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Indicate whether the statement is true or false.
1. The processing of a loan application can be completed more quickly if the franchising organization is registered with
the U.S. Small Business Administration.
a. True
b. False
2. One of the advantages of buying a franchise is that the purchaser has access to a proven business system.
a. True
b. False
3. The unscrupulous actions by franchisors to void contracts of franchisees in order to sell the franchise to someone else
and collect an additional fee is called chewing.
a. True
b. False
4. A nondisclosure agreement signed by a prospective buyer shows the seller that the buyer intends to purchase the
business.
a. True
b. False
5. A wise buyer will also evaluate the legal commitments of an existing business.
a. True
b. False
6. Conducting a thorough due diligence should always be accomplished if purchasing an existing corporation or franchise,
but is unnecessary if acquiring a sole proprietorship.
a. True
b. False
7. As of 2008, the Federal Trade Commission’s Franchise Rule prescribes that franchisors must disclose to prospective
franchisees information such as bankruptcies, business experience of the principals, and litigation in which the firm is
involved.
a. True
b. False
8. The practice of putting one franchise right next to another is referred to as piggyback franchising.
a. True
b. False
9. One of the benefits of a franchise agreement for the franchisee is that the franchisor is solely responsible for advertising
the franchise.
a. True
b. False
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10. Financial statements can mislead a potential purchaser trying to develop an accurate business valuation.
a. True
b. False
11. One drawback of becoming a franchisor relates to possible new restrictions as a requirement for contract renewal.
a. True
b. False
12. Franchising offers both a proven line of business and reduced risk.
a. True
b. False
13. There is no need to find out more information about a prospective franchise as the franchisor should be the primary
source of information.
a. True
b. False
14. Jill sees an advertisement for a franchise opportunity that matches her interests. Her first step in pursuing the
franchise is to look for independent, third-party sources of information to verify that the opportunity is legitimate.
a. True
b. False
15. A franchising strategy whereby a single franchisee owns more than one unit in a given area is typically referred to as
an area developer strategy.
a. True
b. False
16. As part of the valuation process, a buyer should scrutinize the seller’s balance sheet to see whether asset book values
are realistic.
a. True
b. False
17. To control costs when purchasing a business, an attorney at the closing can represent both sides.
a. True
b. False
18. In many cases, a franchisor will receive payments in the form of royalties that are based on a percentage of the
franchisee’s gross income.
a. True
b. False
19. Jarrod is reading a detailed statement of the franchisor’s finances, experience, size, and involvement in
litigation. Jarrod is reading a Franchise Disclosure Document.
a. True
b. False
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20. The Pepsi-Cola Company is an example of a product and trade name franchisor.
a. True
b. False
21. The buyer of an existing business typically acquires its personnel, inventories, physical facilities, established banking
connections, and ongoing relationships with trade suppliers.
a. True
b. False
Indicate the answer choice that best completes the statement or answers the question.
22. The seller of an existing business placed a high value on his experienced employees. The buyer should be wary of this
because:
a. their skills may be obsolete. b. the seller wants a higher price
for his business.
c. the workers may decide to leave after the sale. d. the buyer will
want to bring in his own people.
23. When Konrad purchased his business, he purchased it as a total entity. As a result,
a. Konrad got only the liquid assets of the business. b. Konrad got
both liquid assets and the real estate of the business.
c. the seller must pay any outstanding debt held by the business. d.
Konrad assumed responsibility for all outstanding debts incurred by the business.
24. Darin is assembling a team of experts to help him through the process of evaluating a franchise opportunity. This
team should include:
a. a union representative, a lawyer, and a technical writer. b.
an attorney, an accountant, and a banker.
c. a banker, an accountant, and a contract law consultant. d.
an accountant, another franchisee, and a banker.
25. Marvin is selling his business as a total entity. The buyer has offered a very large down payment, but Marvin would
prefer a lower down payment and a longer repayment period. What is the most likely reason for this?
a. To reduce Marvin’s annual tax liability on the profit of the sale. b.
To allow the buyer time to turn a profit before having to make large payments.
c. To provide a steady income to Marvin during his retirement. d.
To avoid capital gains taxes on the sale of the assets.
26. Martina’s franchise agreement allows her to open up to seven new stores within a 100 mile radius of the first
one. Martina is best described as:
a. a master licensee. b. a franchisee.
c. a franchisor. d. an area developer.
