Entrepreneurship and Effective Small Business Management, 11e, Global Edition
(Scarborough)
Chapter 6 Franchising and the Entrepreneur
1) In franchising, a ________ pays fees and royalties to a ________ in return for the right to sell
its products or services under the franchiser’s trade name and often to use its business format and
system.
A) franchiser; franchisee
B) franchisee; franchiser
C) franchise; business owner
D) business owner; parent company
2) Franchising is currently dominated by:
A) auto dealers.
B) service-oriented franchises.
C) retail outlets.
D) fast food restaurants.
3) ________ franchising exists when a franchisee is licensed to sell specific products under the
franchiser’s brand name through a selective distribution system.
A) Trade name
B) Pure
C) Conversion
D) Product distribution
4) In ________ franchising, a franchisee purchases only the right to become identified with the
franchiser’s trade name.
A) trade name
B) pure
C) conversion
D) product distribution
5) ________ franchising involves providing the franchisee with a complete business system—the
established name, the building layout and design, accounting systems, etc.
A) Product distribution
B) Trade name
C) Pure
D) Conversion
6) Most gasoline products are sold through the ________ system of franchising.
A) product distribution
B) trade name
C) pure
D) conversion
7) McDonald’s is an example of a ________ franchise.
A) conversion
B) trade name
C) product distribution
D) pure
8) The success of franchising is largely due to:
A) the economic growth of the United States and other developed nations, economies.
B) more college students choosing to go to work for themselves rather than for corporations.
C) the mutual benefits it provides to the franchiser and franchisee.
D) All of these factors
9) The ideal franchising relationship is a ________ based on trust.
A) corporation
B) partnership
C) sole proprietorship
D) social enterprise
10) A significant advantage a franchisee has over the independent small business owner is
participation in the franchiser’s ________.
A) centralized and large-volume buying power
B) social gatherings
C) profits
D) policies
11) In view of the cause of most new business failures, probably the most valuable service
provided franchisees by the franchiser is:
A) management training and experience.
B) national advertising.
C) financial assistance.
D) territorial protection.
12) Pure franchising is also referred to as:
A) trade name franchising.
B) business format franchising.
C) product distribution franchising.
D) all of the above.
13) In franchising, the reputation of the franchiser is dependent on:
A) their locations and popularity with the local customer.
B) the brand name recognition and appeal.
C) the rate of growth and the number of national outlets.
D) the quality of the goods and services provided.
14) Franchise advertising programs:
A) are organized by the franchiser but controlled locally by the franchisee.
B) are an expense borne by the franchiser.
C) require franchisees to spend a minimum amount on local advertising.
D) allow voluntary participation.
15) When it comes to financial assistance for franchisees, the franchiser often:
A) provides direct financing.
B) assists in finding financing and occasionally provides direct assistance in a specific area.
C) waives royalty fees for franchisees not making an adequate profit.
D) generally does nothing, as finding financing is a requirement for qualifying for a franchise.
16) The primary advantage of buying a franchise over starting your own company is:
A) in the purchase of the franchiser’s experience, expertise, and products.
B) the fact it is much less expensive than doing your own business start-up.
C) the extensive assistance offered in finding start-up capital.
D) the absolute territory protection offered by all franchisers.
17) Most franchise experts consider the most important factor in the success of a franchise to be:
A) the simplicity of the idea.
B) location.
C) territorial protection.
D) financing.
18) Territorial protection in franchising:
A) varies according to industry.
B) is basically every franchisee for him/herself.
C) is absolute and uniform across industries.
D) is no longer an issue for most franchisees.
19) The failure rate for franchises is:
A) higher than the rate for all new businesses.
B) no different from the rate for all new businesses.
C) lower than the rate for all new businesses.
D) indeterminable because of the Right to Privacy Act.
20) There are two main risks in purchasing a franchise. First, that of the franchiser’s experience
and business system, and second:
A) the brand name recognition of the franchise.
B) the entrepreneur’s managerial skills and motivation.
C) the franchiser’s financing.
D) the economy trends in the country at the time the franchisee begins operation.
21) The first, second and third growth wave in franchising respectively, are:
A) low-cost franchises that focus on niche markets; shift to service sector; fast-food restaurant
using the concept of rapid growth.
B) fast-food restaurant using the concept of rapid growth; shift to service sector; low-cost
franchises that focus on niche markets.
C) low-cost franchises that focus on niche markets; fast-food restaurant using the concept of
rapid growth; shift to service sector.
D) shift to service sector; low-cost franchises that focus on niche markets; fast-food restaurant
using the concept of rapid growth.
22) Despite all the benefits, there are a number of disadvantages to franchises, such as:
A) the time consumed by the management training and support the franchiser provides.
B) the cost of national advertising.
C) strict adherence to standardized operations.
D) territory limitations.
23) The most expensive franchises in terms of total investment are:
A) retail franchises.
B) business service franchises.
C) McDonald’s franchises.
D) hotel and motel franchises.
24) The payment the franchisee makes to the franchiser based on gross sales is:
A) a royalty.
B) the start-up fee.
C) a technical assistance fee.
D) a national advertising fee.
25) When it comes to purchasing products, equipment, etc., the franchiser:
A) cannot require the franchisees buy from the franchise company.
B) can set prices paid for the products, etc., but cannot set the retail price the franchisee charges.
C) is permitted to set the retail price for the franchisee.
