Essentials of Entrepreneurship & Small Business Mgmt., 7e (Scarborough)
Chapter 6 Franchising and the Entrepreneur
1) A franchise is a system of distribution in which semi-independent business owners pay
________ and ________ to a parent company in return for the right to become identified with its
trademark, to sell its product or services, and often to use its business format and system.
A) a percentage of sales; royalties
B) upfront costs; incremental costs
C) royalties; monthly consulting charges
D) fees; royalties
2) Franchises total annual sales represent nearly ________ percent of total annual sales and
employ nearly one in ________ workers in the Unities Sates in more than 300 industries.
A) 8: 17
B) 12: 8
C) 17; 8
D) 2: 21
3) ________ franchising involves providing the franchisee with a complete business system,
with an established name, the building layout and design, accounting systems, and other
elements while ________ franchising allows the franchisee to use the franchiser’s trade name
without distributing the products exclusively under the franchiser’s name.
A) Product distribution; trade name
B) Trade name; pure
C) Pure; trade name
D) Pure; product distribution
4) McDonald’s is an example of a ________ franchise.
A) conversion forms
B) trade name
C) product distribution
D) pure
5) Benefits of involvement in a franchise experience include:
A) management training and support.
B) brand name appeal and standardization of goods and services.
C) national advertising exposure and financial assistance.
D) All of the above
6) Which of the following is not a potential advantage of franchising for the franchisee?
A) Management training and assistance
B) National advertising program
C) Centralized buying power
D) Limited product line
7) Franchisers generally do which of the following regarding financial assistance to franchisees?
A) Provide direct financing.
B) Assist in finding financing and occasionally provide direct assistance in a specific area.
C) Waive royalty fees for franchisees not making an adequate profit.
D) Franchisers provide no assistance because having or finding financing is a requirement for
qualifying for a franchise.
8) A significant advantage a franchisee has over an independent business is the participation in
the franchisor’s ________ largely due to the ________ the franchise offers.
A) centralized buying power: buying insight
B) centralized buying power; brand protection
C) centralized buying power: economies of scale
D) economies of scale: territorial protection
9) Some franchisors offer ________ to give existing franchisees the right to exclusive
distribution of brand name goods or services within a particular geographic area.
A) territorial protection
B) exclusive rights
C) guaranteed protection
D) exclusivity
10) The failure rate for franchises is:
A) higher than the average rate for new businesses.
B) no different from the rate for new businesses.
C) lower than the average rate for new businesses.
D) indeterminable because of the Right to Privacy Act.
11) A recent study reports that the success rate of franchisees increases when a franchise system:
A) requires franchisees to have prior industry experience.
B) requires franchisees to actively manage their operations.
C) has built a strong brand name with training programs to improve knowledge and skills.
D) All of the above increase the rate of success.
12) Franchise royalty fees typically range from ________ to ________ percent with an average
of 6.7 percent.
A) 3; 13
B) 1; 21
C) 1; 11
D) 3; 11;
13) When it comes to purchasing products, equipment, and incurring other expenses, the
franchiser:
A) cannot require the franchisees to buy from the franchise company.
B) can set prices franchisees pay for the products but cannot set the retail price the franchisees
charge.
C) is permitted to set the retail price for the franchisee.
D) cannot require franchisees to buy from an “approved” supplier.
14) Which of the following is not a potential disadvantage of a franchise?
A) Unsatisfactory training program
B) Limited product line
C) Less freedom
D) All of the above are potential disadvantages of a franchise.
15) A franchise myth is that:
A) once the franchise is open, the franchisee has autonomy to run the business in what ever way
he or she sees fit.
B) the owner needs to be hands on.
C) the franchise will only expect to be paid when the franchisee is profitable.
D) franchises fail at a rate higher that independently owned businesses.
16) Which of the following is an indication of a dishonest franchiser?
A) A high-pressure sale
B) A “get-rich-quick” scheme
C) Attempts to discourage you from getting an attorney to review the contract
D) All of the above
17) The FTC’s philosophy regarding the Uniform Franchise Disclosure Document (UFDD)
focuses on:
A) catching and prosecuting abusers of franchise laws.
B) verifying the accuracy of FDD information.
C) providing information to prospective franchisees and helping them make wise decisions.
D) licensing prospective franchisers.