27. A franchise is able to control costs because:
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a. franchise networks have greater buying power. b. suppliers prefer
to sell to franchises.
c. franchises generally pay only minimum wages. d. franchisees are
locked into long-term contracts with vendors.
28. Leonard and the seller have agreed to a price for a business. Leonard cannot pay cash for the entire purchase price so
he applied for a bank loan. The bank is likely to:
a. check Leonard’s FICO score before granting the loan. b. require
the assets of the company serve as collateral for the loan.
c. check the seller’s credit history before approving the loan. d.
demand Leonard carry life insurance as a condition of the loan.
29. RST, Inc., a franchisor, is requiring its franchisee, Raymond, to make significant changes to the equipment and
interior appearance of his business as a condition of renewing the contract. Raymond suspects:
a. these changes will benefit his bottom line. b. he will be less
competitive after the changes are made.
c. the franchisor wants to sell the franchise to someone else. d.
his customers will object to the changes.
30. Nardell has operated a successful franchise for a few years and would now like to open another similar business under
his own brand. The contract Nardell signed prohibits him from doing so. The contract contains:
a. a non-compete clause. b. a co-branding clause.
c. a piggyback franchise provision. d. an area development provision.
31. Where would you suggest Xavier look for information about possible franchise opportunities?
a. Barron’s Weekly b. Inc, Entrepreneur, or the Wall Street Journal
c. the Small Business Administration d. local newspapers
32. One of the most important features of the franchise contract is the provision related to
a. the sale or transfer of the franchise to a government entity.
b. changes in management.
c. termination and transfer of the franchise.
d. termination of contracts with suppliers.
33. The offer and sale of a franchise are regulated by
a. state laws exclusively.
b. federal laws exclusively.
c. both state and federal laws.
d. Federal Trade Commission laws exclusively.
34. A Starbucks franchise located inside a Target store is called ______ franchising.
a. folded
b. internalized
c. cooperative
d. piggyback
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35. Sister Mary Cupcake has partnered with the management of the toll road to operate her stores in the travel
plazas. This arrangement is an example of:
a. master licensing. b. piggyback franchising.
c. area development. d. multibrand franchising.
36. The purchase price of a business is determined by negotiation between
a. lender and seller.
b. seller and broker.
c. buyer and seller.
d. lender and buyer.
37. An entrepreneur would choose a franchise over an independent startup most likely because of the
a. freedom in decision making.
b. guidance provided for organizational structure.
c. probability of success.
d. opportunities to meet and share ideas with other executives.
38. Which one of these is not listed by the Small Business Administration as part of the necessary due diligence one
should do before purchasing a business?
a. Reviewing zoning requirements
b. Acquiring licenses and permits
c. Doing Internet research on the current business owner
d. Hiring an accountant and attorney
39. Annabell has been granted the right to conduct business according to specified methods and terms of another
party. Annabell is a:
a. franchisor.
b. franchisee.
c. franchise.
d. licensee.
40. Belinda signed a _____________ that is a legal agreement between two parties in a franchise arrangement.
a. master license.
b. franchise contract.
c. requirements contract.
d. franchise consent draft.
41. Quality Dining, Inc. operates several different restaurant franchises including Burger King, Olive Garden, Dairy
Queen, and several others. Quality Dining has its own corporate structure and stockholders. This corporation is an
example of:
a. master licensing. b. multibrand franchising.
c. piggyback franchising. d. co-branding.
42. Cameron has established a successful business and would like to expand. He is considering becoming a
franchisor. Before taking that step, Cameron should:
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a. make sure his business model is reproducible. b. have a technical
writer create an owner’s manual.
c. partner with a lender to offer franchisee financing. d. hire a
master licensee to locate prospective franchisees.
43. Rick was so successful with his Sweet Treats franchise that he opened several other Sweet Treats locations. Rick
could best be described as:
a. a franchisor. b. a franchisee.
c. a master licensee. d. a multiple-unit owner.
44. Edward signed a contract allowing Francine to use sell products using his brand name so long as the product meets
Edward’s quality standards. Edward is:
a. a franchise. b. a franchisor.
c. a franchisee. d. an independent business owner.
45. What question is the least important when developing a franchise from an independent business?
a. Who will develop the operations manual?
b. Is the business replicable?
c. How will growth be financed?
d. What expert assistance will be needed for legal matters?
