

b) Franchisee

c) Company of origin

d) Opening company

Ans: a LO: 1 Page: 109 AACSB: Analytic

The small business person who purchases the franchise in order to sell the product or service is known as

the

a) Franchisor

b) Franchisee

c) Company of origin

d) Opening company

Ans: b LO: 1 Page: 109 AACSB: Analytic

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license

distributed with a certain product or service or otherwise on a password-protected website for classroom use.4 Chapter 5: Franchising

40. 41. 42. 43. 44. 45. 46. 47. Franchises have experienced growth since the 1950s, although they have existed since the

a) Late 1700s

b) Early 1800s

c) Late 1800s

d) Early 1900s

Ans: b LO: 1 Page: 109 AACSB: Analytic

In 2010, which famous franchise business took the top spot on the Entrepreneur Franchise 500 list?

a) Starbucks

b) McDonalds

c) Subway

d) Burger King

Ans: c LO: 1 Page: 108 AACSB: Analytic

Samuel has decided to buy a small pretzel shop, where he will be expected to pay fees and royalties for

exclusive rights to local distribution of pretzels made at the shop. Samuel can best be described as a/an

a) Franchisor

b) Franchisee

c) CEO

d) Social entrepreneur

Ans: b LO: 1 Page: 109 AACSB: Reflective Thinking

According to the 2010 Franchise Business Economic Outlook, in total, franchised businesses support over

_________ jobs.

a) 2 million

b) 6 million

c) 18 million

d) 32 million

Ans: c LO: 1 Page: 110 AACSB: Analytic

________ and ________ were two of the first businesspeople to use exclusive agents, which laid the ground

for today’s franchising.

a) Ford, Hoover

b) John Deere, Macy’s

c) McDonald’s, Hilton

d) McCormick, Singer

Ans: d LO: 1 Page: 110 AACSB: Analytic

Today, franchising is represented in almost every industry, with more than ________ U.S. businesses being

franchises.

a) 225,000

b) 909,000

c) 2.5 million

d) 25 million

Ans: b LO: 1 Page: 110 AACSB: Analytic

Franchised businesses directly produce almost __________ jobs.

a) 1 million

b) 32 million

c) 5 million

d) 18 million

Ans: d LO: 1 Page: 110 AACSB: Analytic

Product-distribution franchising involves licensing the use of its

a) Trade name

b) Business format

c) Turnkey

d) Dealership

Ans: a LO: 2 Page: 111 AACSB: Analytic

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license

distributed with a certain product or service or otherwise on a password-protected website for classroom use.Chapter 5: Franchising 5

48. 49. 50. 51. 52. 53. 54. Making products available to consumers in a specific geographic region is the purpose of ________

franchising.

a) Product-distribution

b) Business format

c) Turnkey

d) Dealership

Ans: a LO: 2 Page: 111 AACSB: Analytic

A type of franchise in which the franchisee agrees to purchase the products of the franchisor or use the

franchisor’s name is called

a) Product-distribution franchise

b) Business-format franchise

c) Dealership franchise

d) Logo franchise

Ans: a LO: 2 Page: 111 AACSB: Analytic

Product franchises and business-format franchises are used by all but which of the following groups?

a) Producers

b) Wholesalers

c) Retailers

d) Manufacturers

Ans: d LO: 2 Page: 110 AACSB: Analytic

A type of franchise in which the franchisee adopts the franchisor’s entire method of operation is known as

a) Product franchising

b) Trade-name franchising

c) Business-format franchising

d) Dealership franchising

Ans: c LO: 2 Page: 111 AACSB: Analytic

According to the pie-chart figure in the text, what industry type accounted for the highest percentage of

franchises?

a) Business services

b) Lodging

c) Personal services

d) Real estate

Ans: a LO: 1 Page: 111 AACSB: Analytic

Business-format franchising is commonly used in which of the following?

a) Gasoline stations

b) Soft-drink bottlers

c) Car dealerships

d) Fast-food restaurants and lodging establishments

Ans: d LO: 2 Page: 111 AACSB: Analytic

Tom has opened a Ford dealership, where he purchases vehicles from the Ford Company and has full use of

the Ford trade name, brand names, and logos to promote the dealership. Tom has engaged in what type of

franchising?

a) Product-distribution

b) Service-distribution

c) Manufacturing-format franchising

d) Business-plan franchising

Ans: a LO: 2 Page: 111 AACSB: Reflective Thinking

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license

distributed with a certain product or service or otherwise on a password-protected website for classroom use.6 Chapter 5: Franchising

