Chapter 4—Franchises and Buyouts
TRUE/FALSE
1. The Pepsi-Cola Company is an example of a product and trade name franchisor.
2. 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.
3. One of the advantages of buying a franchise is that the purchaser has access to a proven business
system.
4. The practice of putting one franchise right next to another is referred to as piggyback franchising.
5. Franchising offers both a proven line of business and reduced risk.
6. The processing of a loan application can be completed more quickly if the franchising organization is
registered with the U.S. Small Business Administration.
7. 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.
8. One drawback of becoming a franchisor relates to possible new restrictions as a requirement for
contract renewal.
9. 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.
10. 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.
11. There is no need to find out more information about a prospective franchise as the franchisor should be
the primary source of information.
12. Jarrod is reading a detailed statement of the franchisor’s finances, experience, size, and involvement in
litigation. Jarrod is reading a Franchise Disclosure Document.
13. 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.
14. Conducting a thorough due diligence should always be accomplished if purchasing an existing
corporation or franchise, but is unnecessary if acquiring a sole proprietorship.
15. As part of the valuation process, a buyer should scrutinize the seller’s balance sheet to see whether
asset book values are realistic.
16. A nondisclosure agreement signed by a prospective buyer shows the seller that the buyer intends to
purchase the business.
17. Financial statements can mislead a potential purchaser trying to develop an accurate business
valuation.
18. The buyer of an existing business typically acquires its personnel, inventories, physical facilities,
established banking connections, and ongoing relationships with trade suppliers.
19. A wise buyer will also evaluate the legal commitments of an existing business.
20. To control costs when purchasing a business, an attorney at the closing can represent both sides.
MATCHING
Match the term with its definition.
a.
area developer
e.
co-branding
b.
business brokers
f.
due diligence
c.
business format franchising
g.
encroachment
d.
churning
h.
fair market value
1. Bringing two or more franchise brands together under one roof
2. A franchise arrangement whereby the franchisee obtains an entire marketing and management system
geared to entrepreneurs
3. The franchisor’s selling of another franchise location within the market area of an existing franchise
4. Individuals or firms that obtain the legal right to open several franchised outlets in a given area
5. Actions by franchisors to void the contracts of frahchisees in order to sell the franchise to someone
else and collect an additional fee
6. 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
7. Specialized brokers that bring together buyers and sellers of businesses
Match the term with its definition.
a.
due diligence
e.
Franchise Disclosure Document
b.
fair market value
f.
Franchise Rule
c.
franchise
g.
franchisee
d.
franchise contract
h.
franchisor
8. A detailed statement that provides the accepted format for satisfying the franchise disclosure
requirements of the FTC
9. The party in a franchise contract that specifies the methods to be followed and the terms to be met by
the other party
10. A rule that prescribes that the franchisor must disclose certain information to prospective franchisees
11. The legal document between a franchisor and a franchisee
12. A business model involving a business owner who licenses trademarks and methods to an independent
entrepreneur
13. An entrepreneur whose power is limited by a contractual relationship with a franchising organization
14. The exercise of reasonable care in the evaluation of a business opportunity
Match the term with its definition.
a.
co-branding
e.
noncompete clause
b.
master licensee
f.
non-disclosure agreement
c.
multibrand franchising
g.
piggyback franchising
d.
multiple-unit ownership
h.
product and trade name franchising
15. A provision in a franchise contract prohibiting the franchisee from severing the relationship and
becoming a competitor
16. An independent firm or individual acting as a middleman or sales agent with the responsibility of
finding new franchisees within a specified territory
17. A franchise agreement granting the right to use a widely recognized product or name
18. The operation of several franchise organizations within a single corporate structure
19. The operation of a retail franchise within the physical facilities of a host store
20. An agreement in which the buyer promises the seller that s/he will not reveal confidential information
or violate the seller’s trust
21. Ownership by a single franchisee of more than one franchise from the same company
MULTIPLE CHOICE
1. 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.
2. 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.
3. 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.
4. 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.
5. 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
6. 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.
7. 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.
8. 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.
9. Business format franchising is best illustrated by the system offered by
a.
Goodyear Tires.
b.
Coca-Cola.
c.
Subway.
d.
Dr. Pepper.
10. 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.
11. 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.
12. 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.
13. 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.
14. 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.
15. Martina’s franchise agreement allows her top 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.
16. 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.
17. A Starbucks franchise located inside a Target store is called ______ franchising.
a.
folded
b.
internalized
c.
cooperative
d.
piggyback
18. 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.
19. 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.
20. 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.
21. 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
22. 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:
a.
a patent.
b.
a trade promotion.
c.
yellow to attract attention.
d.
a trademark.
23. A franchise is able to control costs because:
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.
24. The Franchise Registry maintained by the U.S. Small Business Administration
a.
lists warnings about certain franchise systems.
b.
attests that the SBA has reviewed the franchise agreement.
c.
rates franchise systems according to a four star rating.
d.
registers all franchise systems operating in the U.S.
25. 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.
26. 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.
27. 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.
28. 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 his 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.
29. 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.
30. 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.
31. 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
32. 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.
33. 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.