Entrepreneurship, 3e (Bamford)
Chapter 14 Franchising and Purchasing an Existing Business
1) Franchising is viewed as the creation of a new business from a well-established formula.
2) A franchisor is a firm that originates the idea for a business and develops the operational
methods.
3) A franchisor pays a fee to obtain a franchise.
4) An entrepreneur is a franchisee.
5) A franchise agreement is a basic contract that usually contains clauses that require the purchase
of supplies.
6) In 2016, the International Franchise Association reported that franchises made up almost
900,000 establishments in the United States, providing almost 9 million direct jobs.
7) A franchisor should provide a standard, well-known product.
8) A franchisor benefits by enabling a rapid expansion of his or her business, while maximizing the
funds invested in that expansion.
9) A franchisee that has inconsistent quality or service not only hurts his or her own business but
also impacts the brand images of all the other franchisees.
10) The initial fees for selling a franchise is a more important revenue source than the continuing
revenue stream to a franchisor from royalties and selling of inputs to a franchisee.
11) A franchisor makes money when the franchisee stays in business, needs lots of inputs, and
pays continuing royalties.
12) Each franchisor will have a different package to sell a franchisee.
13) Every sale between a franchisor and a franchisee must be governed by the United Franchise
Act of 1987.
14) There is a universal standard regarding what is provided by a franchisor. Each franchisor can
offer a unique package that is different from other franchisors.
15) A franchisor provides both the operational systems and the monetary techniques to run the
business.
16) The more the training opportunities that are offered as part of a franchise fee, the better it is for
the franchisee.
17) For a potential franchisee, depending on a franchisor for market analysis is the best tactics to
understand a market.
18) A potential franchisee must be vetted, or evaluated, by a franchisor before receiving the
complete United Form Offering Contract (UFOC).
19) The relationship between a franchisee and a franchisor is like a marriage.
20) Marketing advice is a qualitative area that is very helpful, independent of who is developing
and delivering the research.
21) When buying an existing business, there is a greater premium attached to the business than if
the business is started from scratch.
22) If an individual buys a troubled business, the first step is to restructure the business.
23) Business brokers are bankers who invest in financing small businesses.
24) Once negotiations for the sale and purchase of an existing business are complete and all
contracts are signed, there will be a transition period.
25) There is a complex issue of organizing the process of change from a former business to a new
business.
26) One advantage of buying an existing business instead of a franchise is that an existing business
already has an established cash flow.
27) Buying an existing business does not take as much planning and thought as starting a business
from scratch.
28) A disadvantage of buying an existing business is that operating processes and policies have
already been established. This means that it is a riskier purchase than the purchase of a franchise.
29) During the transition period of the sale of an existing business, the new owner should spend
significant time being visible in the business, talking with employees, making suggestions, and
doing some of the more menial work.
30) The new owner of an existing business should avoid implementing new policies and standards
during the transition period in order to avoid upsetting the employees.
31) Entrepreneurs should attempt to buy a troubled business at a discount even if they do not have
specific skills and a plan to turn around a business that is in significant decline.
32) In franchising, an entity or individual granted the right to conduct business according to
specified methods and terms of another party is known as a
A) franchisee.
B) franchisor.
C) franchise.
D) licensee.
33) In franchising, an entity or individual that grants another party the right to conduct business
according to specified methods and terms is known as a
A) franchisor.
B) franchisee.
C) franchise.
D) licensor.
34) Yummy Bacon Inc. manufactures and sells bacon and sausages in the country of Valkyris. To
expand its business, it invites interested entrepreneurs to open its branches in a few more cities. It
also assures the prospective entrepreneurs that it will provide specific training in marketing and
operational methods to all staffs in the new branches. In this scenario, Yummy Bacon Inc. is a
________.
A) franchise
B) franchisee
C) franchisor
D) master franchise
35) A leading apparel manufacturing firm in the United States invites applications to establish
franchises in Texas. John, an entrepreneur, approaches the firm with a proposal. After doing
routine background checks, the firm permits John to open a branch of the firm in a given area, use
the firm’s name, and operate a business within the guidelines of an agreement. In this scenario,
John is a ________.
A) franchisor
B) franchisee
C) franchise
D) licensor
36) Which of the following is the basic contract generated by a franchisor for all franchises?
A) Franchise consent contract
B) Master license
C) Franchisor agreement
D) Franchise agreement
37) Which of the following is true of a franchise agreement made between a franchisor and a
franchisee?
A) It directs the franchisor to spend significant time being visible in the new franchise operation,
talking with employees, and making suggestions.
B) It contains clauses requiring the purchase of supplies and the displaying of marketing material.
C) It is enforced at the federal level, and the jurisdiction lies with the federal court.
D) It commands the franchisee to make all significant changes in one day so as to alleviate any
lingering concerns by the employees.
38) Which of the following is a reason for the popularity of franchising in the business world?
A) A franchisor can offer a standard, well-known product that is produced by a consistent,
well-tested process.
B) The profitability of individual franchises does not have to be shared with the franchisor.
C) Buying a franchise does not take as much planning and thought as starting a business from
scratch.
D) There are no significant risks involved in buying a franchise as the losses will be compensated
by the franchisor.
39) Identify an accurate statement about franchising.
A) A franchisor enables a rapid expansion while maximizing the funds invested in that expansion.
B) Specific information on the profitability of individual franchises does not have to be shared
with the franchisor.
C) An entrepreneur spends more of his or her resources than if he or she had to start a new business
from scratch.
D) A franchisor continues research and development on the products and processes that a small
single business cannot afford to pursue.
40) The success of franchising is dependent on the hard work of the franchisee and the value of the
________.
A) owner
B) franchisor
C) lessee
D) licensee
41) A franchisor makes money by
A) selling the franchise.
B) collecting a percentage of sales.
C) providing specific training.
D) all of these.
42) When a franchisee delivers inconsistent quality, it hurts the company and the ________.
A) franchisees
B) business brokers
C) licensers
D) bankers
43) Which of the following rights is NOT a benefit of purchasing a franchise?
A) The right to open a branch of the business in a given area
B) The right to use the franchisor’s name
C) The right to operate a business within the guidelines of the franchise agreement
D) All of these
44) Which of the following statements about the purchase of a franchise is NOT correct?
A) A franchisee has the right to change the operating procedures to improve the business’s
profitability in his or her territory.
B) A franchisee has the right to use the franchisor’s brand name.
C) A franchisor provides operational advice to a franchisee.
D) A franchisor provides some level of marketing advice and assistance.