55. 56. 57. 58. 59. 60. 61. 62. While traveling across country over the summer, Gwen and Audrey stayed in well-known, franchised

accommodations rather than opting for independent, unknown motels. This example demonstrates which

advantage to franchisees?

a) Efficiency

b) Financial assistance

c) Professional guidance

d) Proven product

Ans: d LO: 3 Page: 112 AACSB: Reflective Thinking

An advantage of franchising for the franchisee would be all but which of the following?

a) Product readiness

b) Marketing experience

c) Efficiency

d) Cost of the franchise

Ans: d LO: 3 Page: 112 AACSB: Analytic

The greatest benefit to the franchisee is which of the following?

a) Product readiness

b) Marketing expertise

c) Professional guidance

d) Efficiency

Ans: a LO: 3 Page: 112 AACSB: Analytic

Providing a source of managerial and technical assistance is an advantage to the franchisee that might not be

available to an independent business owner. This is called

a) An opportunity to learn

b) Market expertise

c) Professional guidance

d) Controlled expansion

Ans: c LO: 3 Page: 113 AACSB: Analytic

Technical assistance available to franchisees could include all but which of the following?

a) Store layout and design

b) Location analysis

c) Purchasing assistance

d) Advertising campaigns

Ans: d LO: 3 Page: 113 AACSB: Analytic

Saving money on inventory needs, equipment, and supplies is an advantage for the franchisee that is called

a) Recognized standards

b) Marketing expertise

c) Efficiency

d) Professional guidance

Ans: c LO: 3 Page: 113 AACSB: Analytic

A McDonald’s hamburger that tastes the same at any location in the world is an example of which of the

following benefits to the franchisee?

a) Recognized standards

b) Marketing expertise

c) Efficiency

d) Professional guidance

Ans: a LO: 3 Page: 113 AACSB: Reflective Thinking

_______ franchisors will charge a fee and/or a specified percentage of sales revenue.

a) A few

b) Some

c) Most

d) All

Ans: d LO: 3 Page: 114 AACSB: Analytic

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license

distributed with a certain product or service or otherwise on a password-protected website for classroom use.Chapter 5: Franchising 7

63. 64. 65. 66. 67. 68. 69. 70. A problem with the cost of purchasing a franchise is that the franchisee is usually required to raise most of

the capital

a) Before beginning operations

b) Within one month of beginning operations

c) Within six months of beginning operations

d) Within one year of beginning operations

Ans: a LO: 3 Page: 114 AACSB: Analytic

Which of the following companies has the highest franchise fee?

a) McDonalds

b) Subway

c) Jiffy Lube

d) Gold’s Gym

Ans: a LO: 3 Page: 114 AACSB: Analytic

Because customers view franchises as an entire unit, which of the following can have a negative effect on a

franchisee’s business?

a) Overdependence or unsatisfied expectations

b) Risk of fraud or misunderstanding

c) Problems of termination or transfer

d) Poor performance of other franchisees

Ans: d LO: 3 Page: 115 AACSB: Analytic

From the perspective of the _________, the biggest advantage is the expansion of distribution sources with

limited equity investments.

a) Customer

b) Employee

c) Franchisor

d) Franchisee

Ans: c LO: 3 Page: 115 AACSB: Analytic

Other franchises under the same franchisor can detrimentally affect a franchise by

a) Tolerating substandard performance

b) Opening a new franchise in another market

c) Setting higher standards

d) Not making a profit

Ans: a LO: 3 Page: 115 AACSB: Analytic

A statement in the franchise agreement that states that the franchisee must decline to continue the agreement

before the franchisor can offer the franchise to someone else is called a

a) Right of discontinuance

b) Privilege of rescission

c) Right of first refusal

d) Right of denial

Ans: c LO: 3 Page: 115 AACSB: Analytic

An advantage to the franchisor is all but which of the following?

a) Multiple sources of revenue

b) Expansion with smaller capital investment

c) Bulk purchasing

d) Profit sharing

Ans: d LO: 3 Page: 115 AACSB: Analytic

From the perspective of the franchisor, the biggest advantage of offering franchises is the

a) Expansion with limited equity investments

b) Multiple sources of revenue

c) Level of control of expansion

d) Bulk purchasing

Ans: a LO: 3 Page: 115 AACSB: Analytic

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license

distributed with a certain product or service or otherwise on a password-protected website for classroom use.8 Chapter 5: Franchising

