34. 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.
35. 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.
36. 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.
37. 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.
38. 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.
39. 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.
40. 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
41. 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.
42. 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?
43. 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.
44. Cameron has established a successful business and would like to expand. He is considering becoming
a franchisor. Before taking that step, Cameron should:
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.
45. 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.
46. 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.
47. 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.
48. 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
49. 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.
50. 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.
51. 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.
52. 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
53. 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.
54. 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.
55. 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
c.
loss of an exclusive sales franchise
d.
lack of growth potential
56. 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
57. 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
58. Imelda told a prospective buyer of her business she reported only half the cash from the vending
machines on her cash flow statement and income tax returns. Her purpose in doing so was:
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 the buyer.
59. 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.
60. 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.
61. 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.
62. Union contracts are among the many _____ factors in valuing a business.
a.
nominative
b.
nonessential
c.
nonquantitative
d.
nonqualitative
63. Which factor is a non-quantitative factor of valuing a business?
a.
Future community development
b.
Size of the buildings
c.
Number of employees who will stay with the company
d.
Employee salaries
64. 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.
65. 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. Why?
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.
ESSAY
1. Define the terms franchising, franchisor, and franchisee. Apply to McDonald’s or another franchise
example.
2. Briefly compare and contrast “product and trade name franchising” with “business format
franchising.”
3. Compare and contrast the functions of a master licensee and area developer.
4. Discuss the advantages of buying a franchise.
5. Why is it important for a new franchisee to follow the business plan detailed in the operations manual?
6. What kind of training support might a franchisee expect from the franchisor?
7. Identify and discuss some of the negative aspects associated with franchises.
8. List and describe the cost components of becoming a franchisee.
9. 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.
10. What options are available to the aspiring franchisee to assist in the evaluation of a franchising
opportunity?
11. List four reasons for buying an existing business. Which one is the most important?
12. Identify and discuss at least four of the seven nonquantitative factors in valuing a business.