46. RST, Inc., a franchisor, is requiring its franchisee, Raymond, to make significant changes to the equipment and
interior appearance of his business as a condition of renewing the contract. RST claims this is necessary because:
a. RST has changed its marketing plan and Raymond’s store did not
keep up with the changes. b. Raymond’s contract has a lower royalty fee than current
contracts.
c. sales from Raymond’s franchise are lower than those in newer
facilities. d. Raymond’s customers have complained about the
appearance of his facility.
47. When is a bargain price for an existing business not a good deal for the buyer?
a. When the seller intends to open a competing business in
the same locality b. When the business is losing money
c. When the neighborhood is deteriorating d. all of
the above
48. The franchise contract Pamela signed with DEF Company specified she would have an exclusive sales
territory. While the contract was still in force, DEF opened a corporate-owned store within her territory. DEF is guilty
of:
a. master licensing. b. encroachment.
c. due diligence. d. churning.
49. Abner signed a contract allowing him to use Brian’s business model and sell products approved by Brian. Abner is:
a. a franchise. b. a franchisor.
c. a franchisee. d. an independent business operator.
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50. When evaluating the financial data of a 10-year-old business that is being considered for purchase, which issue will be
of least concern?
a. Understated income in an effort to minimize taxes
b. Unrealistically reduced levels of advertising cost
c. Business expenses related to personal use of vehicles
d. Not having the books for Years 1-5 due to a fire
51. Having worked professionally for 10 years, Tom and Kate have decided to start a new franchise. Considering their
background, a disadvantage for them becoming franchisees is
a. the restrictions on business operations.
b. unlimited company growth.
c. the expectation to work more than a 40 hour work week.
d. an increase in entrepreneurial independence.
52. Imelda reports only half the cash from the vending machines on her cash flow statement and income tax returns. Her
purpose in doing so is:
a. to reduce her income tax liability. b. to increase her net
income on the financial statement.
c. to retain the cash for reinvestment in the business. d. to make
the business more attractive to a buyer.
53. Most franchise experts recommend that the FDD be examined carefully by
a. regulators that specialize in such documents.
b. a franchise attorney and an accountant.
c. everyone associated with the potential startup.
d. suppliers that may be used if the startup is successful.
54. A disadvantage of franchising is
a. reduced risk of failure.
b. access to a proven system.
c. restricted sales territories.
d. immediate economies of scale.
55. The cost of a franchise may include
a. royalty payments.
b. higher operational costs.
c. a one-time federal franchise tax.
d. higher labor costs.
56. Besides the up-front money required of a franchisee, Stuart will have to pay building costs and purchase inventory and
equipment. This type of expense is called:
a. investment costs. b. the initial franchise fee.
c. royalty payments. d. marketing fees.
57. Which factor is a non-quantitative factor of valuing a business?
a. Future community development
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b. Size of the buildings
c. Number of employees who will stay with the company
d. Employee salaries
58. In addition to the regular monthly payment of a percentage of gross sales to her franchisor, Wilma is required to
submit a smaller percentage for advertising costs. She is willing to do this because:
a. otherwise she cannot operate her franchise. b. she receives a discount
on the cost of her inventory.
c. Wilma’s budget is too small for her advertising to be effective. d. the
franchisor promotes the business both locally and nationally, reinforcing the brand name.
59. Fred’s company specializes in bringing together buyers and sellers of businesses. Fred is:
a. a business broker. b. a master licensee.
c. an area developer. d. a real estate agent.
60. Martin operates an ABC franchise. Recently the franchisor has attempted to make changes to the contract that would
increase Martin’s costs so as to make the business unprofitable. The franchisor is engaging in:
a. master licensing. b. encroachment.
c. due diligence. d. churning.
61. Individuals or firms that possess the legal right to open multiple outlets in a given area are referred to as
a. development franchisees.
b. area developers.
c. piggyback franchisees.
d. multiple-unit owners.
62. Consider this quote: “If you can’t follow somebody else, don’t buy a franchise.” Which characteristic of a franchise
does this quote describe?
a. High success rate
b. Restrictions on growth
c. Loss of entrepreneurial independence
d. Location problems
63. In what way is a franchisee’s control over the business greatly reduced?
a. Most franchisors are located near the franchisee.
b. The franchisees are technically employees of the franchisor.
c. The franchisee is bound by the terms of the franchise contract.
d. The franchisee is completely dependent on the franchisor for funding.