71. 72. 73. 74. 75. 76. 77. 78. Franchising may be the only viable way for which of the following to expand?

a) Sole proprietorships

b) Businesses with limited capital

c) Businesses wishing to enter international markets

d) Partnerships

Ans: b LO: 3 Page: 115 AACSB: Analytic

A source of revenue that could be built into the franchise agreement might include all but which of the

following?

a) Franchise fee

b) Percentage of gross operating revenues

c) Revenue from selling necessary products and supplies to the franchisee

d) Interest income

Ans: d LO: 3 Page: 115 AACSB: Analytic

In comparison with expansion of a corporate chain, expanding via franchise can be accomplished with a/an

________ management structure.

a) Simpler

b) Equally complex

c) Slightly more complex

d) Highly complex

Ans: a LO: 3 Page: 116 AACSB: Analytic

Which of the following can significantly reduce costs for a franchisee and thus increase profit margins?

a) Controlled expansion

b) Franchise fees

c) Bulk purchasing

d) Advertising costs

Ans: c LO: 3 Page: 116 AACSB: Analytic

The biggest disadvantage to the franchisor is which of the following?

a) Profit sharing

b) Disputes with franchisees

c) Loss of control

d) Communication breakdowns

Ans: c LO: 3 Page: 116 AACSB: Analytic

Which of the following is a way in which franchisors have adapted products to meet the changing needs of

customers?

a) Multiproduct shelving

b) Corporate displays

c) Establishing company-owned stores

d) Family branding

Ans: c LO: 3 Page: 116 AACSB: Analytic

Franchisors can achieve economies of scale as a result of which of these?

a) Multiple sources of revenue

b) Controlled expansion

c) Motivated franchisees

d) Bulk purchasing

Ans: d LO: 3 Page: 116 AACSB: Analytic

Which of the following is the least likely cause of dispute between franchisees and franchisors?

a) Payment of fees

b) Types of products or services offered

c) Expansion

d) Hours of operation

Ans: b LO: 3 Page: 116 AACSB: Analytic

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license

distributed with a certain product or service or otherwise on a password-protected website for classroom use.Chapter 5: Franchising 9

79. 80. 81. 82. 83. 84. 85. The major trade association of franchising is the

a) International Franchise Association

b) American Franchise Association

c) American Association of Franchises and Dealers

d) Global Franchise Association

Ans: a LO: 4 Page: 117 AACSB: Analytic

The International Franchise Association publishes ______________ annually, which gives requirements,

expectations, and assistance capabilities for each franchise.

a) The Franchise Handbook

b) Current Franchises in Business

c) Potential Franchise Opportunities

d) The Franchisee Guide to Selecting a Franchise

Ans: a LO: 4 Page: 117 AACSB: Analytic

All of the following are questions that should be answered to determine whether franchising is the

appropriate route to small business ownership except

a) b) c) d) Are you prepared to give up some independence?

Do you believe you have the skills to work smoothly with a franchisor?

Are you ready to make a short-term commitment to working with a franchisor?

Are you financially prepared to purchase the franchise?

Ans: c LO: 4 Page: 117 AACSB: Analytic

The American Association of Franchisees and Dealers (AAFD) has developed a ________ as a code of

ethical business conduct for franchised businesses.

a) Franchisee Bill of Rights

b) Franchisor Code of Conduct

c) Franchisee Constitution

d) Franchisor Disclosure Statement

Ans: a LO: 4 Page: 117 AACSB: Ethics

A priceless source of information about a prospective franchise that cannot be obtained from trade

associations or from the franchisor can come from which of the following?

a) Legal records

b) Current and former franchisees

c) The franchisor

d) Current customers

Ans: b LO: 4 Page: 119 AACSB: Analytic

Franchisors are required by the ________ to provide disclosure statements to prospective or actual

franchisees.

a) North American Free Trade Agreement

b) Uniform Commercial Code

c) National Labor Relations Act

d) Federal Trade Commission

Ans: d LO: 4 Page: 121 AACSB: Analytic

Information that franchisors are required to provide to potential franchisees is contained in which of the

following documents?

a) Franchise agreement

b) Purchasing contract

c) Disclosure statement

d) Profit-and-loss statement

Ans: c LO: 4 Page: 121 AACSB: Analytic

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license

distributed with a certain product or service or otherwise on a password-protected website for classroom use.10 Chapter 5: Franchising