18) Which of the following should make a potential franchisee suspicious about a franchiser’s
honesty?
A) Claims that the franchise contract is a standard agreement and that there is no need to read it
or have an attorney look it over
B) An offer of direct financing of a specific element of the franchise package
C) Not providing detailed operational information until 10 days before signing the contract
D) Requiring franchisees to spend a certain percentage of profits on advertising
19) In addition to reading the franchiser’s UFDD, it would be wise for the potential franchisee to
seek a franchise that offers which of the following?
A) A unique concept or marketing approach
B) A registered trademark
C) A positive relationship with franchisees
D) All of the above
20) Franchises have experienced three major growth waves since its beginning that include a
focus on:
A) rapid growth, the fast food, and specific market niches.
B) stable growth, the service sector, and the food industry.
C) rapid growth, the service sector, and specific market niches.
D) predictable growth, the service sector, and specific market niches.
21) A study by the International Franchises Association reports that minorities own more than
________ percent of all franchises and women own ________ percent of franchises.
A) 2;8
B) 9;20
C) 12.;25
D) 20;25
22) ________ is an emerging international market for U.S. franchisers that is expected to realize
the highest future growth rate.
A) Europe
B) Canada
C) Japan
D) China
23) One of the major trends in franchising is the ________ of American franchise systems.
A) replication
B) conversion
C) internationalization
D) reduction
24) The principle of putting a franchise’s products or services directly in the paths of potential
customers with smaller, less expensive outlets is called:
A) cobranding
B) intercept marketing
C) area development
D) master franchise
25) A franchise trend in which owners of independent businesses become franchisees to gain the
advantage of name recognition is called:
A) area development
B) master franchise
C) conversion franchising
D) cobranding
26) In a ________ , a franchisee has the right to create a semi-independent organization in a
particular territory to recruit, sell, and support other franchisees.
A) multiple-unit franchising
B) master franchise
C) conversion franchising
D) cobranding franchising
27) A method of franchising that gives the right to create a semi-independent organization in a
particular territory is a:
A) conversion franchise.
B) master franchise.
C) product distribution franchise.
D) area development franchise.
28) When the franchiser has the right to establish a semi-independent organization in a particular
territory to recruit, sell, and support other franchises, it is known as a ________ franchise.
A) multi-unit
B) cobranding
C) conversion
D) master
29) McDonald’s recently set up several small franchises in nontraditional locations such as a
hospital, a college campus, an airport, a subway station, and a sports arena. These locations are
based on the principle of:
A) conversion franchising.
B) intercept marketing.
C) multi-unit franchising.
D) cobranding.
30) Chris Jaffe, the owner of a small independent doughnut shop, is worried that a large
doughnut franchise will open an outlet near her location and take away business. Taking a
proactive approach, Jaffe contacts the franchise, and after a few months of negotiations, becomes
a franchisee. Jaffe is an example of which trend in franchising?
A) Cobranding
B) Conversion
C) Master
D) Subfranchising
31) Establishing a Baskin-Robbins franchise inside a Blimpee’s franchise is an example of
________ franchising.
A) multi-unit
B) master
C) cobranding
D) diversionary
32) A franchise is an arrangement in which semi-independent business owners pay fees and
royalties to a parent company in return for the right to sell its products or services and often to
use its business format and system.
33) Pure franchising involves the right to use all the elements of a fully integrated business
operation.
34) Trade name franchising is a system of franchising in which a franchisee purchases the right
to use the franchisor’s trade name without distributing particular products under that name.
35) Pure franchising involves a system of franchising in which a franchisor sells a franchisee a
complete business format and system.
36) Before entering a franchise contract, a potential investor should ask, “What can a franchise
do for me that I cannot do for myself?”
37) When a franchisee buys a franchise, he or she is purchasing the expertise and the business of
the franchiser.
38) Quality is so important in franchising that most franchisers retain the right to terminate the
franchise contract and to repurchase the outlet if a franchisee fails to maintain quality standards.
39) A major advantage of a franchise contract is the national advertising campaign that most
franchisers provide free of charge for their franchisees.
40) Examples of some benefits franchise systems offer include management training, brand
appeal, standardization of goods and services, national advertising, proven business formats,
centralized buying power, and site selection assistance.
41) Most franchisers provide extensive financial help such as loans and low-rate financing for
their franchises.
42) The failure rate for franchises is below that for other types of new businesses.