64. Jeffrey’s job is to identify potential business people in his country who might want to do business using a particular
brand name. When the contract is signed, Jeffrey then provides training to the business person. Jeffrey is most likely:
a. a franchisee. b. a franchisor.
c. a master licensee. d. a warehouser.
65. Cheryl is on vacation across the country from her hometown and she’s hungry. Ahead she sees the familiar Golden
Arches and knows she can find her favorite hamburger. These Golden Arches are:
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a. a patent. b. a trade promotion.
c. yellow to attract attention. d. a trademark.
66. McDonald’s corporation helps select the location for a new restaurant and provides financial assistance, training,
marketing, and products. McDonald’s engages in:
a. product and trade name franchising. b. business format franchising.
c. master licensing. d. area development.
67. Before making an offer for a business, Garland will want to
a. talk to the customers. b. check the business’s website.
c. perform due diligence. d. hire a broker.
68. Each month Tomas must report his gross sales and pay a percentage of that amount to his franchisor. This percentage
is:
a. negotiable every month. b. finance charges.
c. royalty fees. d. an investment cost.
69. Business format franchising is best illustrated by the system offered by
a. Goodyear Tires.
b. Coca-Cola.
c. Subway.
d. Dr. Pepper.
70. Harold was given the chance to examine the tax returns and financial statements of a business he is considering for
purchase. The seller asked him to sign a _____________ that prohibits Harold from sharing this confidential information
with anyone else.
a. franchise contract b. due diligence document
c. franchise disclosure document d. non-disclosure agreement
71. Matthew is an individual acting as a sales agent with the responsibility for finding new franchisees within a specified
territory. Matthew is a(n):
a. multiple-unit franchisor.
b. area developer.
c. franchisor representative.
d. master licensee.
72. Which of the following reasons for buying a business is also a reason for purchasing a franchise?
a. Reduction of uncertainty
b. Acquiring goodwill
c. Bargain price
d. Quick start
73. Susan is considering buying the local franchisee of Pots-R-Us. The owners would probably state this reason for selling
when in actuality the other three reasons may be more likely.
a. desire to locate to a different part of the country
b. unprofitable
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c. loss of an exclusive sales franchise
d. lack of growth potential
74. Nardell’s franchise contract contains language that prohibits him from opening a similar business under his own
brand. Nardell considers this to be:
a. due diligence. b. restraint of trade.
c. restrictive practice. d. encroachment.
75. Jasper is evaluating a business for possible purchase. He needs to know what a fair offering price should be. One way
to do this would be:
a. to ask a business broker for his appraisal. b. to search the Internet
for information about this business.
c. to appraise the value of the assets of this business. d. to base his offer
on the owner’s equity on the balance sheet.
76. Which source of franchise information is produced by a federal agency?
a. Buying a Franchise: A Consumer Guide
b. Website of Entrepreneur magazine
c. Francorp
d. Franchise list for the International Franchise Association
77. Stuart is interested in opening a QRS franchise. QRS requires up-front payment of $150,000. This amount represents:
a. Stuart’s investment costs. b. the initial franchise fee.
c. royalty payments. d. marketing fees.
78. The agreement Irma signed with McDonald’s that allows her to open a restaurant using the McDonald’s name is:
a. a master license. b. an area development plan.
c. a lend-lease agreement d. a franchise contract.
79. Caron signed a contract with Devon allowing her to provide services using Devon’s trademark, logo, and business
model. This business is:
a. a franchise. b. a franchisor.
c. a franchisee. d. an independent business.
80. The Franchise Registry maintained by the U.S. Small Business Administration
a. lists warnings about certain franchise systems.
b. speeds up loan processing for small business franchisees.
c. rates franchise systems according to a four star rating.
d. registers all franchise systems operating in the U.S.
81. The franchising strategy whereby an individual or firm is granted the legal right to own more than one unit of a
franchised business is known as
a. multi-brand franchising.
b. multiple-unit ownership.
c. piggyback franchising.
d. aggregate ownership.
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82. JKL Corporation grants another party the right to conduct business according to specified methods and terms. JKL is
a:
a. franchisor.
b. franchisee.
c. franchise.
d. licenser.