86. Disclosure statements identify and provide information on ________ important items.

87. 88. 89. 90. 91. 92. a) 10

b) 20

c) 30

d) 40

Ans: b LO: 4 Page: 121 AACSB: Analytic

Identification of risks, fees, benefits, and restrictions of operating a franchise would be included in the

a) Disclosure statement

b) Franchise agreement

c) Franchise contract

d) Purchase agreement

Ans: a LO: 4 Page: 121 AACSB: Analytic

Alicia is considering opening a popular pizza franchise. Before she makes her final decision, she contacts

the company and obtains a document that outlines the risks, fees, benefits, and restrictions of owning the

franchise. This document is known as a

a) Financial statement

b) Contract

c) Franchise agreement

d) Disclosure statement

Ans: d LO: 4 Page: 121 AACSB: Reflective Thinking

A disclosure statement should include a description of the lawsuits in which the franchisor and its officers,

directors, and management personnel have been involved, also known as

a) Litigation

b) Justification

c) Intellectual property

d) Legal obligations

Ans: a LO: 4 Page: 122 AACSB: Analytic

A complete statement of the basis for any earnings claims made to the franchisee is referred to as

a) Exclusive territory

b) Financial assistance

c) Earning capacity

d) Financial control

Ans: c LO: 4 Page: 123 AACSB: Analytic

Whether a franchise is required to carry the full line of the franchisor’s products or whether additional

product lines can be added would fall under the ________ section of the disclosure statement.

a) Purchase obligations

b) Product or service restrictions

c) Personal participation of franchisees

d) Exclusive territory

Ans: b LO: 4 Page: 123 AACSB: Analytic

Franchisees have recently alleged that the franchisor has overlapped franchise areas. This is a breach of

a) Termination of the franchise agreement

b) Due diligence

c) The exclusive territory rights

d) Franchise fees

Ans: c LO: 4 Page: 123 AACSB: Analytic

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license

distributed with a certain product or service or otherwise on a password-protected website for classroom use.Chapter 5: Franchising 11

93. 94. 95. 96. 97. 98. 99. In the section of the disclosure statement titled “Information about franchisees,” the franchisor must provide

the names and addresses of all franchisees located in which proximity to the prospective franchisee?

a) City

b) County

c) State

d) Region

Ans: c LO: 4 Page: 123 AACSB: Analytic

The legal contract that binds both parties involved in the franchise is known as the

a) Franchise agreement

b) Disclosure statement

c) Contract

d) Business obligation

Ans: a LO: 4 Page: 124 AACSB: Analytic

All but which of the following should be thoroughly understood before the franchise agreement is signed?

a) b) c) d) How the agreement can be terminated or renewed

What fees have to be paid

The rights to exclusive territory

All new products the franchisor will develop for the next year

Ans: d LO: 4 Page: 124 AACSB: Analytic

Some franchise agreements specifically require the franchisee to have a percentage of the total franchise fee

from which of the following?

a) A venture capitalist

b) A nonborrowed source

c) An accredited bank

d) The Small Business Administration (SBA)

Ans: b LO: 4 Page: 124 AACSB: Analytic

The one-time payment made to become a franchisee is called a/an

a) Franchise agreement

b) Franchise fee

c) Royalty fee

d) Initial investment fee

Ans: b LO: 4 Page: 124 AACSB: Analytic

The ongoing payments that franchisees pay to franchisors—which is usually a percentage of gross sales—is

known as a/an

a) Franchise agreement

b) Franchise fee

c) Royalty fee

d) Initial investment fee

Ans: c LO: 4 Page: 124 AACSB: Analytic

Royalty fees are calculated as a percentage of

a) Gross sales

b) Gross profit

c) Net profit

d) Pretax revenue

Ans: a LO: 4 Page: 124 AACSB: Analytic

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license

distributed with a certain product or service or otherwise on a password-protected website for classroom use.12 Chapter 5: Franchising

100. 101. Before Walter can officially become a franchisee of an auto repair shop, he must first sign a document that

defines the precise, detailed conditions of the legal relationship between the franchisee and the franchisor.