D) cannot require franchisees to buy from an “approved” supplier.
26) Typically, the franchiser controls are very tight on what the franchisee:
A) does in terms of who they hire as employees.
B) sets in terms of retail pricing and hours of operation.
C) does with his/her net profits after fees and taxes are paid.
D) sells in terms of the product or service they offer.
27) The biggest challenge facing the growth of new franchises is:
A) the lack of capital.
B) competition from independent entrepreneurs.
C) market saturation.
D) the recent downturn in the economy.
28) The primary market for U.S. franchisers is:
A) Europe.
B) Pacific Rim.
C) Canada.
D) Asia.
29) Based on the principle of ________, the idea is to put a franchise’s products or services
directly in the paths of potential customers, wherever that may be.
A) guerilla marketing
B) intercept marketing
C) franchise marketing
D) path marketing
30) Another term for cobranding franchising is:
A) master franchising.
B) conversion franchising.
C) multiple-unit franchising.
D) piggybacking.
31) To protect investors from unscrupulous franchisers, the regulatory body is the:
A) FCC.
B) Justice Department.
C) FDA.
D) FTC.
32) The document that governs the relationship between a franchisor and the franchise is the:
A) FTC.
B) FDD.
C) UFOC.
D) FOC.
33) The FTC’s philosophy 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 good decisions.
D) licensing prospective franchisers.
34) Which of the following should make a potential franchisee suspicious about a franchiser’s
honesty?
A) Claims that the franchise contract is a standard one and that there’s no need to read it
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
35) Which of the following is an indication of a dishonest franchiser?
A) Very thorough and complete operations and training manuals
B) Recommending retail prices and providing a list of “approved” suppliers of products and
materials needed for running the franchise
C) Attempts to discourage you from allowing an attorney to evaluate the franchise contract
D) Not providing a set of detailed earnings projections for each potential franchisee
36) When buying a franchise, the potential franchisee should first:
A) search for start-up capital for local banks.
B) evaluate him/herself as to the fit with the franchise.
C) work in a similar business or industry for a year.
D) contact the local chamber of commerce for information on the local economy.
37) When evaluating a franchise, the potential franchisee should:
A) interview both current and former franchisees.
B) only interview franchise employees as franchisees vary greatly in their opinions.
C) ask about what oral promises the franchiser will give regarding future earnings.
D) look at the local labor market to see if there is a pool of appropriate candidates for
employment.
38) Typically, franchise contracts:
A) are short-term, for 10 years or less.
B) are heavily weighted in favor of the franchisee due to federal regulation.
C) do not cover transfer and buyback provisions.
D) are not negotiated by established franchisers.
39) The most litigated subject of the franchisee agreement is:
A) franchisee fees.
B) advertising expenditures.
C) termination of contract.
D) resale price maintenance clauses.
40) Under what circumstances would a typical franchiser have the right to cancel a franchise
contract?
A) The franchisee declares bankruptcy.
B) The franchise fails to follow retail pricing guidelines set by the franchiser.
C) Within five days of the initial signing of the contract
D) If the franchiser decides he/she wants to buy back the franchise
41) When franchise contracts are renewed:
A) the existing contract is merely annotated and signed by both parties.
B) a new UFOC must be issued.
C) all terms of the previous contract may be renegotiated.
D) a new contract must be drawn up by the two parties.
42) The franchiser has the right to cancel a contract if a franchisee:
A) declares a bankruptcy.
B) fails to make required payments on time.
C) fails to maintain quality standards.
D) All of the above
43) The fastest growth rate in franchises is among:
A) traditional areas of franchising, where costs are from $2,500 to $250,000.
B) innovative, nontraditional franchisers with fresh approaches.
C) gas stations and fast foods.
D) hotel/motels and retail outlets.
44) ________ franchising involves the owner of an existing business becoming a franchisee to
gain the advantage of name recognition.
A) Product distribution
B) Master franchise
C) Conversion
D) Pure
45) The most efficient method of franchising, from the franchiser’s point-of-view, which has
become popular in the 1990s and permits one franchisee to hold several franchises from the same
franchise company, is called:
A) multiple-unit franchising.
B) master franchising.
C) conversion franchising.
D) piggybacking.
46) Establishing a Mrs. Fields Cookies franchise inside a Hardees fast-food franchise is an
example of ________ franchising.
A) multi-unit
B) master
C) cobranding
D) conversion
47) When the franchisee has the right to establish a semi-independent organization in a particular
territory to recruit, sell, and support other franchises, it is called a ________ franchise.
A) multi-unit
B) piggyback
C) conversion
D) master
48) A master franchise is also called:
A) sub-franchise.
B) cobrander.
C) Both A and B
D) None of the above
49) ________ is when owners of independent businesses become franchisees to gain the
advantage of name recognition.
A) Conversion franchising
B) Multiple-unit franchising
C) Master franchising
D) Combination franchising
50) Perhaps the best way to evaluate the reputation of a franchiser is to ________ several
franchise owners.
A) meet
B) interview
C) write
D) Both A and B
51) What franchisee turnover rate is probably sound?
A) Less than 5 percent
B) Less than 15 percent
C) Less than 25 percent
D) Less than 35 percent
52) The ________ requires all franchisers to disclose detailed information on their operations at
the first personal meeting or at least fourteen days before a franchise contract is signed or any
money is paid.
A) FCC
B) FDD
C) Trade Regulations Rule
D) FDA