83. Geraldo owns a well-known brand and allows Henry to sell products with that brand name. Geraldo has agreed to:
a. product and trade name franchising. b. business format franchising.
c. master licensing. d. co-branding
84. Bart is meeting with a representative of GHI, a franchisor. He has received information about the franchisor’s
finances, experience, size, and involvement in litigation. Bart has been given:
a. a master license. b. a non-disclosure statement.
c. a franchise rule. d. a franchise disclosure document.
85. Union contracts are among the many _____ factors in valuing a business.
a. nominative
b. nonessential
c. nonquantitative
d. nonqualitative
86. Edmond is negotiating to purchase an existing business. One provision he should write into the sale contract is:
a. access to the seller’s customer list. b. disclosure of the
business’s revenues for the last year.
c. a statement of the royalties payable to the seller. d. a non-compete
agreement.
87. If a franchisor is guilty of encroachment of a franchisee, which agreement is it most likely to be in violation of?
a. Nondisclosure agreement
b. Franchise Rule
c. Franchise Disclosure Document
d. Noncompete agreement
88. One possible disadvantage of becoming a franchisor is:
a. complying with all the government regulations. b. the cost
of franchising exceeds the franchise fee.
c. the cost of screening prospective franchisees. d. providing
training to new franchisees.
a. due diligence
b. fair market value
c. franchise
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d. franchise contract
e. Franchise Disclosure Document
f. Franchise Rule
g. franchisee
h. franchisor
89. A detailed statement that provides the accepted format for satisfying the franchise disclosure requirements of the FTC
90. The party in a franchise contract that specifies the methods to be followed and the terms to be met by the other party
91. A rule that prescribes that the franchisor must disclose certain information to prospective franchisees
92. The legal document between a franchisor and a franchisee
93. A business model involving a business owner who licenses trademarks and methods to an independent entrepreneur
94. An entrepreneur whose power is limited by a contractual relationship with a franchising organization
95. The exercise of reasonable care in the evaluation of a business opportunity
a. co-branding
b. master licensee
c. multibrand franchising
d. multiple-unit ownership
e. noncompete clause
f. non-disclosure agreement
g. piggyback franchising
h. product and trade name franchising
96. A provision in a franchise contract prohibiting the franchisee from severing the relationship and becoming a
competitor
97. An independent firm or individual acting as a middleman or sales agent with the responsibility of finding new
franchisees within a specified territory
98. A franchise agreement granting the right to use a widely recognized product or name
99. The operation of several franchise organizations within a single corporate structure
100. The operation of a retail franchise within the physical facilities of a host store
101. An agreement in which the buyer promises the seller that s/he will not reveal confidential information or violate the
seller’s trust
102. Ownership by a single franchisee of more than one franchise from the same company
a. area developer
b. business brokers
c. business format franchising
d. churning
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e. co-branding
f. due diligence
g. encroachment
h. fair market value
103. Bringing two or more franchise brands together under one roof
104. A franchise arrangement whereby the franchisee obtains an entire marketing and management system geared to
entrepreneurs
105. The franchisor’s selling of another franchise location within the market area of an existing franchise
106. Individuals or firms that obtain the legal right to open several franchised outlets in a given area
107. Actions by franchisors to void the contracts of franchisees in order to sell the franchise to someone else and collect
an additional fee
108. The price at which the property would change hands between a willing buyer and willing seller, with both parties
having reasonable knowledge of relevant facts
109. Specialized brokers that bring together buyers and sellers of businesses
110. Discuss the advantages of buying a franchise.
111. Why is it important for a new franchisee to follow the business plan detailed in the operations manual?
112. List four reasons for buying an existing business. Which one is the most important?
113. What options are available to the aspiring franchisee to assist in the evaluation of a franchising opportunity?
114. Identify and discuss some of the negative aspects associated with franchises.
115. What kind of training support might a franchisee expect from the franchisor?
116. Compare and contrast the functions of a master licensee and area developer.
117. Because the relationship between franchisor and franchisee is similar to a marriage, it is important that the
prospective franchisee investigate the opportunity thoroughly. What questions should a prospective franchisee ask to aid
in assessing the franchise? List at least four out of the seven types given in the text.
118. Briefly compare and contrast “product and trade name franchising” with “business format franchising.”
119. Define the terms franchising, franchisor, and franchisee. Apply to McDonald’s or another franchise example.
120. List and describe the cost components of becoming a franchisee.
121. Identify and discuss at least four of the seven nonquantitative factors in valuing a business.
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Answer Key
1. True
2. True
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26. d
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77. b
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103. e
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