This document is referred to as the

a) Forced contract

b) Franchise agreement

c) Disclosure statement

d) Due diligence statement

Ans: b LO: 4 Page: 124 AACSB: Reflective Thinking

Before she could open her franchised hair salon, Lori knew she had to pay a one-time fee of $10,000 to the

franchisor. This one-time fee is known as the

a) Franchise fee

b) Industry fee

c) Royalty fee

d) Due diligence fee

Ans: a LO: 4 Page: 124 AACSB: Reflective Thinking

102. Most franchise contracts run

a) Indefinitely

b) From 1 to 5 years

c) From 15 to 20 years

d) From 5 to 15 years

Ans: d LO: 4 Page: 125 AACSB: Analytic

103. Before signing a franchise agreement, a franchisee should make sure that the franchisor must show _____

_____ to terminate the contract

a) Real cause

b) Due diligence

c) Good cause

d) Cause clause

Ans: c LO: 4 Page: 125 AACSB: Analytic

104. Which of the following sections in the franchise agreement contains information on rights of first refusal,

advertising restrictions, and performance quotas?

a) b) d) Termination of the franchise agreement

Terms and renewal of the agreement

c) Exclusive territory

Franchise, advertising, and royalty fees

Ans: c LO: 4 Page: 125 AACSB: Analytic

105. Overseas franchising has become a major activity for U.S. companies facing increased

a) Taxes

b) Domestic competition

c) Regulation

d) Domestic lawsuits

Ans: b LO: 5 Page: 126 AACSB: Diversity

106. Because it is close in proximity and its markets are similar, ________ is an increasingly attractive market

for U.S. franchises.

a) France

b) Canada

c) Cuba

d) Great Britain

Ans: b LO: 5 Page: 126 AACSB: Diversity

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license

distributed with a certain product or service or otherwise on a password-protected website for classroom use.Chapter 5: Franchising 13

107. In _________, federal law does not seek to regulate the relationship between franchisor and franchisee, but

the franchisee must receive full information at least 10 days before execution of the franchise agreement.

a) Russia

b) China

c) Brazil

d) France

Ans: c LO: 5 Page: 127 AACSB: Diversity

Scenario Questions

Use the following to answer questions 108-112:

Scenario 5-1. Connie is considering opening a small bakery called Connie’s Cookie Cupboard. She loves to

bake cookies. Family and friends have told her she should consider opening a small business using her

baking skills. Connie has no business experience and no idea where to start in opening her own business. She

also has very few funds available. One day she is glancing through the newspaper and notices an ad for a

bakery franchise that would like to open an outlet in the local mall. This franchise provides everything from

equipment to packaging to full business services. She decides to look into the opportunity further.

108. 109. 110. 111. 112. In Scenario 5-1 above, all but which of the following would be a major advantage for Connie in choosing to

purchase a franchise as opposed to opening her own business?

a) Marketing expertise

b) Managerial assistance

c) Proven product

d) The cost of the franchise

Ans: d LO: 3 Page: 112 AACSB: Reflective Thinking

In Scenario 5-1 above, which of the following would be the major disadvantage for Connie in purchasing a

franchise?

a) Potential for business growth

b) Restrictions on her freedom and creativity

c) Marketing expertise

d) Quality control standards

Ans: b LO: 3 Page: 112 AACSB: Reflective Thinking

In Scenario 5-1 above, which of the following types of franchises is the bakery franchise?

a) Product franchising

b) Business-format franchising

c) Service franchising

d) Joint venture

Ans: b LO: 2 Page: 111 AACSB: Reflective Thinking

In Scenario 5-1 above, which of the following advantages from the franchisor would benefit Connie the

most?

a) Quality product

b) Efficiency

c) Professional guidance

d) An opportunity to learn

Ans: c LO: 3 Page: 112 AACSB: Reflective Thinking

In Scenario 5-1 above, all but which of the following would be disadvantages for Connie if she chose to use

franchising?

a) b) c) Problems of termination or transfer

Poor performance of other franchises

The cost of the franchise

d) Marketing expertise

Ans: d LO: 3 Page: 112 AACSB: Reflective Thinking

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license

distributed with a certain product or service or otherwise on a password-protected website for classroom use.14 Chapter 5: Franchising

Use the following to answer questions 113-117:

Scenario 5-2. Connie is considering opening a small bakery called Connie’s Cookie Cupboard. She loves to

bake cookies. Family and friends have told her she should consider opening a small business using her

baking skills. Connie has no business experience and no idea where to start in opening her own business. She

also has very few funds available. One day she is glancing through the newspaper and notices an ad for a

bakery franchise that would like to open an outlet in the local mall. This franchise provides everything from

equipment to packaging to full business services. She decides to look into the opportunity further.

Connie decides to pursue her franchise opportunity further. The bakery franchise looks promising. Since she

has a limited amount of funds, no business experience, and no idea how to start a new business, she is

seriously considering purchasing the bakery franchise located in the local mall. She obtains a copy of the

document that will legally bind her.

