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Essentials of Entrepreneurship and Small Business Management, 9e (Scarborough)
Chapter 8 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 more than ________ and employ nearly ________
workers in the Unities Sates in more than 300 industries.
A) $17 billion; 17 million
B) $120 billion; 8.2 million
C) $710 billion; 7.8 million
D) $225 billion; 21 million
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 franchisor's trade name
without distributing the products exclusively under the franchisor'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) 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.
6) Pure franchising involves the right to use all the elements of a fully integrated business
operation.
7) 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.
8) Pure franchising involves a system of franchising in which a franchisor sells a franchisee a
complete business format and system.
9) Define franchising. Explain the three types of franchising. Which is the fastest-growing
segment?
10) 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
11) Franchisors 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) Franchisors provide no assistance because having or finding financing is a requirement for
qualifying for a franchise.
12) 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
13) 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
14) 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.
15) 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
16) When it comes to purchasing products, equipment, and incurring other expenses, the
franchisor ________.
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
17) Before entering a franchise contract, a potential investor should ask, "What can a franchise
do for me that I cannot do for myself?"
18) When a franchisee buys a franchise, (s)he is purchasing the expertise and the business of the
franchisor.
19) A major advantage of a franchise contract is the national advertising campaign that most
franchisors provide free of charge for their franchisees.
20) 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.
21) Most franchisors provide extensive financial help such as loans and low-rate financing for
their franchises.
22) The failure rate for franchises is below that for other types of new businesses.
23) The bigger the franchise, the more successful the franchisees will be.
24) The franchise contract defines the rights and the obligations of both parties and sets the
guidelines that govern the franchise relationship.
25) Outline the benefits and drawbacks of buying a franchise.
7
Mini-Case 8-1: 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 franchisor 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 franchisor finances the
shop's initial inventory. The franchisee is expected to create a decor within predetermined
standards that Pipe Dreams established. 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 franchisor 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.
26) Help Ralph make a decision by outlining the advantages and the disadvantages of a franchise
arrangement.
27) 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
28) 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
29) 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.
30) A franchise myth is that ________.
A) once the franchise is open, the franchisee has autonomy to run the business in whatever way
(s)he 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 than independently owned businesses
31) Quality is so important in franchising that most franchisors retain the right to terminate the
franchise contract and to repurchase the outlet if a franchisee fails to maintain quality standards.
32) In addition to other fees, franchisees must also pay royalties but only on net profits; in other
words, no profits, no royalties.
33) It is illegal for a franchisor to require franchisees to purchase products only from "approved
suppliers."
34) Having an attorney review and evaluate a franchise contract is unnecessary since the FTC
requires all franchisors to offer a "standard" franchise contract.
35) 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.
36) By signing the franchise contract, a franchisee typically surrenders some freedom and
autonomy in operating her/his business.
37) Absentee franchise owners are consistently successful.
38) Which of the following is an indication of a dishonest franchisor?
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
39) 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 franchisors
40) The Uniform Franchise Disclosure Document (UFDD) is a document that every franchisor is
required by law to give prospective franchisees before any offer or sale of a franchise.
41) If a franchisor 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 franchisor might be
dishonest.
42) What is the Franchise Disclosure Document? How can this document be of value to a
potential franchisee?
43) Which of the following should make a potential franchisee suspicious about a franchisor'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.
44) In addition to reading the franchisor'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
45) The franchisee turnover rate is the rate at which franchisees leave a franchise system.
46) A good method for evaluating a franchisor's reputation is to interview existing franchise
owners about the operation.
47) One of the first lessons in franchising is, "Do your homework before you get out your
checkbook."
48) Most franchisees are better educated, more sophisticated, have more business acumen, and
are more financially secure than those of just 20 years ago.
49) The principle of placing smaller franchise units directly in the paths of potential customers is
referred to as intercept marketing.
50) 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.
51) Outline the recommended procedure for buying a franchise.
52) 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?
Mini-Case 8-1: 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 franchisor 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 franchisor finances the
shop's initial inventory. The franchisee is expected to create a decor within predetermined
standards that Pipe Dreams established. 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 franchisor 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.
53) Assuming that Ralph has adequate capital, would you recommend that he invest in the
franchise or open his own tobacco shop? Why?
54) Franchises have experienced three major growth waves since beginning that include a focus
on ________.
55) 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) 31; 26
56) ________ is the top international market for U.S. franchisors.
A) Europe
B) Canada
C) Japan
D) China
57) One of the major trends in franchising is the ________ of American franchise systems.
A) replication
B) conversion
C) internationalization
D) reduction
58) 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
59) 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
60) In a ________ franchise, 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
B) master
C) conversion
D) cobranding
61) A method of franchising that gives the right to create a semi-independent organization in a
particular territory is a(n) ________ franchise.
A) conversion
B) master
C) product distribution
D) area development
62) When the franchisor 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
63) 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
64) 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
65) Establishing a Baskin-Robbins franchise inside a Blimpee's franchise is an example of
________ franchising.
A) multi-unit
B) master
C) cobranding
D) diversionary
66) 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.
67) 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.
68) Explain the following franchise concepts and give an example of each: area development,
intercept marketing, conversion franchising, master franchising and cobranding.
69) Explain three trends that are currently shaping the franchising industry.