43) In addition to other fees, franchisees must also pay royalties but only on net profits; in other
words, no profits, and no royalties.
44) It is illegal for a franchiser to require franchisees to purchase products only from “approved
suppliers.”
45) Having an attorney review and evaluate a franchise contract is unnecessary since the FTC
requires all franchisers to offer a “standard” franchise contract.
46) Franchisees in fast-growing systems reap the benefits of the franchisor’s expanding reach,
but they also may encounter the downside of a franchisor’s aggressive growth strategy; market
saturation.
47) By signing the franchise contract, a franchisee typically surrenders some freedom and
autonomy in operating his or her business.
48) The bigger the franchise, the more successful the franchisees will be.
49) The franchise contract defines the rights and the obligations of both parties and sets the
guidelines that govern the franchise relationship.
50) Absentee franchise owners are consistently successful.
51) The Uniform Franchise Disclosure Document (UFDD) is a document that every franchiser is
required by law to give prospective franchisees before any offer or sale of a franchise.
52) If a franchiser encourages you to sign without reading the agreement, or discourages you
from “spending the money on an attorney,” this is a warning sign that the franchiser might be
dishonest.
53) The franchisee turnover rate is the rate at which franchisees leave a franchise system.
54) A good method for evaluating a franchiser’s reputation is to interview existing franchise
owners about the operation.
55) One of the first lessons in franchising is, “Do your homework before you get out your
checkbook.”
56) Most franchisees are better educated, more sophisticated, have more business acumen, and
are more financially secure than those of just 20 years ago.
57) The principle of placing smaller franchise units directly in the paths of potential customers is
referred to as intercept marketing.
58) Many franchises have discovered that small outlets in high-traffic, nontraditional locations
generate nearly the same sales volume as full-size outlets at a fraction of the cost.
59) A master franchise gives the franchisee the right to create a semi-independent organization in
a particular territory to recruit, sell, and support other franchisees within a specific time frame.
60) A conversion franchising arrangement gives a franchisee the right to create a semi-
independent organization in a particular territory to recruit, sell, and support other franchisees.
61) Define franchising. Explain the three types of franchising. Which is the fastest-growing
segment?
62) Outline the benefits and drawbacks of buying a franchise.
63) What is the Franchise Disclosure Document? How can this document be of value to a
potential franchisee?
64) Outline the recommended procedure for buying a franchise.
65) What are some indicators that a potential franchisee might be dealing with a dishonest
franchise? What steps can a potential franchisee take to avoid becoming a victim of a dishonest
franchise?
66) Explain the following franchise concepts and give an example of each: area development,
intercept marketing, conversion franchising, master franchising and cobranding.
67) Explain three trends that are currently shaping the franchising industry.
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Mini-Case 6-1: Pipe Dreams
Ralph Emerson thought he’d been a librarian long enough, and when the opportunity arose to
open a small tobacco, pipe, and cigar shop in the newly renovated downtown business district, he
was ready to act. Pipe Dreams is a franchiser of smoke shops, and was founded eight years ago
by a noted tobacconist in New York City. The concept for the shops is simple, yet sophisticated.
It is simple in the sense that the shops sell only tobacco-related products, but sophisticated in the
breadth and quality of the inventory they carry. Each franchise, depending on size, is stocked
with inventory selected by the company’s founder. The franchiser finances the shop’s initial
inventory. The franchisee is expected to create a decor within predetermined standards that Pipe
Dreams establishes. Each franchisee must attend a three-day workshop, outlining the
fundamentals of tobacco blending, the merchandising of pipes and cigars, and the techniques of
successful business operation.
The franchise contract requires the franchisee to contribute 1.5 percent of gross revenue to a
national advertising campaign. According to the contract, Pipe Dreams will finance the required
fixtures for the store for ten years. In addition, the franchiser supplies all inventory at very
favorable prices because it purchases in large quantities.
Ralph knows he can buy tobacco products from a variety of wholesalers. He also has some ideas
on what would make a tobacco shop successful in this town. Ralph knows that Pipe Dreams
franchisees have had a high success rate in the past.
68) Help Ralph make a decision by outlining the advantages and the disadvantages of a franchise
arrangement.
69) Assuming that Ralph has adequate capital, would you recommend that he invest in the
franchise or open his own tobacco shop? Why?