113. 114. 115. 116. 117. Refer to Scenario 5-2. The document that she is carefully considering is the

a) Franchise legal contract

b) Franchise agreement

c) Business contract

d) Partnership agreement

Ans: b LO: 4 Page: 124 AACSB: Reflective Thinking

In Scenario 5-2 above, as Connie is reading through the agreement, she sees that a percentage of her gross

sales will be paid to the franchisor. These are called

a) Franchise fees

b) Royalty fees

c) Advertising fees

d) Operation fees

Ans: b LO: 4 Page: 124 AACSB: Reflective Thinking

In Scenario 5-2 above, Connie is concerned that the bakery franchise not open other outlets within 10 miles

of the mall. She is concerned about

a) Termination of the franchise agreement

b) Exclusive territory

c) Terms and renewal of the agreement

d) Mutual territory

Ans: b LO: 4 Page: 125 AACSB: Reflective Thinking

In Scenario 5-2 above, after reading through the agreement, everything seems clear to Connie. Is there

anyone else she should have read the agreement?

a) Her friends at work

b) Her CPA and lawyer

c) Her friends and a lawyer

d) Her friends and her CPA

Ans: b LO: 4 Page: 126 AACSB: Reflective Thinking

In Scenario 5-2 above, the FTC requires all franchisors to provide which of the following for potential

franchise owners?

a) Statements of information

b) Income statements

c) Disclosure statements

d) Franchise statements

Ans: c LO: 4 Page: 121 AACSB: Reflective Thinking

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license

distributed with a certain product or service or otherwise on a password-protected website for classroom use.Chapter 5: Franchising 15

Short-Answer Questions

118. 119. 120. 121. 122. 123. 124. Describe the two types of franchising systems, explain how they differ, and give an example of each.

Ans: Product franchising allows franchisee to buy products or use the trade name.

•

Connects a single

supplier with many dealers throughout a specific geographic region.

•

An example would be Ford

dealerships

•

Business format is a turnkey approach

•

Franchisors sell the products as well as the

entire way of doing business, including operation procedures, marketing packages, buildings and

equipment, and full business services.

•

An example would be Holiday Inn LO: 2 Page: 110-111

AACSB: Analytic

List and describe three major advantages of franchising for the franchisee.

Ans: Product readiness

•

Efficiency

•

Marketing expertise

•

Professional guidance

•

Recognized standards

•

Potential for business growth

Opportunity to learn LO: 3 Page: 112-113

AACSB: Analytic

List and describe three major disadvantages to the franchisee when considering franchising.

Ans: Cost of the franchise

•

Restrictions on freedom or creativity

•

Risk of fraud or misunderstanding

•

Problems of termination or transfer

•

Poor performance of other franchises LO: 3

Page: 113-114 AACSB: Analytic

After finding a franchise that a small business owner would consider purchasing, discuss three questions

that should be asked.

Ans: Did the lawyer approve the contract?

•

Is everything legal in the state, county, and city?

•

Is

exclusive territory included?

•

Is the franchise involved with any other franchise companies handling

similar merchandise or services?

•

How can the franchise be terminated?

•

If the franchise is sold,

will goodwill be compensated? LO: 4 Page: 120 AACSB: Analytic

Explain why overseas franchising has become a major activity for U.S. companies.

Ans: Saturated domestic markets

•

Less crowded foreign markets

•

LO: 5 Page: 126 AACSB: Diversity

Underserved foreign markets

List at least three questions that individuals should ask themselves to determine whether franchising is the

appropriate route to small business ownership.

Ans: How much equity capital will you need to purchase the franchise and operate it until your income

equals your expenses? •

Are you prepared to give up some independence of action to secure the

advantages offered by the franchise? •

Do you really believe you have the innate ability, training,

and experience to work smoothly and profitably with the franchisor, employees, and customers?

•

Are

you ready to make a long-term commitment to working with this franchisor?

LO: 4 Page: 117 AACSB: Analytic

When considering a franchise, list at least three questions that should be considered to analyze the market in

which the franchise will be operating.

Ans: Does the product or service have a market in your territory at the prices that you will have to charge?

•

Will the population in your proposed territory increase, remain static, or decrease over the next five

years?

•

Will the product or services you are considering be in greater demand, in about the same

demand, or in less demand five years from now? •

What competition already exists in your territory

for the product or service you contemplate selling? LO: 4 Page: 121 AACSB: Analytic

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license

distributed with a certain product or service or otherwise on a password-protected website for classroom use.